This is a website for buyers, owners, and sellers of property in Spain, offering reliable information and resources to help you get things done with confidence. It is run by Mark Stücklin, author of the Spanish Property Doctor Column in The Sunday Times (2005-2008), and the book ‘Need to Know: Buying Property in Spain’ published by Collins.
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.
HIGH DEMAND
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.
David says:
I understand property is often seen as a good investment but that seems to apply in major World cities and major resorts in upmarket destinations, but Spain with 20% combined transaction costs, really? How many investments see costs that high, not the stock market, bullion markets, UK property market etc etc
MH says:
David,
Hear, hear! I have plenty of cash to spend and want to buy in Spain but most of the sellers are still demanding 2007 prices or close to 2007 prices, which, coupled with the 20+% buy and sell transaction costs, makes investing in Spanish property a seriously bad idea right now!
If I could find a reasonable seller with realistic expectations, which I have singularly failed to do in the last 4 to 5 years, it would still take me 3 to 5 years at the very best to recover the transaction costs. Who, over 55 years of age or even under 55 years of age, can possibly consider this to be a good deal?
Bo says:
In a bull property market the buying costs can be recovered quickly – take London, Toronto and Sydney as current examples. There’s not much chance of this happening in Spain for many years to come given the information that is available. A long term tenant in a modern property in a major city would help cover the mortgage and at the the end you will have an asset that someone else has paid for. This is probably the best thought process.
nick says:
We live in a new world were strange is new normal. But the maths are clear. If you have 120,000 euros and it’s in the bank you get maybe 1,200 euros per annum in interest. If you buy a 100k place with 20k transaction costs and it’s yielding 6% that’s 6,000 euros less costs. And if we say 2% annual rent increase, in 5 years you’re adding over 600 euros to that – or half of what you were getting in the bank. For somebody who has saved that money to provide an income the flat looks quite appealing. Ultimately, like all investments, it’s a business. When one buys shares there’s a transaction cost so they also are immediately worth less.
MH says:
Nick,
Your example is too simplistic for me.
There are alot more costs to buying property and renting property than to buying and holding stock. There are plenty of reasonably low risk FT SE 100 stocks with yields of around 4%, offering a better return than your bank. And like stocks come with risks, so there are risks in the Spanish housing market e.g. who will form the next national government, where will the next government will find extra tax needed to keep Spain afloat, would a Socialist government hit home owners, how long will the ECB keep up quantitative easing, will the UK vote to quit the EU etc etc. The list of risks is endless and each investor or potential investor has to make his or her own subjective assessment with all the information they can find.
No investment comes down to simple maths, otherwise there would be no real world and no role for gut feel.
nick says:
Hi MH
The maths is quite simple, what’s not simple is predicting the future which nobody can do. (All the variables you mention would have a bearing on all investments) However, returns close to zero on cash have been the norm now in many countries for a number of years. By the way, why must there be a role for ‘gut feel’? I certainly don’t trust to such things when I’m investing.
But on stocks – the FTSE is down over 20% in the last 12 months so broadly comparable with the transaction costs in Spain. Also, I feel you have fallen into the thinking that property has to be about capital gain and so a building must always be worth more tomorrow than it was today or it a poor investment. Back to the business – if a place brings in a good yield its cash value, unless one needs to sell, is something of an irrelevance. The examples given were people requiring an income and – even with a 20% cost – a place generating 6% and likely rising at at least 2% per annum looks like a fair prospect versus other options. And is you leverage using say 50% LTV BTL mortgages they look better still. No EU stock market can compare. If you don’t agree get your calculator out. I should say, my property investments are in the UK but broadly the same applies.
David says:
Nick, you don’t seem to much about stock and share dealing. The stamp duty is .05% and even though the markets have fallen worldwide hose who source intrinsically sound companies that pay 5% dividends or more with dividend cover close to 2, generally do well which is not all about capital gain but quite often that comes too!
Compared to the Spanish property market which crashed by up to 50%, is still flooded with 1.6 million homes we’re told by RR Acuna with more waiting to come to market as it improves, has transaction costs of 20%, lots of problems like illegal builds, land grab, generally poor build quality, and still attracts ‘B’ money, there are too many uncertainties to make investing in Spanish property safe or rewarding for years to come IMO. Just look at The Olive Press and other journals to see horror property stories unfolding constantly.
Stock market crashes follow booms, they always have come back, so far the Spanish property market has not come back in many years as other property markets such as the UK’s has.
nick says:
Hi David
I can’t see any evidence that you know more about stock exchanges than I do – although I would certainly not claim any particular expertise. But, it does not seem to matter how often I say this – these people are investing for a monthly return, i.e. money to spend on a regular basis. And according to your own figures, the stock exchange is actually paying less in terms of an annual return (if one picks the right company, which is far from guaranteed.) And even so companies will cut dividends to invest, buy other companies etc etc potentially reducing the income of these retired people to zero for an indefinite period. Also, I refer again to the possibility of leveraging money invested in property which is much harder to do (in terms of getting finance) with stocks – although I don’t suggest this happens often with this demograph. I would not compare property in the UK and Spain but when it comes to income, the flat in Spain is clearly worth looking at. I keep saying that the capital value (which could go up or down with both property and shares is a secondary consideration but this does not seem to sink in). Also, do you not think the people in Spain chosing to take this route have not considered company shares?