Spain’s residential real estate market may still be in the doldrums but the country’s commercial property sector is moving forward.

Madrid office take up in the second quarter of the year rose threefold to 160,000 square meters compared to, according to international real estate advisor Savills. Its latest report also shows that take up in the first half of the year is double the total for the first six months of last year.

The data shows that of the deals completed in the second quarter three ‘mega’ deals of over 10,000 square meters took place involving tenants Spanish Airports and Air Navigation (AENA), Alcatel and AMPER. Of particular note, outside the popular city centre, the east area of the city saw 17% of transactions with significant lettings between 6,000 square meters and 9,000 square meters. Meanwhile a rise in owner occupier sales appeared to be on the increase with over 10% deals closed.

In terms of investment, Savills reports first half of the year volumes are 7% higher than the same period in 2009 with hot demand for prime office assets such as Paseo de Recoletas 3 and 56% transactions focused within the M-30. The average investment volume rose from €15 million in the first three months of 2010 to €34 million in the second quarter.

‘One of the most significant investment deals lately, Paseo de Recoletas 3, has set a new record for the length of negotiation period at two months. It has also exceeded the previous records for yield and price per square meter set in recent years. The number of buyers reflects the demand for this type of asset in the market,’ said Luis Espadas, capital markets Director.

Savills finds that despite the steady growth in the investment markets, rents are not yet rising in fact in the CBD they remain at the same levels as the first quarter of 2010 showing averages of €28 per square meter per and €29 per square meter per month but outside this area rents continue to fall. Year on year rental falls in the submarkets range from -11% to -20%.

The report also shows that average vacancy rates outside the CBD now stand at 12% but in CBD they have fallen to 7% from 11% in the first quarter of the year. In the second quarter CBD registered 10% of take up due to a letting to Banca Civica for 7,000 square meters and this has allowed CBD vacancy level to revert back to its characteristically lower rate than average vacancy for the city.

‘We anticipate that national investors will continue to focus on Madrid’s CBD for the second half of the year as with its vacancy rates below market average, it will continue to be the safe haven,’ added Espadas.

The latest real estate figures on prices and transactions are giving some hope that the Spanish property market is improving but foreign buyers are still not returning to the country in any great numbers. Prices are still falling, but less with every passing month, according to the monthly house price index published by Tinsa, one of Spain’s leading appraisal companies.

Average Spanish property prices fell by 4.4% over the 12 months to the end of May. ‘If the Tinsa figures are to be believed, the rate of decline in Spanish property prices has been slowing since June 2009, when it peaked at -10.1%. If the trend towards smaller declines keeps up, average property prices will be stable, or even growing slightly before the end of the year,’ explained Marc Stucklin of Spanish Property Insight.

But he points out that the Tinsa figures are based on their own valuations, not actual transaction prices. ‘Most of these valuations have been paid for by banks and for several reasons they might not give a true picture of property prices. Nevertheless, they are interesting in what they reveal about trends, not to mention the valuations used by banks for mortgage lending purposes,’ he said.

The Tinsa figures show that prices have fallen the least over 12 months in coastal areas and the Islands, areas traditionally popular with foreign buyers looking for holiday and retirement homes. Prices are down 4.1% on the coast and 2.4% in The Canaries and The Balearics. On a peak to present basis prices are down 16.5% nationally, 21.4% on the Mediterranean coast, and 12.8% in the Canaries and the Balearics.

But for the Spanish market to recover it needs foreign buyers to flock back and there is little sign of happening at the moment. The latest figures from the Ministry of Housing show that non-residents bought just 513 holiday homes in Spain during the first three months of the year.

According to the Ministry transactions were up in the first quarter by just 1.5% and on a cumulative 12 month basis sales were down 85. Sales increased over 12 months in places like Catalonia, up 13,6%, The Balearics, up 7,9%, Asturias up 4,6%, Madrid up 4,5%, Valencia up 4% and the Canaries up 1,4%.

Prices fell by 22% in Murcia, were down 14.4% in Extremadura, down 10.3% in Castilla La Mancha, saw a fall of 9.5% in Andalucía, some 7.8% in Navarre, 2.8% in Cantabria and down 0.6% in Galicia.

