Spanish developers advised to drop prices 30% now, or sell for 50% less in 3 years

Spanish property developers need to drop their asking prices by 30% now, or risk selling for up to 50% less in 3 years time, argues Javier Ortiz, finance director of the developer Grupo Inmo, according to a recent article at the Spanish financial news website elconfidencial.com.

“Those who don’t sell for 25% to 35% less (or whatever necessary) will be buggered by an extra little problem: financial costs of 7% (Euribor plus 1.5% at best for new refinancing deals) on 80% of the cost of the property,” Ortiz is quoted as saying. “That means an additional annual financial cost of 5.6%. After 2 or 3 years the developer will have older homes – commercially damaged goods – and 17% more expensive, which means having to sell for 42% to 47% less in real terms.”

Ortiz’s statements contradict the line taken by Guillermo Chicote, president of the Association of Builders and Constructors of Spain, who is claiming that new build property prices have already fallen enough and won’t fall any more. “You can all forget about prices falling 30% to 40% because I’ll give it to the bank before that,” Chicote said recently at a conference organised by Spain’s Association of Financial Journalists.

But according to Ortiz, offering big discounts gets results. “Some of us promoters are prepared to sell flats with discounts of 30%. And when we drop prices, we find demand,” said Ortiz, whose company is selling 138 flats off-plan in phase 2 of a development in Alcalá de Henares, to the east of Madrid.

The first phase of 1 and 2 bed flats was sold off-plan in 2005-2006 for between 3,300 and 3,500 Euros/m2, whilst the second phase is being sold for around 2,450 Euros/m2, which means flats of 60 m2 for 120,000 Euros.

“Just buy putting up billboards on site with the new prices we have got 320 people on the waiting list,” explains Ortiz. “Those who bought before at a higher price are far from happy,” he admits.

Ortiz and Grupo Inmo saw the market slump coming. “It’s as if there’s a buyers’ strike,” says Ortiz. “Since October 2006 a total halt in sales has been in the making. So we were clear we would need a new plan to sell the development.”

The plan they came up with was to slash their margin, and reduce prices. That’s only an option for developers who haven’t overpaid for land, and only really works for developments of small properties, of 1-2 bedrooms and 55-80 m2, where prices are low enough for buyers and mortgage lenders to cope with. “The big problem right now is financing,” explains Ortiz.

Location is also critical for a discounting plan to work, argues Ortiz. “It will be hard for this plan to work in areas with a big oversupply, or in areas where housing should never have been built in the first place, like those big developments in areas that are almost desert, where they have evicted families of lizards and scorpions to build thousands of properties that, quite possibly, developers will be stuck with, or the banks that have to take over those assets when there is no alternative. It should only work in consolidated residential areas of primary homes.”

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