Our independent property expert Mark Stucklin assesses the current state of the market.

Illegal rentals on the coast

According to officials from the Spanish Ministry of Finance, 66% of Spanish properties rented out illegally without paying tax are located in Spain’s coastal provinces, stiffing the Spanish government out of 1.2 billion Euros annually in lost tax revenues.

An estimated 977,306 properties are rented out illegally in Spain each year by owners who do not declare rental income to the Spanish tax authorities. 650,000 of these properties are located in coastal provinces.

Catalonia has the greatest number of illegal rentals, with 24.5% of the coastal total, followed by Andalusia, The Canaries, and The Valencia Region.

The Spanish government is trying to clamp down on illegal rentals.

Most new builds already sold say developers

According to an article in the Spanish daily ABC, the association of Spanish developers (APCE) asserts that almost all of the 1.6 million new properties built in Spain over the last 3 years have already been sold, refuting claims that 1 million newly built Spanish properties remain unsold. The association also argues that reports of 800,000 odd housing starts each year are substantially exaggerated, as this figure relates to planning approvals, not all of which get built. According to the Spanish housing ministry’s figures 665,000 new properties were started last year, and 597,600 were finished.

Foreign investment in Spanish property up by 19%

Figures from the Bank of Spain reveal that foreign investment in Spanish property increased by 19.2% in the first 5 months of the year compared to the same period in 2006. The amount invested by Spaniards in property outside of Spain almost doubled over the same period.

The total amount invested by foreigners to the end of May was 2.252 billion Euros, almost the same as the amount invested in 2005, though still significantly below the 2.925 billion Euros invested in the peak year of 2003.

How does one reconcile this increase in foreign investment in Spanish property at a time when the market is clearly turning down? 

One explanation might be that many of the off-plan sales made in 2004 and 2005 are only now being recorded as investments as buyers take possession of their properties and complete the purchase before notary. This is the moment when the investment is recorded in the national accounts.

Nevertheless, the figures do seem to suggest that foreign demand for Spanish property has picked up significantly since last year, even though property professionals report that the market is still very slow. By the end of the year we should know whether foreign demand has rebounded, or whether these figures can be explained by some other factor.
Real Estate agents in Spain fold in tough market

Recent news of estate agents going to the wall has provided more evidence of the downturn in the Spanish property market.

Alicante’s local daily ‘Informacion’, quoting the regional real estate agents’ association, reports that a severe market shakeout will drive many opportunistic and unprofessional estate agents “established in the shade of the boom” out of business.

Alicante’s real estate agents’ association blames the existence of a “large number of agents that operate without any kind control or appropriate guarantees” on the market deregulation of 2000, which enabled anyone to act as a property broker in Spain. These agents will be first to fold in Spain’s property downturn, the association argues.

According to the article there are some 170,000 companies in Spain’s property sector, 75% of which may have to close over the coming years, with many of the remainder facing financial difficulties.

Fincas Corral – one of Spain’s largest agents – is a good example of the difficulties facing Spanish estate agents in today’s market. According to an article in the Spanish financial daily ‘Cinco Dias’, Fincas Corral has gone from 350 offices in February 2007 to 180 offices today, downsizing by around half. The article quotes a company spokesman saying “the market situation and rising interest rates have hit sales.”

According to Eduardo Molet – president of Spain’s network of real estate experts (REI) – 30% of agents will close this year, and the survivors will need to adapt their marketing to the new situation. Quoted in the Spanish press, Molet says that the market has suffered “a major slowdown since the 2nd quarter of the year,” resulting in a fall in sales that “many agents can’t cope with.” As a result “the stock of unsold properties grows every month,” leading to an “excess of supply.”

“Sales are falling, time-on-the-market is increasing, and estate agents need to develop a new approach to keep selling,” says Molet, who thinks that September will reveal how serious the market downturn is, and how many agents will still be in business after the holidays.

Developers need to “adjust their prices”

An article at the Eroski consumer website reports that the holiday home market on the Spanish coast is the most vulnerable to a downturn, and that developers operating in the sector may have to adjust their prices if they want sell their properties.

Luis Eugenia Martin – from the property consultancy Roan – is quoted as saying that developers will have to make “a real effort and adjust prices” of holiday homes on the coast to sell their stock of new properties. Although he expects prices for primary residencies to stabilise, “a more severe adjustment” may await the holiday home market.

In the coming months “prices for holiday homes on the coast will stabilise or even fall,” says Martin, though he expects primary homes in urban areas to continue rising by 4% to 5%.

Martin advises investors to “wait 6 to 8 months”, as the “increase in supply might mean that developers and owners make a bigger effort to reduce prices, which investors can take advantage of.” First home buyers, on the other hand, are advised to buy now because “first home prices are not going to fall substantially under any circumstances.”
Mark Stucklin is an independent property commentator who writes on the Spanish market for the Sunday Times.

This article first appeared on www.spanishpropertyinsight.com

[September 2007]

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Subject: Spain; property market