Anyone interested in property in Andalucía, or Spain for that matter, should read this annual report on the market by Barbara Wood of The Property Finders, a buyer’s agent. It turns out the quality end of the market is alive and well and delivering great opportunities for buyers.
Market Report – Andalucía 2010
By Barbara Wood
Getting it right
The overwhelming majority of property purchases in Spain go without a hitch. I mention this because if you have been getting your information about the property market in Spain from the property pages in the press and from blogs, newsletters and forums on property portals on the internet then you may well believe that the opposite is true, that just about everyone buys a problem and if you manage to do it legally in Spain it is more by luck than judgement.
But what surprises me is the lack of judgement people show, particularly as so many are buying out of the comfort zone of their own country. Wouldn’t it make more sense to exercise extra caution, double-check everything you are told and pay for the very best and independent legal advice but no, off they go to an agent without checking them out, accept without question the lawyer they are taken to and sign a binding contract without seeing it in translation or asking the most basic questions, for example, does this property conform to the current planning regulations or, is it legal to build on rural land? Not a single client of The Property Finders, not one of the hundreds we have helped buy property during the boom years has bought a problem property and it should like that for everyone but it takes time, lots of research and investigation and asking the right questions.
The Spanish Property Market
There’s no such thing – there’s not even an Andalucían Property Market, at least not in the sense that it’s one market performing in a uniform manner across the region. While it was obvious to those of us who actually work in the sector that activity levels in the prime areas around Marbella were increasing as early as the 1st quarter of 2009 secondary areas lagged well behind with the first green shoots only appearing about nine months later, and the really bad product in the worst locations is still in total paralysis in 2010.
In the good old pre-boom days, property buyers in Spain bought for their own use, with a medium to long-term perspective and most were cash buyers. Buyers needed to be cash-rich because the mortgage market in Spain pre-2000 was very rudimentary; loans to non-residents were a maximum of 60% LTV over ten years, with rigorous checks on ability to repay and possible rental income was very definitely not taken into account. But the overwhelming majority of purchasers did not need finance. Buyers bought in the relatively few areas that can be classified as prime locations, or as close as they could get for their budget, in secondary locations that were acceptable because of their proximity to the very best. There was no mass market and the concept of flipping for a quick profit did not exist – indeed, many of the best properties in the prime locations have been in the same ownership for twenty and thirty years or more. No doubt there have been a few exceptions but I would bet that just about everyone who bought in Spain in the last forty years within these parameters has done very well indeed in monetary terms.
Now, looking back over 2009 and forward through 2010, I am quite pleased by what I see. Once again the typical profile of a buyer entering the market is a cash buyer, buying for their own use, with a medium to long-term perspective, not dependant on rental income and only interested in buying in prime locations. And those that require a mortgage need a maximum of 50% relative to value. In other words, the right purchasing parameters are in place again. Spain’s property market managed very well without a mass market before the boom of the Noughties and will do so again, returning I hope to the stability and long-term growth that held for four decades but this time going for quality rather than quantity. Mallorca decided to take this route in the mid 1990s, transforming its image and property market in the process and by doing so has avoided the worst of the market collapse, so we know it can be done. Regrettably much of mainland Spain opted to stack it high and sell it cheap, dragging the reputation of the quality end of the market down with it. I am not convinced that the lessons have been learnt; only time will tell, but whatever happens in the mass market the quality sector will recover and move on independently of what I call the disaster zone.
The Disaster Zone
One sector of Spain’s property market, much of it in Andalucía, is a catastrophe and will be for years to come. Why everyone is shocked at the carnage is beyond me – all bubbles eventually burst, whether it’s tulip bulbs in 17th century Holland or property in 21st century Spain. The result is always the same. Only a tiny number right at the beginning actually make any money, a few get out neutral while the latecomers, that is just about everyone, take a big hit. The hype continues long after the market has started its downturn but nobody is listening to the few voices of caution. In my 2005 Market Report I stated that I could already see clear signs of a shift to a buyer’s market and indeed, during 2006 I negotiated 25% off asking prices on several occasions even while developers and individual sellers were stuffing another 30% on asking prices! The evidence was quite visible but few wanted to see it.
