REPORT June Key features of the RESIDENTIAL SECTOR. in Spain

Transcription

1 REPORT June 216 Key features of the RESIDENTIAL SECTOR in Spain

2 CONTENTS EXECUTIVE SUMMARY 4 1. ECONOMIC AND SOCIO-DEMOGRAPHIC CONTEXT Key economic indicators: GDP, employment and inflation Demographics Housing accessibility indicators. Mortgage market 1.4. Renting vs. ownership RESIDENTIAL SECTOR OUTLOOK: INDICATORS Housing prices and forecasts Housing sales and purchases Urban land transactions Construction and development TOWARDS A MORE PROFESSIONAL SECTOR: THE ROLE OF INVESTMENT FUNDS, SERVICERS, DEVELOPERS, SAREB AND SOCIMIS Investment funds Servicers Developers Sareb Socimis HOUSING INVESTMENT 3 5. ANALYSIS OF DEMAND FOR NEW-BUILD HOUSING IN SPAIN Housing construction potential between Supply and demand: a much needed adjustment OVERVIEW OF THE RESIDENTIAL SECTOR IN SPAIN S MAIN CITIES Madrid Barcelona Valencia Málaga Palma 54 APPENDIX 1 56 Contents 3

3 EXECUTIVE SUMMARY 1. ECONOMIC AND SOCIO- DEMOGRAPHIC CONTEXT The growth of the Spanish economy since, which has helped boost job creation, was key to the recovery of the residential market in and at the start of 216. The number of households is expected to rise, despite the decline in population, due to a reduction in the average home size, brought on by the greater number of young people leaving home and the increasing number of non-traditional structure households. Access to housing has improved over the past few years. The percentage of household income assigned to mortgage payments has also declined, falling from almost 5% in 29 to the current circa 33% the level recommended by financial institutions. The percentage of rented primary residences is starting to move into line with the Eurozone average (14.9% in ), although it is still a long way off the European Average (33.2%). 2. RESIDENTIAL SECTOR OUTLOOK: INDICATORS According to INE, the General Housing Price Index grew by 3.5% y-o-y in. According to CBRE forecasts, the housing price index will increase by approximately 6% y-o-y in 216. The strong upsurge in the number of existing home sales in, demonstrates the lack of supply of new-build homes in certain locations. The number of urban land transactions varies considerably by province and autonomous community. Of particular note is the upturn in urban land prices in Barcelona and Madrid. Banks have started to lend again for purchasing land and the influx of overseas funds is driving the market, thanks to the resources they have on hand and their ability to purchase without the need for financing. 3. TOWARDS A MORE PROFESSIONAL SECTOR: THE ROLE OF INVESTMENT FUNDS, SERVICERS, DEVELOPERS, SAREB AND SOCIMIS The investment fund profile has quickly shifted from opportunistic to value-added, focusing on development, property refurbishment, and given that funds have noted the construction potential in the market, they will gradually move to managing urban plots of land, with the goal of achieving greater returns.servicers have shifted to multi-client and multi-service platforms, managing not only real estate assets, but also financial assets. Generally speaking, the banks have transferred their loan recovery and sales business to funds, with the real estate assets remaining on the financial institutions balance sheets. Both national, but above all international investors, are showing greater interest in development. Servicers are focused on the economic and real estate recovery, with greater activity in the development sector, depending on the analysis of the plots of land and demand in each area. The development landscape has also seen a good number of jointventures between international funds and local developers. Sareb has now gone one step further and is not just managing the assets from the banking sector reorganisation. Sareb has had to restructure itself in order to deal with changes in the accounting framework, and has also transferred the sale of its best assets to the servicers. The expected increase in the percentage of rented housing over the coming years, would suggest that Socimis will play a more prominent role in this sector, meaning that this sector will naturally become similar to other European markets, where the rental market plays more of a defining role. 4. HOUSING INVESTMENT The expected uplift in housing prices will mean that there will be capital gains in the medium to long-term. Meanwhile, rental housing has become a stable investment, with greater landlord protection. Secondary locations in large cities appear to be where the greatest yields are to be had. 5. ANALYSIS OF DEMAND FOR NEW-BUILD HOUSING IN SPAIN One can safely say that by the end of 216 or the start of 217, available new-build housing stock will be located in highly specific locations or be unsellable surplus housing. Potential new-build housing demand will stand at around 18, units per year between The new market backdrop and the shift in demand are forcing developers to study their potential clients needs in more depth, meaning they require housing of a higher quality than prior to the crisis and homes that are more bespoke and sustainable. Features such as home automation, availability of communal services and amenities for residents and energy-saving systems are also gaining importance. 6. MADRID RESIDENTIAL SECTOR Madrid is the busiest residential market in Spain and there is a notable shortage of serviced development land, which means that all of the developers are bidding for the same plots of land in the most sought after areas. Prices on a provincial level (INE), rose by 5.1% in (4.4% for new-build sales). Demand for newbuild housing is primarily focused on the northern area of the capital, and buyers tend to have mediumhigh purchasing power, while in the Salamanca, Chamberí districts and some central areas, luxury housing is highly sought after, which is causing there to be a lack of product and a rise in the number of refurbishment projects. In Barcelona, the lack of serviced development land in the city centre has meant that new developments are primarily refurbishment projects. The lack of plots of land for new-build developments, has had a direct knock-on effect on prices, as demonstrated by the 4.3% y-o-y increase in the mortgage valuation price of openmarket housing in the city. Valencia has registered a drastic fall in new-build housing supply, due to the lack of new developments and the sale of housing stock in the hands of financial institutions. This has been due to the consolidation of second home demand, with foreign purchasers accounting for a significant proportion of this demand. Malaga s market is very disparate and bearing in mind the large variation in its inhabitants purchasing power, it has the widest price-range in Spain. Tourist apartments in the city centre are driving the market, where primary residences continue to have a limited presence. Growth is being sustained by the increase in demand for second homes in coastal areas, thanks to a large number of overseas buyers (which accounted for 18% of all transactions). Finally, in Palma de Mallorca, the existing supply of properties for refurbishment which are located in appealing areas and which are reasonably priced for conversion into quality housing remains limited. The improved economic outlook and financing terms and conditions are helping to spark more interest in the land market. The highest prices are found in the Old Town, where the price per sqm can reach between 7,- 9, per sqm, due to strong overseas buyer demand for luxury second homes. 4 Residential Report 216 CBRE Executive Summary 5

