Madrid real estate prices are up 21%: Is this sustainable?

Madrid real estate prices rose 21.3% during the last year up to 1Q2018. The average price per square meter is now 3,540.00€ for Madrid as a whole, although there is still a great deal of variation among neighbourhoods. Prices in premium neighbourhoods, such as Salamanca and Chemberí, have now exceeded pre-crisis levels. Areas in the suburbs have been slower to recover.

This is excellent news for the property market in general but both current property owners, and those considering purchasing property, are starting to ask some very valid questions.

Is this a bubble?

We are getting this question a lot lately. In short, the answer is no. Although a 21% year-on-year increase might seem like a lot, it is far from the economic definition of a bubble. The definition of an asset bubble is “When prices rise quickly and surpass levels justified by fundamentals.”

The first recognized asset bubble was in Holland, in the 1600´s, when prices ran up 27,400%. Another example is the Dotcom bubble of the early 1990’s, when the NASDAQ ran up 353%, then promptly collapsed. Clearly, we are a long way from these numbers.

It does make sense to look at the fundamentals. Sometimes, in markets that are restructuring or developing, it may be difficult for even professional financial analysts to determine what constitutes rational pricing. For example, when the Dotcom bubble crashed, the bottom dropped out of everything. Many companies that had lofty valuations went out of business entirely. But this also represented the perfect buying opportunity for many of the biggest firms in the world today. Share prices in companies that did survive, such as Amazon and eBay, have since risen tens of thousands of per cent from their lows in the early 2000’s. Investors that paid careful attention to the fundamentals made a lot of money.

What do the fundamentals tell us?

Naive people look at historical charts of Madrid real estate prices, see that the market has recovered to pre-crisis levels, and automatically assume that the market has peaked. This is a rational approach if they do not understand that the market has undergone significant structural change. Structural change causes a permanent change in the intrinsic value of an asset. There have been many structural changes in the Madrid real estate market in recent years, which will cause real estate prices to achieve stable values well in excess of historical highs.

What are these structural changes?

Madrid has seen much change in recent years. We think four points, in particular, are key to understanding the new pricing dynamics.

There has been a dramatic increase in the quality of Madrid real estate

According to Pierre, our property hunter in Madrid:

“Compared to other European capital cities, the prices in Madrid are still relatively low. What is different now is that the quality of the apartment stock has vastly improved. Ten years ago, the state of the average rental apartment in Madrid was just bad. Most apartment interiors were 20-30 years old, and sorely in need of refurbishment. Prices have had to increase to give landlords the incentive to refurbish and bring the apartment stock to the level of a modern European capital. So yes, prices are increasing, especially in the centre. But they are still quite cheap, compared with the prices in the centre of other cities. People that complain about the recent price increases are taking the luxury of living in a highly walkable, capital city for granted. We’re not even close to a ‘bubble’.”

The City of Madrid is streamlining regulation and taxes

Madrid has the best governance in Spain and is quickly becoming a model for other European cities. In the past couple of years, most bureaucratic functions have been brought online. Procedures in a number of areas have been streamlined and made more transparent. Most transactions that used to require long, convoluted trips to government offices can now be done from the comfort of one’s home. This includes many of the procedures related to real estate transactions.

Business taxes, property taxes and taxes on property purchases have all been lowered over the past ten years. The ITP, which is the tax on second-hand property purchases, is now 6%, the lowest in Spain. In comparison, Barcelona’s ITP is 10%.

Madrid is benefiting from the fallout of the Catalan Independence Movement

Barcelona used to be the “go-to” city for Spanish real estate investment. The increased xenophobia of the Barcelona government and the Catalan Independence Movement are rapidly changing all of this. Notably, Barcelona has introduced exceptionally strong Airbnb legislation: No new Airbnb licenses are granted in the centre. Not surprisingly, this has done a lot to deter foreign real estate investment.