It was a perfect storm, combining a burgeoning construction industry in Spain with cheap and readily available credit that sucked in the mass market, made even worse by the fact that many of these so called ‘investors’ were not the ultimate end-users but apparently sane people who bought into what I can only describe as a property pyramid scheme. Instead of individuals buying one property for their own use for the long-term the trendy way forward was to buy one or more units with the sole intention of selling on during construction. Of course, they wanted to sell at a profit so they hiked the price way beyond the developer’s price list but most seemed surprised when they got stuck with an overpriced property which was now complete but unsold. Faced with a choice of taking possession and servicing a mortgage they couldn’t afford without rental income, some forfeited their deposit and walked away. That turned out to be a pretty smart move as many of those who completed found out that the rental income they had been told to expect turned out to be an optimistic figment of the agent’s imagination. Why so many buyers believed such nonsense I still don’t understand – why didn’t more just stop and think for a moment? Where were all these buyers and renters going to come from? People were buying into huge developments and all they had to do was ask around to find out that everyone was intending to do the same thing.
The situation was made worse because although this sector of the market was quite clearly slowing down as far back as 2005, tens of thousands of properties already under construction still had to feed through, swelling the huge overhang of unsold properties to, according to some estimates, in excess of one million units. And to top it all, it turned out that some developments were illegal, in that although they had a licence issued by the relevant town hall, that licence contravened the planning regulations as they currently existed. In fact, the majority of illegal properties aren’t in this disaster zone – most of them are in the Marbella municipality and are sold and occupied but just the fact that the planning scandal coincided with the market collapse was extra proof, if any were needed, that something was very wrong.
So there you have it, a property nightmare. The majority of people who are now complaining about their lousy investment bought off-plan between 2000 and 2007, buying into high-density projects in inferior locations on the coasts, mortgaged up to the eye balls. And in most cases the unsold stock that is going to extend the meltdown of this sector for years to come is the same product – wretched apartments in high-density developments in poor locations.
In many respects, Spain’s new build off-plan sector from 2000 to 2007 was no better than the other hyped up and unproven ‘emerging markets’ in Eastern Europe, Dubai and beyond; it was speculative and debt-laden and had nothing to do with sound property investment. Too much stock at too high prices meant it was unravelling long before the credit crunch kicked in – that was just the coup de grace. It was always going to implode but this sector of the market has absolutely no connection whatsoever to the long-established and stable parts of Spain’s property market, that is, good quality properties in prime locations, whether they are on the coasts, inland or in the cities.
I genuinely believe that buyers should stay away from this problem sector of the market for the foreseeable future, or even for good. Prices have not yet hit bottom, not even close, and it will not surprise me if prices eventually go 70% lower than at the height of the frenzy. Some of the product is so unpleasant and in such bad locations that it will remain unsold whatever the price and buyers would do well to hang onto that thought when they hear of banks selling their repossessed stock at 50% discounts or properties up for auction with no reserve – just because something looks cheap it doesn’t follow that it is a good buy. In December 2009 the first London auction of Spanish properties, sponsored by ‘A Place in the Sun’ magazine, was cancelled on the day because there were so few people in the room. Having seen the catalogue I’m surprised anyone showed up – with a couple of exceptions the fifty six lots looked like something from communist-era Eastern Europe and were not the ‘incredible no reserve opportunities’ from ‘a great selection of Spanish properties’ as stated in the catalogue. Never mind reserves below €250,000 or €100,000, some of this type of property will struggle to find a buyer at €50,000. Bring on the bulldozers!
There can’t be anyone out there who still doesn’t know that statistics about Spain’s property market are not fit for purpose. Apparently, the stats indicate that at the end of 2009 in Andalucía we were looking at something like an overall 18% fall since prices peaked in 2007 but I wouldn’t let any client of mine go near a property on which we were only getting this level of reduction. I need to see closer to 35% down from the peak before I can recommend it as a good buy.
