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Short term development projects: Do you need to like the location?

A remark often made to us by investors is that they have no interest in investing in, or may not like, a particular market.  Quite naturally, there are sometimes valid reasons for this. Just as some people won’t invest in pharmaceutical or technology shares because they think the sectors will under perform, some people will think the same of certain property markets.  If prices are not going to rise within an acceptable time frame, or the rental income is not attractive, having a passive, capital growth investment property make little financial sense.

Should the same thinking apply to a short term development project where the return is not determined by capital growth?  Of course, if prices are falling then it makes little sense to develop a property as the downside risk may too great.  The eventual return is likely to fall over the construction period and there is no way of evaluating this properly.   However, if prices are stagnant then as long as there is sufficient demand for the finished product at the prices the developer needs to make a profit, and the project is costed and run properly, capital growth is not a factor. If there is any, it will only enhance the return. Under these circumstances there is every reason to undertake a low risk development project in that market.

The Costa del Sol is certainly an example of a property market that has seen a major correction.    As a result of the property crash prices fell by over 40% and whilst the market is now slowly recovering general property prices are not set to leap forward and show staggering returns in the short term.  The good news from a development point of view is that few, if any, analysts and commentators are forecasting the market to fall further.  For example, the Sociedad de Tasación’s new housing market bulletin for 2015 reports that the average price of new housing increased by 2.9% last year, reaching a price level equivalent, in real terms, to those registered in the month of June 2002.   In November 2015, the General Council of Notaries reported that the number of housing transactions carried out reached a total of 34,918, which represents an increase of 7.3% over the same month of the previous year.  This meant 18 months of continuous growth.

Some investors will argue that there is still a lot of property available on the secondary market so it makes no sense to build new properties.  In certain locations and price points this is certainly the case.  According to a study carried out by Idealista, 59% of the advertised homes are priced at lower than €100,000, while 23% cost between €100,000 and €150,000.   The homes with prices between €150,000 and €200,000 account for 10% of those advertised, and those between €200,000 and €300,000 account for 6% of the total. Importantly, just 2% of these properties are priced at over €300,000.   So if you develop properties that are priced at over this figure there is certainly no oversupply.

As Mark Twain is commonly quoted as saying, ‘Lies, damned lies and statistics’. It is easy to be selective and use statistics to support a point of view.  The fact is, some months the figures (and hence the headlines) are good, some months they are not. This is what happens when the market bounces along the bottom of the price cycle.  However, with the general economy improving and demand from overseas buyers picking up, the worst is behind the Spanish market.

So what sort of investment returns should an investor expect from developing in Spain?  This will depend on the location, the sector and the risk involved. Securing a change of use for land to be developed may produce an excellent return, but the risks will be too high for most investors.  Refurbishing an existing building will involve much less risk.   It is all about doing the right due diligence, working with the right professionals and adopting a conservative approach.  With an investment period of two years or less, and double digit annualised returns on invested funds, the financial rewards can be attractive.

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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.

Sotogrande

Is Sotogrande the best residential development in southern Europe?

We have long had a policy that we will not offer properties to our clients unless we have seen them ourselves.   As we mentioned in a recent property bulletin, the Spanish property market is showing signs of recovery so Dan Wainwright, our UK director, and myself have just spent a week looking at opportunities in southern Spain.  There are certainly some great opportunities for both investors and owner–occupiers (holidays and permanent residents) to buy quality properties at the bottom of the price cycle.

One of the areas we visited was Sotogrande and it really is a great place to live. It  is located in the province of Cadiz, where the mountains of Andalusia and the River Guadiaro meet the Mediterranean Sea.   It is 30 minutes from Marbella,  only 20 minutes from Gibraltar Airport, one hour from the airports of Malaga and Jerez and very close to the cities of Granada, Seville and Jerez. It  has been carefully developed into what is now an outstanding resort. Its wide avenues, harbour, two beach clubs, world class hotels, colourful Marina, and every conceivable kind of service:

Banks  ;  doctors   ; lawyers  ;  shops  ;  restaurants  ;  car hire  ;  tennis and  padel tennis courts  ;  horse riding  ;  sailing  ;  art galleries  ;  craftwork and antique shops  ;  a colourful street market every Sunday.

