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Building land market comes back to life, but recovery is patchy, and town planning an obstacle

Spanish building land zoned and urbanised.
Spanish building land zoned and urbanised.

The building land market is recovering in places, but politicians and town planners are some of the biggest obstacles to a healthy land market in Spain. Dysfunctional town planning creates scarcity, encourages speculation and corruption, and ultimately drives up the price of housing for everyone. I also ramble a bit about lost opportunities in the bust.

First, some numbers, boring but relevant.

Building land sales (zoned for residential construction and ready to go) rose by 11% to 17,396 last year, whilst the surface area of building land sales was 23.1m sqm, down 6%, and the value of sales was €2.976 billion, up 15%, all according to figures from the Ministry of Public Works (Fomento).

So, although the number of transactions and total value rose, the volume of building land sales (in sqm) fell, suggesting that building land is getting scarcer (at least in the live market, where demand exists), which drives up the price.

The average price of building land in €/sqm rose 13% in the last quarter of 2016 to €172, land transaction values have been rising since 2013, and are expected to rise this year and next year, at the very least.

That said, we are still a long way from the boom years, just to put this recovery in perspective. In 2004, for example, land transactions were four times bigger than last year, the surface area transacted was five times bigger, and the value of land transactions was eight times bigger. In 2004 the price in €/sqm was 285, 66% higher than now.

The land market recovery is unequal. In some districts of Barcelona, Madrid, and the Balearics, prices are on fire, whilst in other parts of Spain you can’t even give it away. The highest land prices by province are in Madrid (470 €/m2), Barcelona (394 €/m2), and the Balearics (339 €/m2). The lowest prices are in Avila (101 €/m2). In some areas there is no demand, so no transaction price.

Developer say that land prices are being driven up by economic growth, on the one hand, and by town halls artificially reducing the supply of land by halting planning schemes for ideological or bureaucratic reasons, on the other.

Many people don’t realise that town planning in Spain makes the building land market one of the least responsive to housing demand in the developed world. An inelastic land market encourages boom and bust, speculation, and corruption. Which is why the speculative furnace of the property bubble was the land market, not the residential housing market. I wrote about this problem back in 2013. It’s well worth reading the article (Excessive regulations helped cause the boom and bust) and the comments from readers, which help illustrated the cost to Spain in lost investment, wealth, jobs, you name it.

During the boom years, land was the speculative asset of choice. It was the most liquid real estate, but when the bust arrived, it turned into the most illiquid asset of all. I remember a meeting with managers from the Sareb ‘Bad Bank’ back in 2013, when I did some international marketing strategy consultancy work for them. One of them told me I should find investors for their land banks. At the time I didn’t have the time or resources to do it, but in retrospect prime building land would have been a sweet investment.

Mind you, around the same time I was also trying to find professional investors for handsome buildings in prime Barcelona, which in that period of distress could be bought via the right insider channels that I had access to for below replacement costs (in other words, land for free in a city like Barcelona = crazy!). A year of work, and I didn’t convince a single investor. Any one of them would have doubled or tripled their money in three years. Obviously, I’m not cut out for sales.

prime barcelona property sagrada familia
One of the prime Barcelona buildings I dismally failed to sell, right beside the Sagrada Familia (and now worth so much more).

Land should represent around 20% to 30% of the final cost of housing, but in some areas, with the help of local politicians, it now represents 50%, and the supply of building land will soon run dry. Developer margins have been squeezed down to between 14% and 18% (I read in the Spanish press, though I think it’s more like 15% to 20% in some areas). Daniel Cuervo, Secretary General of the Spanish Association of Developers and Constructors (APCE) argues that unless town planners and politicians unblock planning schemes now held up in many municipalities, buying a house will become the privilege of the wealthy in some areas. High land prices will drive many potential buyers out of the housing market. High, regressive taxes on purchase exacerbate the problem. So much for the constitutional right to dignified housing.

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