Even worse for the city, the region of Cataluña has experienced severe capital flight. It used to be the richest region in Spain. So many firms have left (most of them to Madrid) that there is now only one Catalan based firm in Spain’s blue-chip stock index, the ICEX. Even legendary Cava producer Codorniu moved its headquarters out of the region.

The size of the Spanish construction industry has contracted, dramatically

One of the biggest problems in previous years was the significant overbuild. This caused an over-supply of housing, particularly in the suburbs. This oversupply caused the market to languish for years.

A consensus is forming that the industry is acting with much greater restraint, post-crisis. Today the Spanish construction industry accounts for only 5% of GDP, half that of pre-crisis levels. Moreover, some of the “ghost towns” seen outside of Madrid are seeing a renewal. Importantly, they have been re-zoned to increase industrial use and cut the housing stock.

Where will prices settle?

Only a person with a properly functioning crystal ball can answer this accurately. That said, many experts are forecasting Madrid real estate prices to rise 10% in 2018. However, most of these forecasts are based upon historical levels and do not incorporate the structural changes we have discussed.

Brexit is another important factor. Many British passport holders, particularly those that work in the City, are shopping for homes in the EU so they can retain their rights to work on the continent. Although it’s unclear if this buying momentum will last long enough for it to be a structural change (as opposed to a cyclical one), it is having an impact, albeit smaller than that seen in the Paris and Frankfurt markets.

Give the structural changes and Brexit influence, we think 2018 prices could easily rise another 15% year on year. Ultimately, we think the structural changes taking place could cause Madrid real estate prices to find a new equilibrium of 25%+ higher than the peak prices seen in 2007.

Do you want to check what Pierre and his team did for their customers this year? Check our article on that: Madrid property investment: a Case study

Send your request to our property hunter in Madrid, or follow the link if you are looking for a property hunter anywhere else in Spain. Ask us directly and benefit from the strength of our network!

Check the full profile of Brian, our local partner, Property Hunter in Madrid

The post Madrid real estate prices are up 21%: Is this sustainable? The analysis of our local property hunter appeared first on How to buy in Spain.

Madrid property investment: a Case study

Purchasing a “fixer-upper” and renovating it is one of the best ways to make money in property investing. This is particularly true in a city like Madrid, where the housing stock is old. This article explains why Madrid is such a good city for property investment, then shows a case study from one of Brian past clients.

Madrid is in the sweet spot for property investment

Madrid offers some of the best returns in Europe. The entry price is extremely low, and average returns on Madrid property investment are some of the best in Europe- particularly among leading capital cities.

Madrid and Barcelona are the top 2 main European cities in term of yields

according to Deloitte. Check the rental Yields for the major European Cities, Madrid and Barcelona have rental yields close to 5%.

If you want to read more on real estate investments in Spain, read our article we wrote a few weeks ago: What is the return on your Spanish property investment in 2018?… 10.9% according to the bank of Spain.

Madrid is the 3rd biggest city in Europe in terms of size…

Although Madrid property prices rose in 2017, there is still much room for appreciation. Prices are still 54% off their peaks of mid-2007.

Madrid is the 11th City in Europe in terms of price/m²

Source: Deloitte property Index 2017,  Overview of the European Residential Market

Moreover, Spain has some of the highest economic growth prospects in Europe. Remember, GDP growth in Spain is one of the biggest in Europe in 2018 as foreseen by the European Commission… Check our interactive chart (click on any country)

This, combined with efforts the Madrid Government has taken to build the city’s infrastructure and attract direct investment, augurs extremely well for property prices according to the team of Brian, our Property hunter in Madrid.

The icing on the cake? It could be Brexit. As businesses move out of London, many are choosing Madrid. In fact, The Guardian recently published an article detailing how the city stands to benefit from Brexit.

The benefits of apartment renovation

Being a successful property owner boils down to one thing: maximizing your rental yield. One of the easiest ways to do this is to buy a property relatively cheaply and refurbish it to improve its value. This is true in any market, but particularly so in Madrid.