The two beach clubs, El Octógono and El Cucurucho are located in unparalleled surroundings and both have direct access to the beach. The clubs offer members and visitors a range of unbeatable services and activities for children and adults.  The Sotogrande International School has been an IB World School since January 2000. It offers both a Primary Education Programme and the Diploma Programme. It is a private school, with English as the main language.

It is also a great sporting area with five superb golf courses including Valderrama,  the 97′ Ryder Cup venue, the Real Club de Golf and La Reserva de Sotogrande.  It also has eleven polo grounds of the highest level.  It is home to the first marina ever built in Spain, with 1,400 moorings of between 6 and 15 metres. It is often referred to as Little Venice because of the many canals and special atmosphere and it offers residents the option to have their boat moored right outside their home.

New build two bedrooms in the marina start from 350,000 euros and villas in the area start from around 550,000 euros.  There is good rental demand, particularly from people working in Gibraltar, and with the Spanish market set to recover now is the time to buy.  If you are looking for a lifestyle home and a sound medium term investment, Sotogrande may be the ideal location.

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Spain – bottom of the market and set for recovery?

In August 2012 we commented on the Irish property market and the fact that all markets recover in time and Ireland would be no different. This has certainly been the case, with prices in Dublin having risen over 20% in the last year. The recovery has also spread to the rest of the country with prices rising by 5% over the same period. Some analysts have even asked whether a price bubble is forming. This is for a property market that a short time ago many people were questioning whether it would recover in this decade, let alone the next few years! The same applies to the UK market. Like Ireland it fell as a result of the global financial problems of 2007/8 and took some time to recover. When it did, it took many investors by surprise and they ended up buying far outside 10% of the bottom of the market.

Over the past twenty years we have seen a number of ‘boom and busts’ and have learnt a couple of things that we keep reminding ourselves and our clients of – it is almost impossible to pick the absolute bottom of a property price cycle and all markets recover in time. It is a question of ‘when’ and not ‘if’. We firmly believe that if you buy within 10% of the bottom of the market you will have done well. If you buy within 10% of the top you will certainly not have done so. But getting the timing right is not easy. Markets seem to recover a lot quicker now than they did twenty years ago when we started our business. This is partly due to better communication channels (the internet, social media etc), which gives people easy access to market information. Unfortunately, this doesn’t mean it is easier to pick the bottom of a property cycle, it has always been extremely difficult to do that and we doubt that will ever change. It does however, help investors more quickly identify market trends and move quickly to take advantage of opportunities.

If you are looking for a medium term investment in a market:

that appears to have bottomed out and in any event should be within 10% of the low point of the current price cycle
offers security of title
an adequate legal system
access to market information etc
has an active secondary market
is not an emerging market
where do you look?
One country you could consider is Spain. The market there certainly crashed and the ‘doom and gloom’ commentators have said that there is an over supply of properties, no investor demand and no hope of recovery. Does all this sound familiar? We commented on the Spanish market in June and November of last year and fully acknowledge there has been an over supply and little investor demand. However, no hope of recovery? All markets recover in time and Spain seems to be about to do that.

It certainly appears that the market is now within 10% of the bottom of this price cycle. House prices dropped 3% year on year to June 2014, the lowest annual fall for 6 years. The data from Tinsa is the latest evidence of what commentators increasingly declare to be ‘the bottom’ of Spain’s housing market decline. The month of July saw price rises in several provinces, with the improvement being largely credited to foreign property investors buying on the coast and in major cities. These investors are looking to cash in on the highly depressed property prices which tumbled from their pre-crisis highs. This is particularly the case for Britons who accounted for 15% of all sales to overseas investors, followed by the French (10%), Russians (9%), and Belgians (7%). The Golden Visa scheme, which allows residency through the purchase of a property, came into force on the 30th September 2013 and has also resulted in increased interest from the Middle East, Asia and Russia.

Commentators are now becoming more bullish, so we can expect investors to increasingly return to the market. “We have already seen a staggering 2,500 per cent increase in Middle Eastern buyers this year versus the same period in 2012, and a 190 per cent increase in buyers from Russia and Lithuania.”, said Marc Pritchard, sales and marketing director for Taylor Wimpey España, in a report in Telegraph UK. This sentiment is supported by Myles Johnson of the Financial Times who said “Several large deals have been completed for assets that 18 months ago not even the most foolhardy speculator would have touched.”

