New is nice but is it worth a big premium? A look at the new versus resale price conundrum

The College of Architects in Málaga has announced that 5,418 building licences were approved in the province between January and September 2018, representing an annual increase of 41%. In fact, it’s more licences than the number approved between 2009 and 2017 in total. In 2014, six years after the global downturn kicked in, the Spanish construction sector hit absolute rock-bottom and only 798 licences were issued in Málaga during the entire year. Set against the 2007 figure of more than 27,000 approvals, the catastrophe that hit house building in the region during the last decade is clear to see; it more or less disappeared.

So when activity returned and the first price rises were registered in the first quarter of 2014 in the Marbella area it was a recovery of the resale sector, there just weren’t any new projects around. And as there is a time lag between licence approval and a project being up for sale a few approvals trickling out of Málaga was nothing to get excited about. And, in my opinion, they’re still not. The highest number of projects approved so far in 2018 were in Málaga city itself (1,538), followed by Estepona (666), Mijas (623), and Fuengirola (425). Marbella, which always headed the list previously, is still hampered by the uncertainty surrounding the PGOU revision and is in fifth place with 405. Individual houses, including total renovations, make up 22% of the approvals, 78% are for multi-unit developments.

I think these statistics tell us a few things about what’s going on in the current market in the prime areas of the Costa del Sol. Full year stats for 2017 showed 20% of all purchases in Spain were in Andalucía, approximately 105,000 transactions, and it’s likely to be a similar percentage this year. But there are eight provinces in the region and more than 33% of Andalucían transactions happened in just one province: Málaga. The city itself, plus Marbella, Estepona and Mijas accounted for 45% of all purchases in the province. And in the prime locations foreigners dominate the market; for example in the Marbella area about 65% of all buyers are from abroad and at the very top of the market that number goes to about 75%.

So the demand is there but is the supply? In the case of new-build properties the figures quoted above for the year so far indicate a serious shortfall in the supply of new-build properties measured against demand. At first glance it may seem that it doesn’t really matter as the resale market is still outperforming the new-build sector by about 4:1. But I think it does matter because for some reason new-build property attracts overseas buyers like moths to a flame. They just want it even though larger and better-located properties are available at much lower prices just round the corner. The scarcity of new-build projects coming through the system is such that prices for new-build are rising much faster than for resales. At the end of 2017 statistics from the notaries indicated an 11% rise in prices for new build against 3% for resales. I attribute this to lack of supply but high demand in the case of new-build properties while supply and demand on the resale side are more or less in balance.

Marbella, the sixth most expensive town in Spain, is a good example of the new-build versus resale price conundrum. With thorough research it is still possible to identify well-located properties for between €2,500 and €4,000 per square metre, depending on condition, location and other variables. Recently I located a 3 bedroom detached villa front line to one of the coast’s best golf courses priced at €2,450 per square metre and one with 4 bedrooms in the same area at €3,000 per square metre. Both cases tell me that we have motivated sellers keen to do a deal. The fact is that just before prices crashed buyers in this area were paying between €6,000 and €7,000 per square metre for the best locations, no more, and in the resale sector prices should still be well below those levels to secure a sale.

However, buyers are already paying more per square metre than the pre-crash peak just to get their hands on a new property and in some cases the premium is as much as 50% above the equivalent resale price. I’ve worked in the Andalucían property market for many years and been through a few high/low cycles and I can’t remember a time with such a discrepancy between new and resale prices.

The College of Architects estimates the full year total will be around 7,000 licence approvals. I can’t see this improving the supply side in a meaningful way as it will be 2020/1 before these properties are in the sales pipeline. In the meantime, I worry that some buyers are paying such inflated prices for new build properties that they may never see a return on their investment. While I can accept some purchasers don’t mind too much about not making a profit I’ve yet to meet one happy to make a loss. New may be nice but when you come to sell it will have to relate to resale price levels. The fact that you paid double the going resale rate at the time won’t mean you can ramp up your asking price over and above what the market can stand. Only a big and sustained increase in the supply of new-build properties will reduce the pressure on prices and, unfortunately, I can’t see that happening in the short-term.

 

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About Barbara Wood - Property Finder

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2 thoughts on “New is nice but is it worth a big premium? A look at the new versus resale price conundrum”

  1. Adam Neale

    Interesting article. The disparity in prices between new and old can also be explained by a drop in prices in the resale sector. Unless reformed to new or nearly new AND/OR located in a highly desirable area, resale properties, particularly villas, are suffering from the competition of the new. The majority of clients simply do not want to buy a traditional andalucian style property. This is pushing prices up for new or recently reformed properties and pressuring downwards the prices of older properties.

  2. Barbara Wood - Property Finder Post Author

    I don’t think resale prices are falling, the statistics from the notaries show prices rising in all regions, most strongly in the cities and Mediterranean hotspots. I think many asking prices are too high but that’s because sellers got over-excited when they saw activity recovering and they need to be moderated but that’s not the same as prices falling. I know many buyers don’t fancy the idea of renovating themselves but it does make financial sense if you can buy, do a top-of-the range renovation and still come in under a new-build price per square metre. It’ll be interesting to see how prices compare, i.e., new against resale, when new-build supply does become more in line with demand.

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