Inversión Inmobiliaria magazine published an article about the situation of the Spanish Market. On pages 178 and 179 in its last edition, Mariano Capellino analyzed more deeply the key points that are currently turning Spain into one of the most attractive markets for global real estate investors.

You can see the article by clicking here or read the transcription below:

Report: Spain, the market targeted by real estate investors

Research: Mariano Capellino, co-founder and CEO of INMSA.

Today, there is no doubt about the recovery of the real estate market in that country. After 7 years of crisis, the real estate sector is showing signs of strong recovery for the second consecutive year. The year 2016 exceeded the amount of 10 billion Euros of investment, the same as 2015.

This phenomenon is turning the Spanish Market into the new star of the Real Estate investments globally. This is the opinion of the most important Real Estate investment funds worldwide which have been acquiring Class A assets – those with the best quality and location – for the last 3 years. In this segment, a strong recovery in their values is being observed which shows that there is a solid tendency for this estimate to become a reality.

In order to understand this phenomenon, it is important to analyze the macro-economic context.  The exchange rate in Spain has become competitive against the dollar since 2015 and continued throughout this year. The economy is improving, showing a 3.2% GDP growth in 2016 and for the second consecutive year, even after the uncertainty generated by Brexit. Such growth is significant compared to 1.6% of the European Community. Employment is still growing with the creation of 560,000 new jobs – data gathered from 2016- therefore the unemployment rate has continued falling, decreasing from 22% to 19%.

But it is not only the macro-economic context a helpful factor. The real estate market is showing very encouraging signs. After several years of decline, the average price of homes had an increment of 4.3% annually during 2016. The recovery is heterogeneous showing increments of more than 10% in Prime zones of Madrid and Barcelona and drops of 2% mainly in small locations in the interior of Spain. Today, it is possible to acquire assets under the replacement cost in zones with oversupply with moderate absorption.

In addition to this, mortgage interest rates are at historically low levels, approximately 2% annually – quite under that of USA – as a consequence of the reduction in the risk premium and a more expansionary currency policy from the European Central Bank. Also, there is a decision by the banks to finance end users and investors by boosting the number of home loans provided during 2016 which grew 31.3% compared to 2015.

As instructed by the Bank of Spain, the banking institutions are compelled to sell their non-performing assets rather than keeping them in their balance sheets. This is causing some acceleration in the process of liquidation of assets with debt burden in real estate and financial (mortgage debts) distress involving secured assets, which according to some estimates, exceed the amount of 100 billion euros.

In addition, there are also essential indicators that show a great opportunity for investors. Some decrease of approximately 50% is maintained in property values compared to 2008 in Class B assets (residential and offices). A new cycle of construction is being initiated, especially class A and B assets in zones where there are few used properties available.

The years 2015 and 2016 were considered years for construction recovery in the real estate sector, with a strong increment in the number of new works and permissions. The residential market showed an increase of 33% compared to the previous year, thus exceeding the number of 50,000 approvals for new construction works.

During 2016, the residential real estate investment in Spain was the star in relation to any of the alternative financial investments available, achieving average returns between appreciation and income from rental of 10.9% annually, compared to 1.4% of ten-year bonds, 0.3%  bank deposits and -2% in the Stock Market (Ibex 35).

Also lands are showing a strong recovery. Sales operations increased by 46%. This has been mainly concentrated in Madrid, Barcelona, in the main coastline destinations and capital cities of the provinces such as Malaga and Valencia, among others. The value of residential lands grew by 30% in some of the so-called hot zones in the abovementioned cities.

The number of new residential developments recently initiated is increasing and mortgage loan facilities have returned for developers and end users which can again have access to the acquisition of homes with just 10% initially and with 90% financed in 30 years at an annual rate of 2%.

On the other hand, the discounts between the listed values of the properties and sale prices are quite lower compared to previous years and assets sale terms have been significantly shortened.

The recovery process is not being homogeneous but it is progressive. There is an increasing number of market segments where sales are rising, the excess of supply is being absorbed and suitable conditions for new developments are being generated.

Another significant fact is that homes acquired by foreigners are still growing non-stop. These recent years, foreigners have gained share accounting for 17% of the total investment, which shows the beginning of the recovery process, as this demand usually anticipates 2 years the change in homes price cycle.

Considering the mid-term risk/reward ratio, Spain seems to become the most attractive country to invest in Real Estate if compared to other countries undergoing similar risks in Europe or compared to other countries or regions such as the United States or Latin America.

Some examples prove this. The value per square meter of the so-called class A residential asset in Miami reached in 2007 the average amount of US$ 5000 per square meter.

The same happens in Argentina, where the current values of an apartment in Buenos Aires located in Class A areas such as Puerto Madero, Palermo, Barrio Norte, are maintained at the same level as in 2007, around US$ 4000 per square meter.

While a property located in Madrid, in zones such as Chamberi, Chamartin or Retiro, considered within the top ones – fairly similar to Puerto Madero or Palermo – which in the year 2007 experienced values over 5500 euros per square meter, today they are reaching the amount of 3800 Euros.

Furthermore, if we take the US dollar currency as a reference to analyze the situation, we can see that in the year 2007, acquiring one square meter implied an investment of US$8000 while today, the same square meter is US$4000, i.e. 50% lower.

In turn, we have to take into account that in these locations values have decreased the least and there has been a recovery process for two years and a half. There are other locations and cities with even higher advantages and, following the same equation, 70% advantages can be obtained because of the stronger drop in prices.

This emphasizes the idea of Spain as one of the global real estate markets most attractive to investors.