The general economy is also showing signs of improvement. Spain has the 13th Highest GDP in the world and in 2013 it stood at approx. $1.4 trillion, with a per capita figure of $30,557 . In line with most countries in Europe and elsewhere, its economy was adversely affected by the 2008 global financial crisis. The government was forced to seek EU financial aid and introduce severe budget cuts which culminated in unemployment exceeding 20%. By 2014 the economy was on its way to recovery with 1.4% increase over the previous year. Exports mainly led the recovery which was aided by private consumption, an improving labour market and stronger confidence. Business investment is projected to benefit from the better economic outlook and higher exports. Higher activity will result in positive employment growth, but ample spare capacity will keep inflation low.

The above doesn’t mean that prices are going to boom overnight throughout Spain, but it does mean that in some areas now is the right time to buy and take full advantage of the up-turn.

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Spain – bottom of the market and set for recovery?

In August 2012 we commented on the Irish property market and the fact that all markets recover in time and Ireland would be no different. This has certainly been the case, with prices in Dublin having risen over 20% in the last year. The recovery has also spread to the rest of the country with prices rising by 5% over the same period. Some analysts have even asked whether a price bubble is forming. This is for a property market that a short time ago many people were questioning whether it would recover in this decade, let alone the next few years! The same applies to the UK market. Like Ireland it fell as a result of the global financial problems of 2007/8 and took some time to recover. When it did, it took many investors by surprise and they ended up buying far outside 10% of the bottom of the market.

Over the past twenty years we have seen a number of ‘boom and busts’ and have learnt a couple of things that we keep reminding ourselves and our clients of – it is almost impossible to pick the absolute bottom of a property price cycle and all markets recover in time. It is a question of ‘when’ and not ‘if’. We firmly believe that if you buy within 10% of the bottom of the market you will have done well. If you buy within 10% of the top you will certainly not have done so. But getting the timing right is not easy. Markets seem to recover a lot quicker now than they did twenty years ago when we started our business. This is partly due to better communication channels (the internet, social media etc), which gives people easy access to market information. Unfortunately, this doesn’t mean it is easier to pick the bottom of a property cycle, it has always been extremely difficult to do that and we doubt that will ever change. It does however, help investors more quickly identify market trends and move quickly to take advantage of opportunities.

If you are looking for a medium term investment in a market:

that appears to have bottomed out and in any event should be within 10% of the low point of the current price cycle
offers security of title
an adequate legal system
access to market information etc
has an active secondary market
is not an emerging market
where do you look?
One country you could consider is Spain. The market there certainly crashed and the ‘doom and gloom’ commentators have said that there is an over supply of properties, no investor demand and no hope of recovery. Does all this sound familiar? We commented on the Spanish market in June and November of last year and fully acknowledge there has been an over supply and little investor demand. However, no hope of recovery? All markets recover in time and Spain seems to be about to do that.

It certainly appears that the market is now within 10% of the bottom of this price cycle. House prices dropped 3% year on year to June 2014, the lowest annual fall for 6 years. The data from Tinsa is the latest evidence of what commentators increasingly declare to be ‘the bottom’ of Spain’s housing market decline. The month of July saw price rises in several provinces, with the improvement being largely credited to foreign property investors buying on the coast and in major cities. These investors are looking to cash in on the highly depressed property prices which tumbled from their pre-crisis highs. This is particularly the case for Britons who accounted for 15% of all sales to overseas investors, followed by the French (10%), Russians (9%), and Belgians (7%). The Golden Visa scheme, which allows residency through the purchase of a property, came into force on the 30th September 2013 and has also resulted in increased interest from the Middle East, Asia and Russia.

Commentators are now becoming more bullish, so we can expect investors to increasingly return to the market. “We have already seen a staggering 2,500 per cent increase in Middle Eastern buyers this year versus the same period in 2012, and a 190 per cent increase in buyers from Russia and Lithuania.”, said Marc Pritchard, sales and marketing director for Taylor Wimpey España, in a report in Telegraph UK. This sentiment is supported by Myles Johnson of the Financial Times who said “Several large deals have been completed for assets that 18 months ago not even the most foolhardy speculator would have touched.”