The source of the statistics is irrelevant, they are all useless. The official Ministry of Housing figures, based on registered transaction prices and supposedly objective, are distorted by under declarations of the sale price in the past and only once we have had several years of full price declaration will this distortion be washed out of the system, while the oft-quoted TINSA stats are based on subjective market appraisals. Either way, they are unreliable and, therefore, are meaningless. So it surprises me that many property experts and commentators continue to publish them in bulletins, blogs and the like as the basis for serious market comment – what’s the point? They are only regurgitating unreliable statistics but as that is all they’ve got to go on that’s what they focus on and try to make them mean something. But even if the statistics were reliable they can only tell you what has already happened and have no predictive value. And as I have already pointed out there is no single Andalucían property market so one figure will disguise huge differences in % price falls between the best and the worst areas.
Who To Believe
One of the problems buyers face at the moment is getting independent and balanced information about current market conditions. During the last year I have read and heard some of the least informed comments about Spain’s property market from some of the least qualified sources in all of the years that I have been in the business, and that’s quite a number. Throughout 2009 the media and I mean that in the broadest sense, the press, t.v., the web, etc., were obsessed about just one sector of Spain’s property market, the disaster zone that I have just described. The mood has been 100% negative, focusing on illegalities, unfinished product, repossessions and lost investments. I can’t be the only person to find this a bit odd, given that media hype during the boom played a big part in whipping up the frenzy that encouraged people to purchase poor quality product in bad locations, taking on whopping mortgages that could only be serviced by rental income. In the market frenzy they talked everything up and in the downturn they are talking everything down but always failing to distinguish the good from the bad.
Buyers need to be more critical and sceptical about the media in all its forms; for example, some publications are reluctant to print independent comment if it has just the merest hint of criticism about a product or location for fear of upsetting their advertisers and supposedly independent property portals are also advertiser dependant. Do take into account the fact that often developers pay for journalists to visit their projects which means they cannot be objective in what they write – they have accepted what in effect is a bribe for favourable comment. Not all periodicals do this but many still do and I would like to see all such articles carry a footnote stating whether or not the developer paid for the trip, a kind of a health warning. Travel features carry such footnotes, so why not property too? Then whatever emerging market or hot-spot is being talked up might seem just a bit less desirable. At the height of the boom I saw Mongolia’s capital, Ulan Bator, being tipped in a respected broadsheet as the next investment hot-spot; at a lunch a couple of days later I found myself sitting next to the journalist responsible and she confirmed what I had already guessed – that it had been an all-expenses trip paid for by a developer and I think that is a useful bit of information to give the reader, might induce some healthy scepticism.
Internet forums are another source of comment about the market but again, potential buyers need to use their judgement about the worth of the information. As far as I can see, they are often dominated by people who have made bad investments – dig into threads and you will see the same agents being slated, the same developments named and shamed and the same complaints against lawyers. But everyone in the industry knew who the rogue agents were, any decent agent knew which developments were illegally built and we all know excellent lawyers. All this information is easy to get if you do the right research. The latest trend is ridiculing anyone daring to suggest that there are signs of life at the quality end of the market while the mass market they bought into is dead and buried. It’s as though they can’t bear the thought of people buying now making a good investment when theirs turned out such a disaster.
There is only way to get good information about what prices are doing in 2010 and that is to talk to someone who is actively involved in putting deals together right now. That would have been tricky in the 4th quarter of 2008 when the market was totally paralyzed, but during the 1st quarter of 2009 transactions started picking up and a price pattern emerged.
When I’m asked about price falls, if they have hit bottom or if they have further to go my reply is that it all depends and there is no one answer but it seems to me that there are two main factors influencing outcomes: location and how badly the seller wants to sell. And both these factors have to be present; if the owner has no urgent reason to sell and the asking price remains at a pre-crash level, even in a prime location it won’t find a buyer, perhaps not for years. It may well happen that they eventually do get their price but that will be because it converges with a rising market. Conversely, there are lots of properties whose owners are desperate to sell but the locations are wrong and currently there are no buyers for second-rate positions. In addition to the property being in a prime location and the seller being keen to sell there can’t be any problems. Buyers are able to pick and choose like never before and things overlooked in the boom will be flagged as a problem now – for example, road noise, easterly orientation with no afternoon sun, an ugly apartment building in the line of sight, a vacant plot close by, mobile phone mast or electricity pylons nearby to name just a few. Lots of people bought properties with this kind of issue in the boom but will now be regretting their choice as even those in the very best locations will be difficult, even impossible, to sell for the foreseeable future. All of the above were reasons for me not short listing properties for my clients in 2009 – I just didn’t need to, I kept looking until I found a property that was 100% right.
