All experts agree. The year we have just left has been spectacular for the Spanish residential market, the best year since the real estate bubble burst a decade ago, and the trend will remain at least throughout 2018, which will be a continuation in terms of house construction, house sales, mortgage concession and price increases. Also, even though the market will continue to move at different speeds with Madrid, Barcelona, the Balearic Islands and coastal areas running ahead, the burden of recovery will gradually spread to other areas.
“Undoubtedly, 2017 was the best year since the crisis broke out. From 2007 to 2013, we witnessed a strong restructuring that included price adjustments of up to 30%, in 2013 the market stabilized and by this year we’ve seen significant price increases that will remain throughout 2018. We foresee price increases ranging between 10% and 15% in large cities such as Madrid and Barcelona, and increases that could even reach 30% in prime areas where demand has grown and there’s very little offer”, states Óscar Larrea, new work Engel & Völkers director in Madrid.
Bankinter is also very optimistic about the next financial year. “Undoubtedly, 2018 will be the best real estate year in the last decade”, states Jesus Amador, real estate analyst for the entity. “From the macro point of view, we will continue to see figures that support the housing market. The GDP will stand at 2.5%, employment will continue to increase and unemployment rates will fall for the first time in many years based on a 15% threshold by the end of 2018, which will undoubtedly boost home demand”. In addition, “housing will continue to be a very attractive asset to invest in when compared to other financial products such as fixed income in a low-interest rates context.” In fact, 2018 will also be the last year before financing costs start to rise”, adds Amador.
Despite these good prospects, the market will have to overcome several obstacles. The lack of land classified for urban development, high construction costs, and the promoters’ difficulties to access financing could, if not truncated, at least condition the construction activity, as well as a positive price evolution. Many promoters have already begun to consider the first of these obstacles.
“It’s clear that throughout the last few years urban management has stalled, meaning that lands classified for urban development would run out sooner or later”, says Sandra Daza, Gesvalt’s general director. This lack of land that is ready to build has already led the main promoters in the country to include the purchase of land not classified for urban development in their business strategies, even with the urban planning and processing risk that this entails. This was unthinkable until just a couple of years ago but is now necessary so listed companies can fulfill their business plans and long-term housing delivery.
“The lack of land classified for urban development, high construction costs and the promoter sector’s difficulties for accessing financing will determine 2018”
“We have land to build homes for the next four or five years, but our plans are to buy land not classified for urban development to manage it and maintain the building rhythm once it runs out”, says David Martinez, Aedas Homes general director.
“In recent years, not enough land classified for urban development has been generated to build the 120,000-150,000 homes the market aims to build, and once it is reached the cycle will have changed, because the land production timing is supra-cyclic, that is, it lasts longer than a cycle”, adds Alberto Valls, Deloitte’s responsible real estate partner.
Land classified for urban development is running out
In his opinion, promoters have very few options to face this shortage. “Either they create land or buy companies or platforms that have important land portfolios”. In this sense, he remembers, for example, two of the large real estate transactions of last year. Blackstone and Cerberus’s acquisition of the Santander and BBVA’s real estate portfolios, respectively. Both with an important land component.
The huge shortage in land classified for urban development is beginning to be a problem in the strongest markets such as Madrid or Barcelona, where price tensions are already occurring in the land that is going on sale, with a more than evident competition and with some promoters willing to pay prices that have started to alarm people, even if it’s only in very specific areas and spaces.
The most recent and striking example is, without a doubt, Operation Calderón, where the Athletic of Madrid’s intention is to obtain a land repercussion price of around 3,500 euros per square meter, which would imply selling homes for over 6.000 euros. Undoubtedly, an outside-the-market price that has led a good part of the sector to despair, and which, nonetheless, hasn’t managed to demotivate all those who are interested.
“Those who continue targeting this type of operations, do so because they know that land won’t be released in the short term”, explains Carolina Roca, vice president of the Madrid Promoters Association (Asprima). “The problem is that land isn’t only gaining popularity in areas with more elastic demand, where price can be increased, but strong price rises are also taking place, where demand is much more rigid, like for example in El Cañaveral, where land prices have gone from 300 to 500 euros per square meter, which means houses are 15,000 euros more expensive”, he adds.