The general economy is also showing signs of improvement. Spain has the 13th Highest GDP in the world and in 2013 it stood at approx. $1.4 trillion, with a per capita figure of $30,557 . In line with most countries in Europe and elsewhere, its economy was adversely affected by the 2008 global financial crisis. The government was forced to seek EU financial aid and introduce severe budget cuts which culminated in unemployment exceeding 20%. By 2014 the economy was on its way to recovery with 1.4% increase over the previous year. Exports mainly led the recovery which was aided by private consumption, an improving labour market and stronger confidence. Business investment is projected to benefit from the better economic outlook and higher exports. Higher activity will result in positive employment growth, but ample spare capacity will keep inflation low.

The above doesn’t mean that prices are going to boom overnight throughout Spain, but it does mean that in some areas now is the right time to buy and take full advantage of the up-turn.

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Fortune favours the brave property investor as Spain launches Golden Visa

They say the darkest hour is just before dawn and that is certainly the case when it comes to the Spanish property market. It is in a severely depressed state with an over supply of properties in some locations and little demand from domestic and overseas buyers. Many value buyers will see this as an opportunity to buy a quality property at a heavily discounted price. Property experts are predicting a boost for the Spanish property market with the country’s new ‘Golden Visa residency investment visa set to attract a lot of buyers from outside the European Union. However, as you will see below, for every ‘bull’ there is a ‘bear’ out there.

The long anticipated ‘Golden Visa’ legislation granting non-EU nationals automatic Spanish residency if they buy suitable property investments will certainly impact on the market. This has now officially been made law after being published in the state Gazette (BOE). This opens the door to thousands of potential investors spending a minimum of €500,000. Whereas traditional buyers have been the British, Dutch and Germans, this could change with estate agents reporting a rise in interest from buyers from the Middle East, Russia and China. These nationalities have already been snapping up properties in anticipation of the new law, which is retrospective. The law will allow those who have already bought to benefit from the residency rights which allow them to stay in Spain for 12 months compared with the current 90 days and a further residency permit that is renewable every two years

The visa is set to boost the prime property market in Spain according to Knight Frank. Its latest residential insight report says that prime markets are on a firmer footing with some more affluent second home hotspot reporting price growth for the first time since the onset of the global financial crisis. According to the Knight Frank report Mallorca, Ibiza and Barcelona are leading the way and it is hoped that investors from Asia and the Middle East in particular will shore up some of Spain’s more oversupplied markets as a result of the investor visa. ‘The outlook for Spain’s luxury housing market is improving. Both the volume of enquiries and agreed sales have increased in the first half of 2013. Spain’s prime markets are attracting a broader range of international buyers who have the confidence and finance in place to purchase. Buyers previously looking in neighbouring European countries are seeing value in Spain and in particular the Balearics once more,’ the report says.

The report also reveals that Madrid is increasingly on the radar of international buyers with interest from buyers in the United States, Mexico, Colombia and Venezuela. Knight Frank’s associate office in Barcelona recorded more sales in the first half of 2013 than in the whole of 2012. Mallorca‘s recovery is also evident across most price bands but particularly below €600,000 and above €2 million and Dutch and Belgian buyers are increasingly active in the prime Ibiza market. Sales in Marbella rose 21% in 2012 year on year and there has also been interest from French buyers as a result of French President Francois Hollande’s policy on wealth tax. The report points out that Sotogrande remains a firm favourite with Madrid’s wealthy and Gibraltar’s business community. Popular areas include Sorogrande Costa, the Kings and Queens area and large plots close to the Almenara Golf Course

With the aftermath of more than a decade of debt-fuelled speculation is still taking its toll, not everyone is relying on the Golden Visa to cure the problems of the Spanish property market. Since the start of the year, foreign investors not seeking residency have begun to return to the Spanish property market for the first time since the crisis hit in 2008. Several large deals have been completed for assets that 18 months ago not even the most foolhardy speculator would have touched.
The question many people are asking is whether this increased interest from supposedly ‘smart money’ is an indication a floor has been placed under the property market, or whether such deals are simply speculative bets on heavily distressed assets. A rush of deals from private equity groups has been used by supporters of both sides of the argument to justify their case. Since the end of summer a number of real estate portfolios have been sold to more adventurous private equity buyers such as Blackstone and HIG Capital. The latter has bought a stake in the first large package of property assets put on the market by Sareb, Spain’s so-called “bad bank”.

