Are you thinking about a real estate investment in Madrid? The market is recovering, and it’s a moment of opportunity in the Spanish capital.
It is common knowledge that during the last ten years house prices in Madrid have dropped, however the market has now turned the corner. Since peaking in 2007, property prices in Madrid have dropped between 40-60%, but certain areas of the city, especially downtown, the recovery in sales and prices is firmly underway. In the last six months of this year we have seen price increases in excess of 5%.
And there is even more good news, as in our opinion, there are still properties which remain undervalued. However, there is little room for price negotiation, as the owners who have not sold already, can afford to wait. The current market it is ideal for those looking for medium term capital growth, which still could be found in undervalued properties, while benefiting from the income offer by short-term from rentals.
So, if you are looking for a bargain apartment located in the attractive neighborhoods of downtown Madrid, do not expect to find many. You will be able to find a handful of high spec properties located in excellent surroundings, with shops and restaurants, and a swarm of potential buyers struggling to get the best prices. Out of these properties, most of the local property developers obtain a standard return of around 5%, however, if you are willing to work with certain market experts, who specialize in Madrid and in international buyers, you could achieve up to 10-12% return.
Is now a good time to buy property in Madrid?
Definitely, you should buy now, but only if you meet the following 3 investment requirements:
- You must be willing to consider an investment horizon of a minimum of 5 year period during which you should either live in the property or rent it, and be willing to consider properties which require complete renovation;
- You must have cash or an already approved mortgage;
- You must be willing to work or collaborate with a professional to find the right property, negotiate in detail all aspects of your acquisition, verify all legal matters, and make sure you get a price that allows you to achieve your required medium-term capital gains.
Of the three requirements listed above, funding is the key. As an investor with readily available funds, you are in a unique position to beat other buyers to a deal. This is your competitive advantage, which provides you with about two years head start, after which time credit will likely be more accessible to all, and the chance to buy quality properties at good prices will have diminished. But don’t let others for you. Consider your personal goals, expected fiscal gains, the strength of your financial situation, and the bargaining power it offers you to make a good investment.
Also bear in mind that, during the worst years of the crisis, many construction projects were left unfinished and, especially in large cities like Madrid, prime plots of land often did not progress further than digging the foundations. Nowadays, in cities such Madrid and Barcelona, the market is very different. In Madrid alone more than 30 top-quality projects are to be released in the coming months (compared to the nine new projects which were delivered in 2015) and sale prices are on the increase – a trend that it is projected to continue in the future. Ernesto Tarazona, director of Residential and Land of Knight Frank, describes the current situation: “Although [in Madrid] the number of construction projects has increased significantly compared to 2015, the supply is still scarce; we have an absorption rate of between 30% and 40%.”
Who is buying property in Madrid?
Around 70% of the demand, either as an investment or as a home, comes from Spanish nationals, so locals still dominate. Other buyers come from Latin Americans (12%) and Europe (8%). And, although it is too early to speculate on the real effect of Brexit on high-end residential investments, it is reasonable to suppose that Madrid will benefit from investors abandoning the UK in search of high value properties within the EU. Obviously, the political situation with Catalonia needs to stabilise, but the bigger picture in Spain shows positive trends in indicators such as tourism, expenditure in infrastructures, and employment. Frédéric Mangeant, director of the asset manager Shaftesbury in Spain, points out how the mortgage market also reflect this growing trend: “Traditionally, the general opinion has been that customers who buy this type of product hardly ever require financing, however, increasingly, we are seeing investors are returning to this market to leverage part of their purchase in favour of keeping cash. On the other hand, from the lender’s point of view, these type of clients and projects are highly interesting.”
Scarcity driving a bullish property market in Madrid
Scarcity is a big factor in the property markets of Madrid and Barcelona. The number of plots with already granted building permission available for construction in both cities is minuscule. The process of obtaining these licences is slow and cannot be speeded up from one day to the next (or even from one administration to another). For this reason, there is a consensus among industry participants that better town planning is urgently required, as the lack of a clear policy is extremely detrimental. In the case of Madrid, in particular the Operation Chamartín regeneration project needs to be unblocked, and the planning process for renovating buildings in the downtown area urgently needs to be streamlined. Without these improvements on the supply side, house prices can only go up.
With its high quality of life and attractive house prices, Madrid is perfectly placed to attract a growing numbers of investors and home buyers, and it’s a good time to invest in new developments and renovations that also help boost the local economy.