On the other hand, purchasing the land under management isn’t risk-free. Let’s not forget that Madrid has jumped on the informative arena in the last two years due to the paralysis or delay of several areas that comprise thousands of homes. One of the most popular ones is, without a doubt, Operation Chamartín –renamed as the Castellana Norte District -, which represents about 11,000 homes and which could finally emerge in 2018.
Cranes haven’t reached the old Cuatro Caminos garages or the old Ministry of Defense site in Raimundo Fernández Villaverde yet, both cooperative projects started three years ago. And even though the southeastdevelopments are more striking in terms of housing volume -37 million square meters-, with a building capacity for up to 105,000 new homes over the next 15 years and where the Madrid City Council has decided to build only one-third of the homes planned.
“In recent years, sufficient land hasn’t been generated to reach the 150,000 homes the market aims to build”
“Without a doubt, land purchases will have to be done rigorously and will continue to be done with private funds. Whoever doesn’t do it this way may have some problems, although they won’t be systemic problems, as happened ten years ago, but individual problems”, adds David Martínez.
For his part, Ernesto Tarazona, executive director of the Twin Peaks family office, states that “there is no doubt that price levels are being reached that are no longer as easy to defend and that will end up being transferred to the final customer. They may be able to pay for the homes, or not. At least, unlike what happened ten years ago, banks won’t be behind this type of operations”, he adds.
Land isn’t the only concern in this sector. In the last year, experts have also warned of a high construction cost due to the huge lack of skilled labor and still very weak financing of the promoter sector. “We need to recover the productive fabric that the crisis destroyed and which couldn’t recover in the last ten years. 1.5 million jobs cannot be created overnight, which is why the low skilled labor that exists pressures prices and delays terms,” says Carolina Roca.
“On the other hand, promoter sector financing has been exclusively reduced to five financial entities and to go from 80,000 to 150,000 homes, the developer loan will have to be doubled, and we don’t see said entities forecasting that,”, he concludes.
Objective: build 150,000 homes per year…
All experts also agree on the number of homes that need to be built in a healthy market and that number fluctuates between 120,000 and 150,000 homes per year, a figure we’re still far away from. According to the Ministry of Development, the number of visas in all of Spain was of 60,700 homes by September, fourteen times less than during the boom. Out of that amount, approximately 15,000 correspond only to Madrid, that is, 25% of the total, which gives an idea of the national level impact that a possible construction activity stoppage would have in the Spanish capital.
“There’s a structural demand for 100,000-120,000 homes per year that must be met and that cannot be covered only with used homes”, says Jesus Amado, who believes that “until homes that are currently under construction aren’t delivered, supply shortage will be a price catalyst”. To this date, only 10% of the homes sold – about 50,000 units – are new, compared to the overwhelming majority of second-hand transactions – about 450,000.
Evolution of housing visas… and overcome half a million homes sold
Another objective of the sector is to widely overcome the 500,000 homes sold barrier, a figure that hasn’t been overcome since 2008 and which has been within reach this year but that the Catalonia instability, could have prevented – without having official data – due to the sales stoppage in the Catalan community in the final stretch of the year.
“The economical context and prospects are clearly very good, but the truth is that the Catalonia political crisis not only affected the Catalan market, but also the Madrid market, since a part of the investment shifted towards this market, especially towards the renters market. We will have to see what happens after the elections, but the truth is that the market has slowed down, has lost impulse, and that will be difficult to recover from”, says Tarazona.
Bankinter estimates that “residential demand will reach a volume of about 550,000 homes in 2018, driven by more employment and better financing conditions”. “This will be possible thanks to the upward trend that will continue throughout 2018, giving a greater real estate activity in other areas such as the Basque Country, Valencia, Alicante, the Canary Islands, the Balearic Islands, Catalonia, a growth in the mortgage market and more employment and reverse migration, that is, those Spaniards who left during the crisis and are now returning and need a house to live in”, states Fernando Encinar, head of studies and one of the idealist’s founding partners.