Stucklin also points out that foreigners who are buying tend to be economic migrants from places like Morocco and Ecuador buying primary homes in or around Spain’s big cities.
‘They won’t help mop up the glut of holiday homes on the coast. There are tens, if not hundreds of thousands of holiday homes for sale on the coast that will need to attract foreign buyers in large numbers if the holiday home glut is to be dealt with anytime soon,’ he explained.

Last week a new report from Spain’s Property Registrars suggested that transactions are bottoming out, though it is still too early to declare a recovery under way. The number of property deeds of sale recorded in the property registry rose by 7% in the first quarter of 2010 compared to same period last year. This is the first time in several years that annualised sales have risen in a quarter.

The report cautions against declaring a recovery under way. They point out that temporary factors such as the imminent increase in VAT on home sales, and elimination of tax relief on mortgage payments, could be bringing forward sales and boosting the figures temporarily.

Buyers looking at real estate in Spain should not worry about the much headlined subject of illegal properties as they can purchase with a title guarantee in certain circumstances, it is claimed.

One couple who have not been put off are Paul and Shani La Frenais who are buying a three bedroom finca with Roman style pool set within private grounds in Lliber, near Alicante on the Costa Blanca, an area where around 300 family homes are now considered illegal.

The couple from Newark, Nottinghamshire, wanted to move to Lliber because it has an international school for their 12 year old son.

‘We love Spain and have travelled widely around the country before settling on this particular location. Currently we are living in rented accommodation which has enabled us to acclimatise to the Spanish lifestyle and also to do our homework in terms of the feasibility of purchasing in an area that is sadly blighted by corrupt local officials who allowed building to commence without everything being in order,’ explained Paul.

The blighted properties in the area are without mains water, the majority have dubious electricity connections and none of them has the final habitation certificate. The difficulties have arisen because of agreements made between former town hall officials and developers which allowed them to build with licences granted by the Town Hall but without the authority of the regional Government.

From 1999 to 2004 an estimated £60 million was paid to the developers by unsuspecting buyers. The situation is now in the hands of the new Major in the hope that all houses and land can be re classified to allow the homes to become legal.

‘Nothing in life is guaranteed. Even the house that we are buying, could, in future be classified as urbanistic land and as such we could be asked to pay to upgrade roads, connect water etc. Having said that, I have trusted an English lawyer who has worked in Spain for many years,’ said Paul.

He has also bought through an official IASPP Safe Purchase Estate Agent, which has included a 20 year guarantee that protects the rights to the property title. This has given us added peace of mind,’ he said.

According to Christopher Hara the owner of Premier Villas Spain, the scheme takes away the worry that buyers might have over titles. ‘We have sold over 100 properties in the Costa Blanca North without any complaints regarding the legal side of buying in the region. I feel that there is often more concern from the British before they get here, but once they see for themselves the value for money homes, and the many happy residents, they tend to appreciate that life in Spain is very sweet,’ he said.

‘Being able to offer clients the advantage of an IASPP Safe Purchase Guarantee is important to us. We want clients to buy with confidence. Including the guarantee with each sale gives buyers excellent legal support and financial compensation in the event of a monetary loss in the future,’ he added.

Ian Hawkins, Director of Safe Purchase Spain said that the Spanish market should not be avoided by potential purchasers. Buyers should take steps to educate themselves and seek out the best industry professionals.

A glut of new properties in Spain shows that the real estate industry is unlikely to recover quickly as over supply still clogs the market. The most recent figures from The Ministry of Development show that 387,000 new homes were finished last year despite a property market crash already into its second year. This compare with 220,600 new home sales recorded by the National Institute of Statistics for 2009.
‘This means there is an oversupply of around 166,500 new homes that joined the glut of new homes already languishing on the market in search of a buyer. It illustrates the severity of Spain’s construction boom and bust,’ said Mark Stucklin of Spanish Property Insight.

‘What is worse, there is no quick solution as much of the trouble is stored up in a new homes glut that will take years for the market to digest,’ he added.

