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Thursday, February 12th, 2015

The harmonious convergence of the markets

Summary

The combination of various macroeconomic indicators and special circumstances in certain economic sectors will attract foreign investment in Spain in 2015, reflected in many sectors such as real estate.

The recent measures adopted by the European Central Bank, along with a lower exchange rate of the Euro against other currencies, the drop of the Euribor, the decrease of the risk premium and the fall in the price of Spanish bonds create an ideal environment for foreign investment which, united with the current cost of property in Spain, will affect favourably the Spanish property market as much for purchases for individual use as for investment properties.

1. Spanish GDP

Different predictions about the Spanish economy (at this time considered the economy in the Eurozone with the greatest prospects) guarantee this optimism; just as noted by entities such as JP Morgan, BBVA Research or Deutsche Bank (according to their report “Financial Prospects 2015”). Miguel Cardoso, economic chief for Spain at BBVA, has recently signalled a prediction for an increase in Spanish Gross Domestic Product (GDP) of between 2% and 2.5% for 2015, a prediction which goes well above the revision of the estimate from the International Monetary Fund (that was between 1.2% and 1.6%) and even that from FUNCAS that placed the increase in GDP at 2.1%.

2. The ECB´s Expansionary Monetary Policy

Amongst the favourable macro-impacts on which we are going to comment in this article, is the important announcement made recently by the European Central Bank on the purchase of bonds by countries in the Eurozone to an amount of more than a trillion Euros and that will begin at the start of the coming month (March). This monetary expansion (quantitative easing, QE) will extend until the year 2016, in the case that inflation in the Eurozone does not exceed 2%. This manoeuvre from the ECB, that for Spain supposes a purchase of 10% of the public debt (100,000 millions of Euros in bonds) which that, from the beginning, will increase the liquidity in the market and offer greater access to bank credit for families and companies.

3. Fall in interest rates: positive consequences

On the other side, the ECB´s expansionary monetary policy ECB contributes to a fall in interest rates that from last Autumn have descended by 30%. This new injection of liquidity will help the banks, giving these institutions a greater number of bonds, and companies and individuals, such that it will reactivate the economy with a lower financial cost.

4. Fall of the Euribor and behaviour of the real estate market

Euribor 2008-2015

It is well known that during the last seven years the amount of credit available from banks for the purchase of houses has been scarce. It is presumed that those people who had hoped to get a mortgage in order to buy a house will have the option to go back to the Bank now with better success rates that will unequivocally increase activity in the sector.

However, those home-owners who have variable mortgages that are priced against the Euribor-rate will see a reduction in their fees, according to falling interest rates, that had surpassed 4.733% in the year 2008 to 0.298% at the beginning of 2015. This data is particularly interesting for the property market in Spain in that around 80% of Spanish households live in their own property. Of this percentage, a third are partially financed by a mortgage and of this last third, 90% are variable mortgages, priced according to Euribor.

5. Risk premium and the drop in interest rates on Spanish bonds

The ECB´s expansionary monetary policy can reduce greatly the Spanish risk premium which at the moment hardly exceeds 100 basic points and which at the beginning of the year was below this level, something which had not happened since May 2010.

Risk premium in January 2015

This reduction of the risk premium is the other face of the same coin which is reflected in the drop in the price of Spanish bonds which reached in January 2015 an historic low, paying interest of less than 1.5%. Just less than a year ago, this interest was at around 4%, giving foreign investors a lot of confidence. At the moment, the Spanish risk premium is lower than countries like Australia, the UK, Canada or the USA and than Italy or Portugal within the Euro-zone. The reduction of the risk premium will have positive consequences allowing a lower cost for the debt of the state and for Spanish companies that will have access to cheaper credit.

Spanish and US bonds to 10 years

6. A more favourable exchange rate for exports and real estate investments

The reduction of the exchange rate that happened in 2014 leads to a “cheapening” of our exports or a lower cost for the investors whose money is, for example, the Renminbi (¥), the Pound Sterling (£), the Swiss Franc or the Dollar ($). In the Valencian Community, exports represent approximately 50% of the GDP of the region. The exchange rate EUR/USD is now around 1.14 dollars to the Euro, at levels from the year 2003.