A number of factors may be cited for the jump in the number of property deals, after three years in which almost no transactions took place. One has been the creation of Spain’s state-organised “bad bank”, which took €54bn of troubled property loans from the balance sheets of the country’s nationalised lenders. Sareb has begun to place these assets into portfolios to be sold to investors, which has helped generate confidence that a floor may have been set on prices . Another factor has been a wave of government-imposed provisioning rounds, forcing reluctant banks to write down the value of their bad loans and to raise capital to cover the expected loss. This has encouraged lenders to begin selling off assets at prices low enough to tempt foreign investors back to the negotiation table after years of denial and reluctance to accept large write downs.

Of course, in spite of encouraging signs, there is no guarantee that the good times are about to return. Spain has a stock of 650,000 unsold homes, according to its ministry of public works, with average prices having fallen by 30 per cent since the start of 2008. Nevertheless, some people believe the worst is over and now is the time to enter the market. ‘Fortune favours the brave’ and in this case, there are reasons to believe this will be true for Spanish property

Spain - flag

Spanish property market – is now the time to invest there?

We are often asked whether now is the time to buy an investment property in Spain. The answer is not as straight-forward as many people think. Some astute investors, including large institutions, are looking at investing there and are driven by distressed prices, an attractive rental yield and a weak currency. One essential ingredient to make it a great property investment is missing though – rising house prices and therein lies the dilemma facing the investor.

The economic situation is certainly not good at the moment. The economy is expected to contract by over 1% in 2013. Unemployment is rife, with youth unemployment at over 55% and there are ongoing talks with the EU over how to reduce the country’s budget deficit, which is likely to cause further pain for the market there.

The Spanish residential property market has seen prices fall by up to 40% since 2008. It is estimated that 500,000 home owners are in a negative equity situation and the government has had to pass laws to prevent banks repossessing homes and evicting families. However, the government is less inclined to help developers and banks who are sat on a large number of unsold homes. Both are being forced to sell at distressed prices, sometimes at up to 70% below their 2008 peak. This is not going to solve the problem overnight though. The international credit rating agency Fitch estimates there are more than 1m unsold homes in Spain, including hundreds of thousands of newly-built properties.

New construction has also been affected. In 2006 over 750,000 new homes were built. In the last two years it has been less than 100,000 per year. There is no point in building new homes if there is no demand and too many houses are already available. Developers didn’t grasp this point when they were building homes in expectation of future demand. A dangerous strategy that has now come to haunt them.

Unfortunately, house prices are showing no signs of recovery. They fell by 11% in 2012 and are expected by fall by around 10% this year. The good news is that some people expect the market to stabilise next year as the steps taken to assist the economy and re-structure the banking sector begin to take effect. Having said that, it is difficult to see when prices will actually start rising again.

One point supporting the argument now is the time to invest there is the relative weakness of the Euro. If the Euro strengthens over the next three to five years as the economy there improves, which many people expect it to, then the currency gain could be attractive.

If you do buy a property, there are fewer lenders who will finance overseas buyers in Spain. If you can find one, the maximum LTV is likely to be 60pc with interest rates starting at 4.5pc.

Some good news is that you will find the rental market is sound in the major cities and residential areas, but less so in some of the over-developed resort areas. Gross rental yields of around 4% p.a. should be achievable and of course, if you buy at a distressed price your return may be substantially higher than this.

For those seeking somewhere to live, the Spanish government is about to offer permanent residency to people who invest at least 500,000 Euros in the property sector. The program has been discussed for some time and it was originally muted that the figure would be 160,000 Euros. The sum appears to have gone up, but final details will not be available for several more months.

In summary, Spain may be viewed as speculative, opportunist market where some investors will make a great deal of money and some will sit on a non-performing asset for quite some time. However, if you buy the right property in the right location for the right price there isn’t much downside. This is especially the case if you are enjoying an attractive rental yield and an appreciating currency – both of which may be applicable in the case of Spain.