But with all things coming together, that is a motivated seller, a cash buyer or someone who doesn’t need more than 50% finance, and a problem-free property in a top location then I am prepared to stick my neck out and say that prices falls have bottomed out at around 35% below what they were at the top of the market – at this level of reduction buyers are happy to buy and I have even seen buyers competing in recent months. And as after a period of market correction recovery ripples out from the prime locations, now we have an indication of the new price levels in the best areas then the process of establishing the correct value in secondary locations or for blighted properties can begin. And this is where it can get really painful for many sellers who now have to accept that that their location is not prime or those overhead electricity cables or unsightly view that apparently didn’t bother them on purchase are a now huge deterrent to everyone else because we can be certain that when the dust has finally settled on the market upheaval % price falls will not be the same across the board; for many sellers it is going to be much worse than a 35% drop and they are just going to have to get over it.
A good example of a well-located property with a problem is a house I saw in 2009 in Guadalmina that is not going to sell until the price shows much more than a 35% drop. The location is excellent, front line to the golf course, the standard of renovation is reasonable but there are high tension electricity cables overhead. In 2006 the original asking price was €1,695,000, now it’s €1,450,000 and an offer of €1,200,000 was rejected just prior to the credit crunch kicking in. A 35% reduction from the original asking price would bring it in around €1,100,000 but during 2009 clients of mine secured a deal on a superbly located problem-free property that I rate as superior to the Guadalmina house for just under €1m, about 40% below the original 2006 asking price of €1,690,000, and this inevitably drives down the price of an inferior property. No matter how much the sellers fight the trend I would argue that this Guadalmina house has to go way under €1m before it finds a buyer and I predict an eventual fall of 50 – 60% below the original price before someone is prepared to gamble on the cables going underground at some time in the future, so that would bring it in around €700,000. So while they both started off with virtually identical asking prices at the same time, in locations I rate as equivalent, one will drop far more in % terms than the other.
And it works the same in respect of locations. It was possible during 2009 to find good quality apartments close to Puerto Banús for €250,000, about 35% below what they would have made at the market peak. So it is absurd for a seller, developer or individual, to suggest that €250,000 for a similar property in inferior locations like the overbuilt mess that is Manilva or in parts of Calahonda or Almería is a good deal even though that is 35% below their start price. I would want to see a differential of at least €150,000 because of the inferior locations, driving the price down below €100,000 before it is at the correct relative level. Again that indicates a 60% drop as a minimum and in the case of Manilva and similar disasters zones in Almería and elsewhere I think it could go lower still.
We had to wait until properties started selling in the best areas before we could get around to working out values in the other areas but that process is now happening. There are plenty of buyers around if the price, property and location are right but there are very few properties that fall into this category and I shortlist only a small minority of all the properties I view on behalf of my clients. So far from there being a huge overhang of unsold properties as in the disaster zone, I would say there is a shortage of top quality properties in the best locations at the right price level for 2010.
One stumbling block the market has to overcome before activity levels move up a notch is seller resistance to lower prices; there are far too many who think their property is going to be the exception and that it will sell in 2010 for its 2007 price. The fact that, as transaction levels increase, we can show evidence of similar or better properties selling for hundreds of thousands of Euros less than their asking price is of no interest to them. What they hope to achieve with this attitude mystifies me as nothing ‘cooks’ a property more than it languishing unsold for so long that the photograph in the agent’s window fades to a sepia tint. But there are thousands of them, some on the market since 2006 and they will remain unsold until the seller does finally get it. In the meantime, although they think their property is on the market I can assure them it is being ignored. Estate agents aren’t bothering to show them and I certainly don’t shortlist overpriced properties for my clients to view. Sellers must understand that there is no sentiment or emotion in the market, buyers are not falling in love with a property and must have it at any price. It is all about the bottom line and that has to be a 2010 price.