When the figures are added together it means the market is now facing a glut of 1.2 million new homes. The Spanish developers’ association and the Ministry of Housing are more optimistic in their figures and estimate there is somewhere between 700,000 and 750,000 new homes on the market but even at that level it will take years for the market to absorb the over supply.

Stucklin says the industry has consistently built too many properties over many year and ignored falling demand. ‘Last year, there were around 225,500 new households formed in Spain, down from 300,000 plus per annum in the boom years. New household formation surged as immigrants flooded into the country and changing demographics and life-style choice, for example and increasing divorce rate, pushed up the demand for housing. But even at the boom level of 300,000 new households a year, it is now clear that Spain was building way too many new homes,’ he explained.

‘In 2006, for example, there were 865,500 planning approvals, though not all of them went on to become housing starts. And in 2007 there were a record 641,500 housing completions. Now even if you assume that demand for second homes was a generous 200,000 per year, Spain was still building something like 200,000 or more excess homes per year. Now they are idling on the market, tying up capital, and dragging down the Spanish economy’s productive potential,’ he added.

Although supply now seems to be adjusting to demand there is still a huge glut in the market.  But this doesn’t help the economy as a collapse in new building is just as bad for the economy as too much building, Stucklin reckons.

British property owners in Spain are taking to the streets to protest at homes being demolished as they were allegedly built illegally despite having planning permission.

In the biggest demonstration by expatriates to date, hundreds of mainly retired British residents from Andalucía, have been waving placards and marching outside the offices of officials they hold responsible for ‘persecuting’ innocent home owners who bought properties in good faith.

The organisers, AULAN, are demanding an end to real estate and planning corruption across the region and an end to the insecurity thousands of owners are feeling as to whether or not they will be affected by the latest round of demolitions.

They are also demanding compensation for Leonard and Helen Prior, both aged 64, whose property was demolished a year ago despite having planning permission from their local town hall. The permission was subsequently declared void and their home declared illegal. They are now living in a garage on the site of their demolished home.

Top of the property owner’s hit list is Luis Caparros, head of planning and housing in Almeria, who has been dubbed ‘Demolition Man’ and ‘Mr Bulldozer’ for his enforcement of the illegal building issue.

He has recently declared a further 5,000 homes in the neighbouring Almanzora valley as illegal and owners are waiting to see if they will be demolished. The problem stems from a two tier planning system in which town halls, which have the authority to issue building licences, failed in many cases to adhere to regulations set by the regional government of Andalusia and allowed construction on designated rural land.

During a decade long construction boom corrupt mayors, often in cahoots with local builders, allowed swathes of countryside to be built over without the proper licences being issued.

Many British buyers unwittingly bought these illegal properties through unscrupulous estate agents and the lawyers recommended by them. They claim they are victims who bought in good faith and should not be penalised in a clamp down by regional authorities.

Those currently in limbo include Thomas and Carole Jones in Albox, some 30 miles from the Mediterranean coast. They face losing the three bedroom villa they bought almost four years ago for €250,000.

A spokesman for the regional council said it was acting correctly within the law. He advised that compensation should be sought from the town halls and mayors who issued the original illegal licences and not the regional council.

The price of re-sale property in Spain increased in January for the first time in 24 months, according to new figures and other reports suggest there are tentative signs that part of the country’s battered real estate market is coming back to life.Prices rose by 0.6% on average, with the regions of Cataluña, and La Rioja seeing the greatest recovery in price at 4.6% and 4.5%, according to figures from the real estate portal fotocasa.es.

Property prices also rose in the regions of Comunidad Valenciana, up 2,2%, Asturias up2%, Baleares with a 1,9% increase, Aragón up 1,4%, Galicia up 0,9% and Madrid up 0,7%.

While another index shows that overall Spanish property prices fell by 5.5% over the 12 months to the end of January.

But these figures from appraisal company Tinsa often need to be taken with a pinch of salt as they are based on their valuations, not on actual selling prices.

But the latest Tinsa index is an improvement on the 6.6% decline last month and confirms a general trend towards smaller price declines.
However activity in the real estate market is still very depressed.

