Mallorca Property Market Report October 2010

It is 6 months since I wrote my last Mallorca Property Market Report and it is always a little bit worrying going back to reflect on what one has said and, whether with the benefit of hindsight, an alternative conclusion might have emerged! Back in March the big question was whether we could call the “bottom of the market” and what that might actually mean in practice – one thing is a market that has touched bottom and ready to move up the gears quickly, with real growth just around the corner, while the other is a market where values have bottomed out but the expectations are much less about growth and much more about “stagnation”!

My conclusion at the time was that we may indeed be able to call the bottom of the market if we were to define it in terms of reaching the “bottom of the cycle of underlying residential property values in Mallorca” (please note the very important reference to underlying values, something very different to, for example, asking prices!). More specifically:

March 2010 Market Report Conclusions

1. Underlying values to bottom out at current levels
2. The evolution of asking prices to vary dependent upon whether they have been set realistically / adjusted sufficiently to account for the significant falls in property values.
3. Future growth in values to be non existent in the short term and very limited and restricted to underlying inflation in the medium term ie no real growth in the next couple of years. Modest growth over above general inflation levels in the economy to follow thereafter at levels of 1-3%
4. Special properties with “unique” qualities – front line; very good sea views; restrictive planning conditions – rural fincas; high quality developments etc to perform better / out perform the market in the medium / long term.
5. Land values to hold down prices in the medium term as developers take advantage of cheaper land to sell at these new lower levels for the medium term. Long term shortage of supply, save for those in urban areas and for “mid range” apartments, like Palma, Inca and Manacor, should see values rise

Alongside these conclusions I set out a few “tips” or recommendations for both owners and potential investors of Mallorca residential property:

1. If you are a lifestyle purchaser or investor with an income return bias start to look at the emerging buying opportunities BUT..
2. “BUYER BEWARE” it is all about value and ensuring that you buy at an appropriate level and don’t over pay on unrealistically priced properties.
3. Look at new build where good discounts are available (but beware of off plan unless your deposit(s) are backed with a bank guarantee)
4. Look at properties with “defensive” qualities, as set out in (4) above, for greater short term security
5. Look at land to hold as a long term investment / to build a home. Particularly rural plots, front line or with very good sea views etc

Market Update March 2010 – October 2010

So what has been the reality of the last 6 months? Have my conclusions been largely borne out or has hindsight led us to see that we should have reached alternative conclusions?

Lets start by reviewing the statistics and data that have emerged since the March 2010 report and what the so called specialists have been saying. But before that let’s enjoy the headline that greeted me this week that none other than the Spanish Prime Minister had just called the bottom of the property market in Spain! While I am immediately cynical when it comes to anything said by a politician, particularly when it is a Foreign PM talking to US investors in a desperate attempt to convince them to buy bundles of government bonds at the lowest possible yield, he did seem to be confirming what I said, namely that we are at the bottom and although it is true that I said it 6 months ago, if prices have largely remained unchanged over that period, then it could be said that it was the bottom then as well as now!

The problem for me is that Zapatero then proceeded to get over excited, quoting official statistics that appeared to indicate that in many areas of Spain prices were starting to rise ie we had touched bottom and wey hey we are on an upward trajectory again! So let’s look at the emerging data, starting with ZP’s own Housing Ministry.

National Institute of Statistics (INE) According to new figures from the INE, Spanish property prices rose (quarterly) for the first time in 3 years. More specifically these figures claim that average prices at the end of June were 1.6% higher than at the end of March although over 12 months prices are still down but by just 0.9%. For the Balearic Islands / Mallorca the statistics weren’t quite as rosy but still offered “some positive” news for those desperate to call the end of anything called recession / crisis / market crash etc! Here the overall figures put property values unchanged for the last quarter but down 2% for the year. For new build property it appears there is a “rebound” with prices up 1.4% even though for the last 12 months prices remain 2.5% down. Second hand property values were down 1% for the last quarter and 1.6% over 12 months.

Interestingly only Navarra in Northern Spain came out with worse data with a small fall of 0.1% in the last quarter. In other words what the INE is suggesting is that in all regions, bar Navarra and the Balearic Islands / Mallorca, property prices grew in the last quarter!

The trouble is it is very difficult to take seriously figures which tell us that overall Spanish house prices have only fallen 10-12% since their peak in 2007. The fact that the index suggests prices may have started to rise is not in itself that surprising had the index registered price falls of 30% or more. The problem is that we are expected to believe that, having barely fallen since the peak, prices are now rising again (at least on a quarterly basis) while we are still living out the consequences of the worst recession in living memory, a severe credit crunch, 20% plus unemployment, and a glut of 1 million new homes sitting there empty!

The same INE statistics, but this time for land values, paint on the surface of things a similar picture but equally show where future on going price weakness in the market may come from. According to these figures released earlier this month land prices in Spanish cities fell 14.9% over 12 months to the end of June, although the figures for the first quarter of this year indicate a small 3% rise. That said this 15% annualised fall in Q2 was the biggest fall on record since the Ministry of Housing started publishing this data in 2005. This put the average cost of building land in Spanish cities at 210.7 €/m2. With land values accounting for 30 – 50% of the final value of a property it is clear that while this trend continues the floor under the market for new build housing will remain weak something which effects the wider market as well. In other words with land values falling developers, when they decide to build again, will be able to do so much more cheaply and thus offer them for sale at much lower prices possibly even lower than what they can today for the existing stock! With the stock of available properties still so high and the prospect that new housing can come on stream profitably at lower levels it is easy to conclude that general growth in the market (ie values starting to rise), as we said in March, is still some way off. Obviously where the supply side is constrained because of the location eg front line properties, or type eg rural fincas where planning laws are getting much tighter, both of which are very relevant factors in Mallorca, then the outlook may be a little brighter.

Tinsa (Property Valuation Company): According to Tinsa average Spanish property prices fell 4.6% over 12 months to the end of August. Furthermore after 9 months of trending towards smaller price declines, this is now the second consecutive month in which the index shows price falls accelerating, from -4% in June, to -4.6% in August. For the Balearic / Mallorca and Canaries Islands the fall was a little larger and stood at minus 5.3% taking the overall fall in the index for the Islands down 16% since 2007 compared to 17% for Spain as a whole and nearly 22% % for the Mediterranean coastal areas. While the differences are what might be expected ie the mainland coastal areas, which bore the brunt of the speculative development boom, have suffered most, all the anecdotal evidence including actual sales prices would suggest that at best the market has fallen by 25%-30% and some what more in the worst effected areas. (important note: many properties were historically over inflated in terms of asking price at the height of the market, and remain so even as we speak today, so here an adjustment might even have to be be as high as 50% to get back to true underlying value. Obviously where a property was appropriately valued at the peak a 25% reduction might be perfectly reasonable to reflect true current value)

It is important to note that Tinsa’s figures are based on subjective valuations and in most cases these are calculated using asking prices of comparable properties in the region. By nature therefore these valuations are likely to lag the market, some say by anything between 12-24 months. In other words we could quite realistically assume that if Tinsa says the market is still falling and that the pace of fall has started to increase again, then in all likelihood this trend in falling values could well continue for a few months yet. Where I might differ is not with where the figures are going but the time it is taking for the likes of Tinsa to reflect what has really happened ie they are indeed probably at least 12 months behind the times. Since they base their valuations on asking prices it is hardly surprising! In other words the Tinsa figures may call the bottom of the market 12 or 24 months after we really have seen values touch bottom.