“Employment continues to improve nationally and will undoubtedly push the real estate market, but we must not forget that there is still a great geographical disparity. While in Andalusia or Melilla unemployment rates remain above 25% in the Balearic Islands, For example, it is below 10%”, recalls Sandra Daza.
Prices will continue to rise
Regarding price evolution, there will also be continuity with respect to the increases registered last year, although, as David Martínez points out, these “cannot rise eternally above wages”. For Óscar Larrea, prices in the best areas of Madrid and Barcelona will rise between 10% and 15%. “We still have two or three good years left with price increases that will range between 5% and 20% depending on the type of asset and location. In fact, there are products in very prime areas and very exclusive products such 800 meters homes in El Viso or penthouses of more than 500 meters, where prices are returning to their 2006 and 2007 level due, mainly, to the huge shortage of the product”.
“Price levels are being reached that are no longer as easy to defend and that will end up being transferred to the final customer. They may be able to pay for the homes, or not.”
Bankinter, on the other hand, estimates a national level growth of around 5% “more in line with the cycle and with wages, which remain stagnant”, says Jesus Amador, while Daza insists on the need to talk cautiously about price evolution. “The market is very heterogeneous and has changed a lot in the last ten years, hence the need to analyze the market in detail and be careful about the messages sent regarding price increases since, for example, in Madrid, Catalonia, Galicia, the Valencian Community and Castilla y León, prices have risen by 5% in the last year, while in Aragón, the Basque Country, Asturias or Canarias, they are stable and in Cantabria or La Rioja they have dropped by 5% and 2 %, respectively.”
Finally, regarding the sector’s configuration, after Neinor and Aedas entered the market, Alberto Valls believes that in 2018 we will see the stock market debut of new companies and that we are heading “towards a concentration process similar to that of other countries such as France or the United Kingdom, where the first five promoters hold more than 40% of the market”, while David Martinez acknowledges that throughout the year that is about to start “we will probably see consolidation operations in the sector”.
Ernesto Tarazona, meanwhile, highlights that the market’s current liquidity is being translated into investor support for listed companies that are developing new works, as it happened in the past, while ensuring that we will begin seeing how” big international and national investors who got involved in the Spanish market four years ago, will be executing their divestment plans” in 2018.
No bubble in sight
This is the million dollar question. Is a new real estate bubble brewing? Despite these market anomalies, especially in very localized areas, experts discard it unanimously.
“We don’t have all the factors to think of one. We can talk about microbubbles in small markets or areas like Malasaña or Lavapiés, which have a lot of vacation rentals”, acknowledges Oscar Larrea.
For Fernando Encinar, “we have lived thinking that the real estate sector moved unanimously in a single direction. At the boom, everything rose, any type of asset, and everywhere and after the bubble burst all assets fell, no product or market was left unscathed by the crisis- What is new in the current situation is that some products rise in some areas, but fall in others,” he explains.
In his opinion, there’s another element that differentiates the current housing situation from the boom. “We live under a new mantra, that if the market rises, it’s a bubble and that any investor is an evil speculator that will inevitably cause prices to rise like foam. The truth is that most of the investors that are currently in the market are savers who have decided that their money, which was standing in the bank, deserved some movement and receive better returns with rentals.”
“The nervous investor profile who bought a home to sell it in a short time with large capital gains that proliferated 10-14 years ago has disappeared from the market. The new investor is more calm, quiet and assumes the profitability that the house’s rental produces, with no intention of selling, at least for the moment, because a decade ago, it was bought based on expectations, but there was no real demand for housing”, states Encinar.
“People bought to sell after a while because they knew that the price would rise. Now there’s a real demand and where there is no demand, prices are adjusted. The bubble speculator no longer exists, today the speculator who buys is to rent out the house, not to put it back on the market” concludes the expert.
# Credits to Fuster & Associates