Low interest rates and financial market turmoil is driving private investors towards property, explains Rosa Salvador in the Spanish daily La Vanguardia, reporting a new study by the Tecnocasa franchise chain of estate agents, published in collaboration with Catalonia’s Pompeu Fabra University (UPF).
Where do small investors turn when interest rates on savings are almost zero, and global turmoil makes financial markets look like a minefield? The perennial favourite asset class for private investors the world over – property.
Small investors like pensioners are now responsible for one in four Spanish property purchases says the report by the UPF using Tecnocasa data based on 7,443 home sales handled by the company last year. 25% of their sales involved an investor, and 27% of those investors were over the age of 55.
This is a relatively new trend for Spain, explains Salvador, in a recent La Vanguardia article. Professional investors like funds and family offices have always included property in their portfolios, but small investors used to stick to savings accounts and pension plans based on Government bonds. “They are elderly people, who have their life’s savings in the bank, typically around €120,000, earning practically zero interest,” says Lázaro Cubero, head of research at Tecnocasa, quoted in the article.
Small-time investors are well placed to understand their local property market, and can see that house prices are down by more than 55% in many areas. “They are after small flats with 2 bedrooms, generally speaking in a building without a lift as they are the cheapest; properties that don’t need much work and can be rented out quickly,” explains Salvador.
“They are looking for cheap flats, which don’t appeal to people looking to buy primary homes who want to invest in better quality,” says Paolo Boarini, head of the Tecnocasa Group. In a city like Barcelona there is a wide choice of cheap flats for investment costing €120,000 or less in working-class districts like Hospitalet de Llobregat, whilst in provincial cities like Zaragoza, the capital of Aragon, similar flats cost between €70,000 and €80,000, says Boarini.
Private investors with the most limited budgets go for parking spaces, which in some areas cost as little as €15,000. “These are investments that require a lot of management, as rental client churn is high, but they tend to be people with time on their hands who can deal directly with their clients, and even collect the rent,” explains Cubero.
Salvador writes that private investors may even have an advantage over institutional operations when it comes to risk assessment in Catalonia, where legal uncertainty makes it difficult to evict non-payers. “Many large investors have halted their investment in residential assets for this reason,” says José García-Montalvo, leading the research team at the UPF. Private investors operate locally, and are in a better position to choose their tenants based on personal knowledge, he says.
Smalltime investors are responding to growing demand for rental housing in Spain, say Tecnocasa. 34% of clients are looking for a home to rent, rising to 48% in Barcelona’s L’Hospitalet de Llobregat district, and 44% in Valencia City. Gross rental yields are 6% in Barcelona and 7.7% in Madrid (on average), with higher yields for 2-bed flats, claim Tecnocasa. However, there is a problem. “It’s not a very transparent market,” concedes Cubero.
CHEAPER TO BUY THAN RENT
With property prices down 55% or more from the 2007 peak, and Euribor interest rates nudging into negative territory, reducing average mortgage repayments by almost two thirds (from €976 per month in 2007 to €358 per month now, according to Tecnocasa data), it’s cheaper to buy than rent if you can get a mortgage. The problem is that “banks have practically stopped giving mortgages to people with temporary work contracts,” says Boarini. That shuts most young adults out of the market; just 2.6% of buyers have temporary work contracts, and just 3% of buyers are under the age of 25, all according to Tecnocasa. They have no option but to rent if they want to fly the nest, driving up demand and rental prices by 6% in Barcelona ,and 4.6% in Madrid last year.
Mark Stücklin is a Barcelona-based property market analyst and consultant, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on email@example.com.
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