Housing market recoveries are under-way in prime city centres and coastal areas, but there is a risk that foreign investors will drive up land prices to unsustainable levels, said property professionals at a recent real estate conference organised by ESADE Business School in Barcelona.

Foreign funds are crowding into the Spanish property sector with big budgets but little knowledge of local markets. They see land prices as cheap compared to other European capitals, and speculate that land prices will rise back towards boom-time levels..

“There are lots of funds, in particular from the US, who are studying acquisitions on the basis of higher [house] prices, which international buyers can pay, but local buyers can’t,” explained Alex Vaughan, founding partner of Lucas Fox, speaking at the conference.

“There are two different markets,” said Vaughan. “There are areas that attract foreign demand with high purchasing power, where there is some room for price increases, and then the rest. Betting on big increases in prices is irresponsible.”

Rising house prices in city centres would justify higher land prices, but local developers are sceptical of that.

“The funds are buying land in Barcelona expecting sales prices of 10,000 Euro per square metre in the Eixample,” said Elena Massot, director of the local developer Vertix. “They make offers [for land] that local developer can’t match, because the numbers don’t add up, so we prefer to wait.” She went on to say that “the majority of local buyers can’t afford to pay higher prices.”

Juan Antonio Gómez-Pintado, president of the developer Vía Celere, and head of Madrid’s Association of Developers (Asprima), called for more transparency in the market, with better information on sales volumes and prices, to avoid a bubble in land prices. “In many cases today, expectations are fixing prices,” he said, referring to funds with little local market knowledge. As a result, land vendors now expect “more aggressive offers.”

Alberto Valls, real estate expert at the consultancy Deloitte, explained that, in some cases, land prices in Madrid have gone from 700 Euro/m2 to 1,150 Euro/m2, an increase of 64 per cent. “The funds buy expecting an annual return of 15 per cent, or two times capital,” he said. “That was possible when land prices were low, but now that confidence has returned, and less specialised funds have entered the market, with less financial rigour, investors have to use more debt to get that level of return.”

Joan Bertran, head of real estate investment at Sabadell Bank, said the market is recovering principally in Barcelona and Madrid, where the bank is concentrating more than 60 per cent of developer financing, and in coastal areas with foreign demand, plus some provincial capitals. Everywhere else the market is still depressed, with no prospect of higher prices for years to come.