Is the residential sector in Spain overvalued?
Are foreigners overpaying for their properties?
A dual housing market in the residential sector in Spain is appearing quite drastically especially in Barcelona. We could call it a hyper-segmentation of a very high residential segment. We don’t make any judgment about it, but only invite you to think about this phenomenon. It is causing the fact that the residential sector in Spain is only attractive to foreigners. This phenomenon was very common in holiday rental but was relatively new in the residential sector in Barcelona. It has resulted in a rapid increase in prices in a very short period of time basically within the last 18 months.
We suggest having a look and checking some of the current top strategies aimed at foreigners. The suggested exercise is, firstly, comparing the square meters to German, English or French standards of properties for sale. The Spanish “metro construído” (square meter) shall be minimum 10% – 15% less than the comparable EU standards commercial area. This exercise will increase the minimum square meter price by 10% – 15%. Secondly, one must keep in mind that many foreign investors have sold US dollars, British pounds or Swiss francs to buy euros to pay for their properties. In the last 12 months, they have “benefited” with 19%, 14%, and 13%, respectively for the exchange rate: a stimulus to shift that interest rate profit to the purchase price. Finally, one must also consider the low-interest-rate environment we are living, and the power of this to investing in property at prices that would be questioned if there was a rational alternative. After this little exercise, we may end up with prices per saleable square meter comparable to those of Munich or to good Paris districts.
Barcelona is a fascinating and vibrant city, a good place to live and invest in real estate. But it’s not Paris nor Munich. All residential property investments (especially in the higher ranges) have an emotional and not rational component, which therefore can not be assessed. However, despite this seek for a “lifestyle investment” (superbly created as a marketing concept by the high-end real estate agencies, who have read and understood the market situation perfectly), buyers eventually want to find some economic sense in the asset, either through renting or considering a future sale.
This strategy is so aimed at a small audience (range and high) and a sub-segment of the public (foreign) that the niche market is tiny. Certainly, the argument that someone shall oppose us is that the residential sector in Spain is not local, but in a cosmopolitan city like Barcelona, the customer is worldwide. We personally don’t believe feasible to build a model of real estate investment (property is the most local thing in the world) completely ignoring local demand in a large urban area like the present one. Barcelona is not, for example, Ibiza, where local demand can be completely ignored in the business analysis due to its size. And we recommend being careful with that hyper-segmentation.
The liquidity of an investment is an essential value. This liquidity is given because one can sell or rent it an efficient way, in a reasonable time and fulfilling the expectations that are being sought. Such properties have complex liquidity to be rented at the prices that are needed for the investment to make some financial sense. Those who can afford those rents are often the corporate rentals (expatriates), and those areas (areas below Diagonal street) are not popular amongst families, they are far away from all international schools, where parking vehicles is often quite complex…. Other forms of rental can be explored, such as seasonal rentals, but the situation is very similar to the tourist apartment- the trend seems clearly oriented at buildings with this exclusive use (entire buildings) with many additional services to justify strong price premiums.
Regarding liquidity through the sale of these properties, we have the same opinion. At this point, I guess no one can still say that “properties never fall in price.” In our opinion, a local high range of clients in Barcelona does not seem to feel a predilection for buying in those areas. I believe no single buyer of “upper – Diagonal” would pay 6000-7000 € / m2 for an apartment in the Eixample, Ciutat Vella or any similar district. If they own one apartment there it probably has been inherited or belongs to their parent. So, the buyer must be a foreigner. I have enormous admiration for the professionals who are dedicated to that segment of luxury for foreigners and their huge business capabilities, but I still think that the base of customers for this assets is low or very low and the risk for lack of liquidity needs to be considered.
Finally: if you want to buy your flat because you are in love with it or because you could not live without seeing the rising sun in the morning through its window, or because of the autumn light reflected in the windows of the buildings in the Eixample courtyard, then forget everything you have read above and because you have enough money not to worry about it.
Read more about the residential sector in Spain in the next article!