Real estate information company urbanData Analytics (UDA) argue the investment case for property in Barcelona at this stage in the housing market cycle.
I read UDA’s analysis in an article published by the Spanish daily El Mundo. Curiously, the article was titled ‘Is this a good moment to sell an apartment in Barcelona?’, but then went on to answer the question ‘is this a good moment to buy?’. I guess you could argue it’s the same question just looked at from a different angle, but the focus was clearly on the buying side.
The criteria UDA uses to make the investment case are 1) expected returns and 2) the price differential compared to the 2007 peak of the last real estate cycle. They argue these criteria are “key to deciding” if this is a good moment to sell, but both of them have their flaws, in my opinion.
1. Barcelona expected real estate investment returns in 2017-2018
UDA combine current gross rental yields and capital gains over the last 12 months to forecast gross expected returns for the next twelve months. Capital gains were by far the biggest factor in moving the needle over the last 12 months, but just because house prices rose by 17.8% over the last year in Barcelona (according to UDA), will they continue doing so? UDA assume next year will be the same as last year without trying to explain why, at least not as far as I could tell.
2. Barcelona house price differential compared to boom-time peak
UDA claim that house prices in Barcelona (currently 3,808 €/m2 as a city average) are still 10% below their boom-time peak, with variations from district to district. But does it tell us anything useful to compare today’s house prices to those achieved at the peak of the boom a decade ago? Just because prices today are below the prices achieved in a bubble, does that make them good value, or show they still have room to increase? I accept that bubble prices do show how high house prices can rise if the conditions are right, but I don’t think they tell us anything about the ‘right’ price or fundamental value, which is better understood in relation to something real like rents or incomes.
Based on these criteria, UDA forecast expected returns of 23% on average for the city, and variations by district going from +32.9% in Sants- Montjuic to +13.2% in the upmarket Sarria-Sant Gervasi district (see table below). The UDA investment return forecast for Barcelona is 11% higher than Madrid.
The table also shows peak-to-present house price comparisons by district (right column). House prices in the Ciutat Vella Old Town district so popular with tourists have fully recovered, whilst in the working class Nou Barris district, which fails to interest tourists and foreign-investors, prices are still 42.5% below the peak. But looking just at rental returns, the district with the best yields is Nou Barris, offering 6.6% gross. With the best rental yields and discount to peak prices, Nou Barris should be the place to invest, at least according to UDA’s logic.
Whilst pointing out that every investment has it’s own considerations such as transaction costs, maintenance costs, and tax issues, UDA conclude that “all the districts of Barcelona, with the exception of the Ciutat Vella, still have margin for growth in the following year if we compare them to the 2007 peak of the last real estate cycle.”
They are right, but it doesn’t prove anything. If house prices and rents rise in Barcelona over the next 12 months, delivering positive gross investment returns, it won’t be because they rose in the past, or have anything to do with boom-time highs.