spain-beaches

The Costa del Sol or the major cities?

With the Spanish property market showing signs of recovery some of our readers have asked where in Spain they should buy and whether the oversupply in some areas will impact the recovery.   It is certainly true that there is still an oversupply of properties throughout Spain and this is likely to remain the case for some time.  The good news is that the number of unsold homes in Spain will shrink to 563,000 units in 2015, according to a report issued by the Spanish Realtors Association, in collaboration with the Institute of Business Practice (IPE) and the National Network of Qualified Property Consultants (RAIC).  This is a 40 percent decline from 2010.   It is worth noting that many of the homes are half built or poorly constructed in bad locations, with little chance of ever selling. It is all about buying the right property in the right location for the right price.

A commonly held view is that the major cities will be the first to see prices rise as foreigners snap up bargains there.  To some extent this appears to be happening, with agents in Barcelona for example, advising that up to 30% of sales are going to foreign buyers and prices are edging upwards in certain districts. The same is true of the Costa del Sol though, with foreign buyers rapidly returning there.

In the UK, London has historically out-performed the rest of the country in terms of capital growth.  Howere, in recent years this has not been the case in Spain.  The price of coastal properties surged 250%  from 1996 to 2007 as hundreds of thousands of foreigners, mainly from the UK, France and Germany, bought property.  Contrast this with the main cities of Barcelona and Madrid where prices rose 188% over the same period.

As you would expect with a property crash,  some areas were worse affected than others.   The Costa del Sol, which is on the coast and where prices are typically lower than the major cities, saw prices fall by as much as 50% as a result of the global financial crisis in 2007.  Barcelona and Madrid experienced a much less severe fall, with prices dropping by up to 30%.   Of course, such price falls are in general terms only and you can always find individual properties where the price has fallen more or less than these percentages.

Given the above, one could argue that the major cities are a safer location in terms of capital preservation – if prices fall they will fall less in these locations. However, given the state of the market the downside risk is not considerable. We believe the emphasis should be on picking the area that will show the best investment returns rather than which area will be the best for the preservation of capital. After all, with a limited downside the reason for investing in Spain is to maximise the return.

As indicated above, the price gap between the major cities and the Costa del Sol was narrowing between 1996 and 2007.  With prices falling further in percentage terms in the Costa del Sol, the price gap has now widened again with the major cities being relatively more expensive in comparison.  With foreign buyers returning to the Costa del Sol we may see a resumption of the previous trend where it out performs the major cities.

Whilst the major cities may or may not recover sooner, the issue for most investors is not which market will be the first to show price increases, it is which market will show the best returns over the medium term.  At the end of the day it is all down to the investment return over the period of time you want to invest. There is an over supply of properties everywhere, and more so in the Costa del Sol than in Barcelona.  However, it is all about buying the right property in the right location for the right price.  Both the Costa del Sol and Barcelona have properties that can satisfy those requirements.