The typical Madrid apartment is in an old building. Historically, they were divided into many small rooms and were often dark and rather forbidding. The city has been late to the game, compared with other European capital cities, in embracing the light-filled, open spaces that are so popular nowadays. Moreover, most Madrid apartments contain very old appliances- most lack dishwashers and dryers. Bathrooms rarely have modern showers and often lack the water pressure and/or boiler capacity for a proper bath.

Corporate clients and wealthier tenants prefer refurbished properties with modern conveniences such as dishwashers, microwaves and even wine refrigerators. Luxury and convenience rule the day. To meet these needs, one needs to do a full renovation. In the long-run, the money and time invested are well worth it.
In short, we have found that every additional 1€ our clients spend on refurbishment add an additional 1.5€ to the value of their apartment.

Case study: Calle de la Palma

This is typical of a renovation we managed for a client. The apartment is on Calle de la Palma, situated in the trendy neighbourhood of Malasaña. The street is a small side street, directly off the thoroughfare Calle de San Bernardo. Like many streets in old Madrid, it is narrow, lined with yellow and pink buildings trimmed in white. Houses are festooned with old gas lights and iron balconies- it is particularly evocative at sunset.

Relatively quiet at night, it has a number of excellent places to enjoy tapas. Bodegas el Maño, founded in 1927, is a traditional old bodega (wine shop) where you can still enjoy a glass of their speciality, wine from Zaragoza. Or if you like the new and fashionable, you can get a glass of wine and tapas at the sleek, sexy La Loca Juana. At the end of Calle de la Palma is the atmospheric Plaza de las Comendadoras. Here you will find a number of outdoor terraces and modern restaurants, such as Federal and Roll, mixed with traditional Spanish fare.

The renovation

This is what we call a “lifestyle renovation.” Our clients wanted a property they could use as a vacation home, but also rent for profit. After much looking, we found this property for them. Their total investment was 358,000€.

The apartment was a typical Madrid property- dark and forbidding with very few modern conveniences. Here is a before photo:

As you can see, the drop ceilings were very low, creating a hovel like effect

We opened up the drop ceiling to reveal the beautiful old wooden beams. We opened up walls, enabling the light and energy to flow freely through space. The kitchen and baths were re-tiled, although we retained some of the old touches to supply a bit of old-style Spanish flair. All appliances were modernized. Here is the final result:

The living room with opened up walls, enabling the light and energy to flow freely through space.

The kitchen was completely renovated, in a style which appeals to higher-end renters.

Old plumbing was replaced with modern sinks, toilets and showers. We let as much light into the apartment as possible.

We added luxurious touches to the Master Bedroom.

The smaller bedrooms let the light in and maximize the number of Airbnb guests.

Overall return

After five years their total overall returns, based upon a total initial investment of 358,000€, were as follows:

Read the September 2018 update from Brian on the Madrid real estate market: Madrid real estate prices are up 21%: Is this sustainable?

If you are looking to buy in Spain, we would suggest that you read our earlier paper on Property hunting: 6 essential reasons for loving your Spanish real estate shopper. This paper is very interesting and gives you some of the important reasons why working with a property hunter is very useful for foreigners looking to buy in Spain. You will find specific samples our independent local partners worked on in Alicante, Valencia, Barcelona and Madrid. If you are looking to buy a property in Barcelona, read our Barcelona “Case study” article of May 2018.

About Brian and his team, our Property hunter in Madrid.

We help clients locate, purchase and renovate property in Madrid. We also serve as a full-time property manager for those who wish to let their properties. We have a large portfolio of actively managed properties and have helped over three hundred clients find their dream homes and investments. Get in touch today if you’d like to learn how we can help you invest in Madrid.

Send your request to our property hunter in Madrid, or follow the link if you are looking for a property hunter anywhere else in Spain. Ask us directly and benefit from the strength of our network!

Check the full profile of Brian, our local partner, Property Hunter in Madrid

The post Madrid property investment: a Case study appeared first on How to buy in Spain.