Looking back to the last big price correction in the mid 1990s I recall exactly the same seller resistance acting as a drag on recovery for several years but, in the end, everyone waved the white flag, no exceptions. At the end of 2009 I saw two properties go under offer; one came down from €700,000 to €465,000 and the other from €850,000 to €550,000. Sellers, resistance is futile, the market has fallen 35% minimum and if you want to sell in 2010, get over it.
In The Countryside
Buying in the Andalucían countryside was once only for the likes of writers and artists, even seen as a bit eccentric, but after 2000 the rural sector joined the mainstream market as better road infrastructure improved accessibility, allowing buyers to consider the options of villages houses or country houses with land, paying a fraction of the price of a small apartment on the coast. And as the number of foreigners wandering around inland villages increased thousands of Spaniards suddenly remembered the pile of stones they had inherited years previously and were staggered to discover that someone was prepared to buy it, it must have been like winning the lottery. Unfortunately, a side effect of this activity was that hundreds of foreign estate agents sprouted all over Andalucía and the vast majority didn’t have a clue what they were doing, didn’t know the rules, didn’t speak the language – a recipe for disaster. At the height of the market some of the most popular villages had up to thirty estate agencies; now at the depth of the downturn most have none, only the best have survived. But none of this would have mattered if everyone had stuck to the rules but many didn’t and now we have a few problems.
In many ways, the rural market is no different to the coastal one; there are some dreadful locations which attracted a mass market in the boom solely on low prices while there are prime locations with superb country houses for which demand remains firm. Similarly, some buyers failed to do due diligence or ignored the rules, making appalling mistakes as a result and blaming everyone but themselves, while those who did it correctly are now sitting on seriously good investments. And as on the coast, prices in the best locations have to be about 35% lower than the peak before buyers show interest and there is zero demand for non-prime locations such as Almería and the Axarquía. But there are differences; for example, mortgage lending on rural properties is restricted and therefore, few country properties are heavily mortgaged so buyers in 2010 are not going to find many distressed sales. And many people who bought in the country during the boom years moved to Andalucía full-time so these were not speculative purchases; a handful did buy to renovate and sell on but the majority did not.
But just like the coast, the rural market hit the headlines in 2009 for all the wrong reasons; corrupt town hall officials and illegal properties and demolitions got all the attention and again, the media coverage gave the impression that the whole sector was involved, dragging down the reputation of the quality end of the market. But the upside to this is that 2009 brought a very big change; town halls, now being closely scrutinised for the first time by the regional authorities in Seville, started enforcing planning regulations to the letter. These are not new rules, they were already in place, but they were ignored by thousands of overseas buyers who could be facing very serious consequences in 2010. I have to admit to having little sympathy for any of them. I have acted on behalf of dozens of buyers in the countryside and, without exception, they all have legal properties with impeccable title deeds. Why? Because I made sure they complied with the rules but if others chose a different route that’s their responsibility.
I divide the problem properties in the countryside into three categories: firstly, new developments on rural land not designated for construction, with a licence that contravened existing planning regulations issued by the town hall. The town hall knew it was illegal, the developers knew it, the lawyers and agents knew it and if buyers had taken the trouble to make full and detailed checks they would have known it too. The second category, which I think affects many more people, possibly thousands, involves plots of land bought from local Spaniards, with an abandoned house or ruin or nothing at all, on which the buyer, usually British, built a new house or renovated existing construction. In many of these cases when the buyer realised that what they wanted to do did not comply with existing regulations they went ahead anyway. And finally, in the third category, again probably involving several thousands, are those cases in which the buyer applied for a licence for a legitimate agricultural building, e.g. a tractor shed or barn. Then, as if by magic, during construction doors, windows and terraces appeared and the finished product looked remarkably like a house. Although some claim ignorance, most likely because they neglected to get documentation translated, the majority did know what they were doing was illegal but did it anyway. l buyers have to do in 2010 to get it done legally is know what the rules are in the countryside and stick to them. It is illegal to extend a property beyond its original footprint and square metres so if you want a 250m2 house don’t buy a 50m2 ruin and expect to get away with it. If you apply for and are granted a licence to build a shed then build a shed, don’t morph it into a house and finally don’t buy en empty plot of rural land and construct a house – it’s illegal. And because the town halls are being monitored so closely and all decisions scrutinised in detail you should assume that you will not be allowed to install an in-ground fixed swimming pool nor replace a collapsed roof. These last two items would have been waved through in the past but not any more.
