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The Spanish real estate market seen increasing by 4% according to Bankinter

10 May
2017
Real Estate estimated Returns in Spain Chart

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Bankinter wrote an interesting report earlier on this year.

We found it was interesting to publish the main points of this research:

    1. The Spanish real estate market continues to be an attractive sector for investments.
    2. The demand will grow to exceed the threshold of 500k homes throughout 2018 thanks to the expansion cycle of the Economy, improving employment, low labour costs and low financing costs.
    3. The average price of housing will increase at rates close to + 4%, driven by the scarcity of supply and the boom of rent in the most consolidated areas.
    4. Bankinter believes that buying opportunities are depleting and the upside potential of prices is already more limited, once the price premium areas have reached pre-crisis peaks.
    5. The gradual reduction of stock and the strong growth in new work visas suggests that this time, the promoter activity will awaken from its lethargy.
    6. Finally, returns on real estate assets are being reduced by the higher expectations of inflation.

 

The most attractive investment ideas according to Bankinter are:

  • The purchase of real estate assets in very consolidated locations and with solvent demand: for instance: large cities and tourist areas, with a view of rental yield slightly above 3% and a minimum investment horizon of 3 to 5 years.
  • The investment in the real estate companies (check Bankinter full report at the bottom on this)

 

Chart of expected return vs the mortgage costs

Real Estate estimated Returns in Spain Chart

Residential markets: The favourable cycle continues

The recent evolution of the housing market in Spain characterised by a strong growth in demand and a disparate behaviour of prices.The most recent data from the General Council of Notaries show that total sales of housing increased by + 12.7% until the end of November. Growth is driven by sales of used housing, which increased + 17%. It concentrates 90% of the residential market and more than compensates for the decline of 7% in new home sales.

 

Check our chart of the yearly transactions in Spain by Spaniards and foreigners:

Yearly data. Source: Ministerio de Fomento
The average price registered a year-on-year increase of + 4% in late 2016. However, the current average of € 1,500 / m2 does not reflect a high dispersion of prices depending on location.

 

Economic cycle, profitability and conditions of financing are strong positive factors

According to Bankinter, the upward trend in demand will continue over the next few years.We estimate growth of demand close to + 10% in 2017 and a further moderate increase in 2018, supported by the following factors:
      • Economic growth and job creation The economy expansion in the years 2017 and 2018, for which we estimate GDP increases of + 2.8% and + 2.6% respectively. This expansion will give continuity to the Positive trend in the labour market.
      • Attractive investment Real estate investment has become one of the few assets capable of generating higher returns than inflation. The gross profitability of the housing rental rate stands at 4.36% in Dec16 according to the Central Bank of Spain and exceeds 8% if you take into account the capital gains (see our chart above). The real estate sector will continue to attract investment flows.
      • Good financing conditions Interest rates mortgage loans are still very low and the cost of financing is an incentive for the acquisition of housing.

 

Prices continue to rise. Are we facing the latest buying opportunities?

The housing price increase in Spain will continue to be progressive, in a range + 3% / + 4% over the next 2 years says Bankinter.These price increases should be more present in the more consolidated areas of large cities in the coming quarters, due to the following factors:
      • Scarcity of the supply 2016 marks a new low in construction, with a figure of 40k homes completed. The combination of a supply shortage and the increase in home sales will continue to push the soaring prices.
      • Increases in the main cities Madrid and Barcelona are recording year-on-year + 4% and +7.7% respectively and have already accumulated 8 quarters consecutive rise. The price trend in Madrid and Barcelona continues to accentuate price inequality in the residential market. Thus, while average prices continue adjusting slightly lower in annual rate in cities such as Bilbao (-2.9%) and Seville (-4.1%).

 

Check our chart of the yearly and quarterly price evolutions in Spain:

Real estate prices quarterly and yearly changes for all the regions of Spain. Updated to December 2016

      • Increases in the rental prices By the end of 2016, consolidated the trend of rising rents. The index Rental Contracts Updater (ARCA) accumulates 9 months consecutive increases, with strong increases in the neighbourhoods with scarcity. According to Urban Data Analytics, the rise in Barcelona exceeds 20% in districts like Sant Andreu and Sants-Montjuic and reaches 15% in neighbourhoods such as Gràcia, where prices suffered a slight adjustment during the crisis. This increase in rents will continue to be consolidated in the districts centres of the big cities by the rise of tourist floors exploited through platforms like Airbnb. The high profitability of these leases is already generating an increase in rents in more central districts in Madrid (Retirement + 17.3%, Center + 14%) and Barcelona (Eixample + 19.8%; Ciutat Vella + 12.8%). According to Bankinter, these double-digit increases derived from the shortage of supply and the boom of the tourist rental will not last in the long term will not extend to the whole of a market.

 

Residential development: a turning point in 2017 from historical lows.

The revival of residential development has not taken place in the second half of 2016, which closes with a few figures extremely low.The final data will show that the number of homes completed throughout 2016 will be in the environment of 40k units, which is a new historical minimum.
      • Reduction of the stock of new housing.
      • Strong growth in new building visas The visas of work presented in the Colleges of Surveyors for construction of housing closed 2015 with a rebound of + 38% and have increased + 33% until October 2016, which would give us a projection close to 65k visas of new construction for construction of housing in 2016. This figure would be the best figure since 2011.

 

Conclusions and investment recommendations of Bankinter

The real estate sector continues to be an investment alternative interest, because of the rising trend of prices and an attractive alternative to other alternatives in a context of low-interest rates.The selection of assets depends on the investor patience and the saving capacity of the seller.
The real estate assets located central locations and well-consolidated areas of large cities and resorts with higher demand continue to be an adequate alternative.Revaluation of housing is backed by the obvious shortage of supply, a growing demand and the increase in rents derived from the recovery cycle economic and tourist boom.In a scenario conservative, the gross return per rental can be the 3% / 3.5% range, an attractive return in the current environment of very low-interest rates and moderate inflation rates.Likewise, we consider that the medium size housing (100 m2) will absorb a greater percentage of sales, since those current buyers are, except for investors, families which have a demand for replenishment and greater needs for space, on the other hand, housing smaller in size than were frequent during the boom will be destined to rent in an increasing percentage.
As you will see on this chart, foreigners are active in Spain:
Have a look at our full report: “Why foreigners are buying real estate in Spain in 2017?
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