Why to invest in Barcelona value added projects in 2017–2018
Recovering after the crisis, the Spanish economy is regaining lost positions: if in 2009 the GDP growth rate fell to a record low of −3.57%, then from 2012 the figure shows steady growth, reaching 3.2% in 2016.
Catalonia is the most developed region of Spain, the GDP of Catalonia is 20% of the GDP of the whole country. The unemployment rate in Barcelona is consistently below the national average: in 2016, the gap was 3.7%.
However, despite the positive signals, it is difficult to speak with confidence about the long-term stability of the Spanish, and hence the Catalan economy. The unemployment rate in Spain and Barcelona remains relatively high, and the income of the population, despite the increase, is still lower than in most European countries: for example, the average salary in Germany is 86% higher and in France by 47%.
Under these conditions, according to Tranio experts, the Barcelona market is beneficial for short-term investments in value-added projects in order to capitalize on current price increases. You buy a residential, office or hotel object in poor condition, make repairs or change its purpose, thereby increasing the value of real estate, and in 1-2 years you sell the object at a higher price. If the yield ceiling in the rental business is 5–7% per annum, then redevelopment can earn 12–20% on invested capital minus the costs of the management company and local taxes.
Value-added projects pose more risk to investors than a simple rental business. One of the main – reducing the value of the property during the implementation. However, a number of factors indicate that property prices in Barcelona will grow for at least a few more years:
low mortgage rates;
potential price increase;
increase in profitability and cost of rent;
demand exceeding supply;
population growth and expenditure;
growing tourist flow.
Low mortgage rates
The key reason for the growth of the market throughout Spain and Barcelona in particular is low mortgage rates.
Mortgage rates in the EU are based on the Euribor – the interbank offer rate. Since June 2014, the rate has continuously decreased and in October of the same year for the first time reached a negative value, whereas during the 2008 crisis it exceeded 4%.
Non-residents are Spanish banks that provide loans in the amount of up to 60% of the value of the object at an average of 2.5% per annum, and for residents the conditions are even more profitable: you can get a loan of up to 80% just under 1.5%.
Price increase potential
As of the I quarter of 2017, property prices in Spain are 42% lower than the peak value of 2007. For 10 years, the average cost per square meter in the country dropped from 2,862 to 1,664 euros. However, in 2015, prices stopped falling and began to gradually recover – by almost 3% by the beginning of 2017.
According to the Idealista website, in Barcelona, from a maximum of Q1 2007 (4,732 euros / m²) to a minimum of Q3 2013 (2,957 euros / m²), prices fell by 37%, after which they grew by 39% to 4,123 euros / m² by I quarter of 2017.
Property prices in Barcelona and Spain
Real estate in Barcelona is more expensive than the average in Spain: in 2017, the cost per square meter in Barcelona was 2.5 times higher than the national average. Moreover, the meter rises in price faster: in the first quarter of 2017, property prices in Barcelona increased by 6% compared to the average of 2016, which is 6 times more than the average in Spain. However, prices have not yet reached the pre-crisis maximum, so the potential for growth remains.
Increase in profitability and cost of rent
According to Idealista, in the fourth quarter of 2016, the average rental price in Barcelona was 17.9 euro / m² per month, which is 19% higher than the pre-crisis level (end 2007) and 57% higher than the 2013 bottom.
Rental and Yield Dynamics in Barcelona
From the fourth quarter of 2015 to the fourth quarter of 2016, housing prices in Barcelona increased by 14%, rent – by 17%. The dynamics of the lease outpaced the rise in prices for the purchase of housing, therefore, the profitability of long-term rent tends to increase. The data from the Idealista website shows: in 2007, real estate brought in an average of 3.9% per annum, in 2016 – 5.5%.
Demand above supply
Until 2012, the volume of construction exceeded the dynamics of sales of new buildings. But since then, the opposite trend has been observed. In 2014, the gap reached a maximum value: the number of transactions with new buildings exceeded construction volumes by 111%, but in 2016 the difference was reduced to 1%.
Both indicators after a sharp decline in 2013 show a positive trend. The number of deals with new buildings in the period from 2013 to 2016 increased by 2.1 times, and the volume of construction – by 1.9 times.
Construction and sales of new residential units in Barcelona
According to CBRE, Barcelona requires 7.9 thousand units of new housing per year, and less than 2 thousand are being built. Thus, the demand for new buildings is significantly higher than the supply.