Exchange rate EUR-USD

Exchange rate EUR-CNY

The favourable exchange rate will also influence the national tourist industry with a predicted figure that this year 2015 there will be a a new record of incoming tourists.  Last year, 65 million foreign visitors contributed to 12% of the jobs that this sector generates. The exchange rate of the Euro against other currencies, also contributes to the tourists and investors, particularly Swiss, British, Russian and Chinese who take advantage of the moment to make their purchases. It stands out that 23% of all the foreign visitors who arrived to Spain in the last year were from the UK. This favourable exchange rate is particularly important for the Valencian Community given the weight that the tourist sector has on the Valencian economy.

7. Reduction of unemployment

The reactivation of the economy will have a reflective effect on the reduction of the rate of unemployment creating an increase in employment and in purchases. The data for December 2014 referring to the rate of unemployment in Spain, one of the biggest in the Eurozone, signalled a fall of 253,627 unemployed people (-5.39%) with respect to the same period in 2013, which translates to a bigger drop than from 1998. To this data we must add the increase in 2014 of those who signed up for Social Security (2.5% more, 417,574 new members), putting the total of employed people at 16,775,214 people in Spain.

Reduction of unemployment in 2014

8. Minor increase in cost of living in certain areas

The cost of living in Spain has increased in the last year, on average, by 1.3% according to the Sociedad de Tasación (a Spanish organisation of property valuations), putting it at levels from 2008 and putting an end to the consistent drop over the last six years.

Housing cost for autonomous communities

The growth in the Valencian Community follows the line of that experienced in other communities like Madrid, Navarre and the Balearic Islands, regions that bring together leading roles in the financial, industrial, agricultural and tourist sectors, respectively.

Spanish House- annual price change 2008-2014

9. A suitable moment to invest in property. 

To the macroeconomic data explained, we must add the changes that have begun to occur in the prices of properties in certain concrete markets, after the evolution of property prices in Spain from the beginning of the economic crisis in 2008. The general fall in prices was also observed in luxury properties, even if to a lesser extent and without following the rules that affected the general market.

We can find high quality properties in privileged locations, at very competitive prices, which creates a growth in buyer interest, especially those from overseas who pay in cash. The increase in liquidity and the greater ease of access to credit that awaits in the following months will predictably encourage more Spanish people to move house, in order to make the most of the current attractive prices.

Here we provide two examples to show the evolution of prices from 2007 to today.

What to buy with 850,000 € in 2007 and in 2015

Evolution of housing prices 2007-2014

To finish, we would like to provide a study that draws some curious conclusions.

Historically, the profitability of properties has been between 1% and 2% in Spain. This can make as much to a “low” rental price as a “high” sale price, always in relative terms.

The economic difficulties of these seven years of crisis have made rental prices just as sale prices go down, both in absolute terms. Nevertheless, the observed decrease, for example in the sample that we have collected of apartments in Valencia, indicates that rent prices have resisted better these decreases. This is an indicator of the necessity of families to have a home, even if it is to rent (in large numbers, five out of six of the houses in Spain are occupied by their owner) and on the other side that the sale prices of the same apartments or other similar ones have had to adapt to the circumstances of the market.

From today, in our prediction, the profitability of well-situated properties, be they residential or commercial, will have to soften themselves slightly to the historic observed levels; to accommodate the natural increase in rent prices that will not be so accentuated as in the recovery of sale prices, which indicates the suitability of this moment to invest in high quality properties in Spain.

Average prices for apartments in Valencia

 

Investment examples:

1. Beach front Apartments

1. Beach front Apartments

2. Bank owned Apartments

 2. Bank owned apartments

3. Shares of wineries

3. Shares of wineries

4. Winery Ribera del Duero

4. Winery Ribera del Duero

5. Winery in Rioja

5. Winery in Rioja

6. International School

6. International School

 7. Green energy factory

7. Green energy factory

 8. Luxury Spanish farm

8. Luxury Spanish farm

 9. Office building

9. Office building

 10. Apartments building

10. Apartments building

 11. Luxury Hotel Resort

11. Luxury Hotel Resort

 12. Senior Housing

12. Senior Housing

13. Villas for sale

13. Villas for sale

14. Hunting Palace- La Serreta

14. Hunting Palace

15. Hotel, spa & wine resort- Can Bonastre

15. Hotel, spa & wine resort

16. Luxury rental villa- Mas Mateu

16. Luxury rental villa

17. Winery in Toro

17. Winery in Toro

18. Luxury country hotel

18. Luxury country hotel


 

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