One side effect of all this is that thousands of roofless ruins all over Andalucía no longer have any value at all as they cannot be renovated and they will be allowed to crumble into the ground. On the other hand a well-located and legal house in the country with its roof intact, with a pool or a water storage tank that would convert into a pool, will become hard to find in the future and prices should recover well. And providing your project complies with the rules you will get a licence for the renovation. Rural town halls want this kind of investment to continue because, unlike the over-development on the coast which has destroyed the environment and was wholly negative, overseas investment in rural areas has had a positive impact on the local economies of many villages.
It would be good to think that the system has changed for good but corruption at all levels of the planning process are very deeply embedded in the culture and it is going to take some time to flush it out. But I do get a sense that some Spaniards are really shocked at the extent of what’s been uncovered so far, (and there’s definitely more to come), and concerned about the damage done to Spain’s reputation overseas. There are encouraging signs of changing attitudes and clamping down on perpetrators – some mayors and town councillors in Andalucía have already been convicted and imprisoned and barred from further public office And the courts are going after individual owners who ignored or bent the rules to suit themselves. At the end of 2009 the Málaga court handed out prison sentences, plus fines and demolition orders to two people, one had built on rural land and the other had built a house above a garage but the licence was for just a garage. 2010 could turn out to be a very tough year for many others as teams of Guardia Civil inspectors are fanning out across Andalucía, visiting every town hall in alphabetical order, checking for planning infractions. They’ve been at it for a year already but they are still on the letter A and I expect to see many more demolition orders issued in 2010.
As well as focusing on quality properties in the best locations there are a few things buyers can do to maximise their chances of securing a great deal in 2010. For example, if GBP£ remains weak buyers, whatever their nationality, should hunt down British sellers as, without doubt, they are accepting lower offers that Euro sellers because of the currency’s weakness. Then they should target serious sellers only. I’ve already mentioned that lots of sellers still don’t really get it and buyers risk wasting a huge amount of time viewing houses that aren’t going to sell for years. It is not always easy to find out why a property is for sale but it is essential in current conditions. Out of thirty three properties I looked at on behalf of one client in 2009 I assessed only five were genuinely for sale in the sense that the seller was a needy seller. The reason isn’t always about finance; it might be illness or divorce that is the trigger but there has to be a reason. Sellers who say they aren’t in a hurry should be avoided until they are. If finance is required find out what you can borrow before looking at specific properties as transactions are failing to complete because the buyer can’t get a mortgage. Also mortgages are taking longer to come through than previously and sellers will usually want a quick deal once they have accepted what they will think is a very low offer so make your application early and get an offer in principle. But buyers also need to be realistic. The days of 90% loans for non-residents are over. Expect 60% maximum and only borrow if you can afford to service the loan without the need for rental income.
As regards market conditions I predict that the mass market will remain dead in the water throughout 2010 and for many years to come. €150,000 for a two bedroom, one bathroom apartment in a hideous block in Garrucha, Almería is not a good deal, nor is €250,000 for a townhouse in the Manilva area but banks, developers, agents and auctioneers are still trying to present them as such. For this kind of money buyers can get a quality property within five minutes of Puerto Banús. There aren’t many and a lot have been sold in 2009 but they are still there to be hunted down. Some commentators say that the market will not recover until the British appear in large numbers again but I disagree. As long as the mass market is dead British buyers will be relatively thin on the ground as they dominated that sector but one of the strengths of the prime end of the market in Andalucía is that it is truly international. Buyers of quality property in prime locations, at all price levels, are just as likely to be one of wide range of other nationalities as they are to be British and this end of the market has not been dependant on one nationality for years. A feature of the market recovery in the mid 1990s was that it happened without the British being involved – they were all still languishing in negative equity in the UK and by the time they did surface again prices were already well off the bottom and other nationalities had scooped all the best deals. During 2009 I could already see the same thing happening again – I worked for French, Russian, Swedish, Dutch and British clients during the year – and I predict that the prime end of the market will continue moving forward in 2010 irrespective of the level of British activity.
© Barbara Wood
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