The latest figures from the National Institute of Statistics shows that year on year the market shrank by 27% in volume terms to 372,000 transactions in 2009. They have fallen 48% since 2007 when there were 715,000 sales.

December 2009 had just 28,669 home sales, the second lowest level of monthly sales on record. But compared to December last year, sales were down just 1%. ‘That’s because by December last year, the market was already deep in crisis.

From now on, annualised comparisons won’t look so bad, and won’t give any indication how far the market has fallen,’ explained Marc Stucklin of Spanish Property Insight.

‘When the market hit the skids, resale transactions collapsed much quicker than new builds, which outnumbered re-sales throughout 2009.

In normal market conditions, it’s the other way around.

As 2009 went by the two started to converge, and in 2010 re-sales may once again overtake new builds, though it does depends on whether banks are prepared to lend to resale buyers,’ he added.

Whilst there’s little doubt that life is returning to the Spanish property market, it still remains utterly price sensitive, according to Chris Mercer, director of Mercers real estate agents with offices in Costa Cálida and in Jerez.

‘We are making it our business to find realistically priced property from motivated sellers for serious buyers who are in a genuine position to make a purchase.

The reality is that decent investment properties are out there, whatever the market, it just takes some expertise and effort to find them,’ explained Mercer.

‘If your property is overpriced you won’t sell and you’re wasting your own time and our time, whilst also giving the buyer an unrealistic view of the market. If you’re a motivated seller able to accept a realistic price for your home, we’ll find a buyer,’ he added.

He also believes that for investors renting to local people can prove fruitful. These include apartments in Jerez at €70,000 that can rent for €450 a month, a return of around 8%.

‘If you’ve got a 20% deposit then the rent will comfortably pay the mortgage and as you’re truly buying at the bottom of the market, you have an asset that will certainly appreciate in years to come,’ he said.

The latest RICS Global Property Survey published today (29th October 2009) is noticeably more upbeat than the second quarter report both in terms of the lettings environment and investment activity.

Confidence in the outlook for tenant demand over the next three months is either less negative or more positive than was previously the case in every region of the worlde.

This better tone has, significantly, also begun to filter through into rental expectations.

Latin American and Asian countries have the most favourable readings when it comes to the outlook for rents with Hong Kong enjoying a particularly big swing in sentiment.

In the second quarter of the year, a net balance of 67 percent of respondents from Hong Kong expected rents to fall further; by contrast in the latest survey, a net balance of 16 percent of respondents suggest rents are likely to rise over the next three months.

Peru, Columbia and Brazil also reported positive net balances on rental expectations while South Korea, China, Thailand and India were only moderately negative.

Australia, UAE and the UK also saw rental expectations become less negative over the quarter but the weak results from the US and Japan were not far from the lows touched in the second quarter report.

Interestingly, a number of European countries including Ireland, France and Spain have the worst readings on the rental outlook.

The mood amongst real estate investors also appears to have perked up according to the survey with capital values expected to increase in a number of countries including Brazil, Hong Kong, South Korea, China and India.

This more positive mood has also been reflected in activity indicators with number of investment bidders per property picking up sharply not just in Asia and Latin America but also in a number of European countries.

This is consistent with the latest data from Real Capital Analytics (see page 2 of the RICS survey) which shows either a steadying or a modest increase in transaction levels around the globe.

Overall Spanish residential property prices are continuing to fall but there is some light as the declining value of re-sale real estate appears to be slowing, according to the latest published figures.

Data from the National Institute of Statistics (INE) show that prices for new properties fell by 3.9% in the second quarter of the year and are now down 7.7% over 12 months.

But prices for resale property bucked their downward trend for the first time since the INE starting publishing its index, with prices falling by less in the second quarter than in the first.

Prices were down 12.5% in the first three months of the year and that slowed to 11.2% in the second three months.

The index also shows that areas of Spain that are popular with foreign real estate investors such as Andalucia and Murcia have not been the hardest hit this year.

It is places like Catalonia, Madrid and the Basque Country where prices rose the most that have seen the biggest price declines.

But these so-called official figures need to be taken with a pinch of salt according to Spanish property experts Mark Stucklin.