4 1 ECONOMIC AND SOCIO- DEMOGRAPHIC CONTEXT The growth of the Spanish economy since, which has helped boost job creation, was key to the recovery of the residential market in and at the start of 216. Following on from this, effort rate indicators suggest that it is a favourable time to acquire housing, although the recovery in household disposable income still needs to gain a stronger foothold to bolster demand. Regarding trends in the sector, the demographic changes and the surge in the rental market are redefining the residential sector landscape. In terms of 216 and subsequent years, economic fundamentals would suggest that the outlook for the sector is optimistic. It is expected that the improved job market and the gradual recovery of salaries, along with favourable financing terms and conditions, will allow greater access to housing and the normalisation of the sector. Housing prices, which started to recover from record lows last year, will continue to rise slightly faster than the figures registered in. GRAPH 1 GDP (demand) and growth contributions Consumption Source: INE and Bank of Spain. Public Spending Investment External demand (Imp-Exp) GDP Growth 6 Residential Report 216 CBRE Economic and socio-demographic context 7

5 2% Unemployment is expected to fall in Key economic indicators: GDP, employment and inflation In Spain, improved lending terms and conditions, job creation, the drop in the price of oil and earlier than expected tax cuts drove consumer spending in, a year which registered GDP growth of 3.2%. These tailwinds are expected to hold in 216, with the Bank of Spain estimating GDP growth of almost 2.7%, provided external uncertainties caused by the downturn in China and advanced economies at the start of the year do not heighten. In, national demand accounted for 3.6% of GDP growth, with consumption being the economy s main driver. Total investment and public consumption, which rose 6.2% and 2.4% y-o-y respectively, also contributed to the rise in GDP. In turn, national demand strengthened imports which, despite the upbeat export figures led to overall negative net external demand of -.4%. In 216, the combination of low inflation and heightened employment growth will continue to favour an increase in household and business consumption. In CPI was very much determined by the change in oil prices, which pushed it into negative territory throughout virtually the entire year. Deflation, despite its risks, had a positive effect on real household and business income. We would note that the non-energy related CPI continued to recover and closed out the year at 1.1% y-o-y. In 216, prices (-.3% in January, -.8% in February and -.8% in March) will continue to be shaped by oil prices and the euro exchange rate, although we expect to see the non-energy component consolidate. As regards the job market, ended with an unemployment rate of 2.9%, employment was up 3% with over 18 million employed, half a million more than at the end of. In 216 unemployment is expected to drop below 2%, with ample room still left for improvement in job creation. Salary increases remained moderate in (+.75%), however the salaries fixed in collective union agreements are expected to rise in the region of 1.5% and the minimum wage is expected to be raised by 1% Demographics Demographic growth was a key factor in Spain s urban development during the first decade of the XXI century. The large inflow of immigrants, combined with a continued growth in the population and the number of households were key growth drivers in the residential sector. The strong economic environment seen until 27 also favoured this positive trend. However, during the economic crisis this trend was inversed and the number of emigrants became significantly larger than the number of immigrants. Migratory flows started to balance out as of, with the figure currently showing a minimally negative balance. Spanish population figures underline this trend, falling since 211 when they hit a maximum of 47,19,493 inhabitants to the 46,423,64 in H2. According to INE population forecasts, Spain as a whole will lose one million inhabitants over the next 15 years, especially in inland areas. However, this contrasts with the population increases forecast by some autonomous regions such as Madrid, Andalusia and The Balearic Islands. This is due to the sharp decline in the birth rate, which in was lower than the death rate for the first time ever. The number of households is expected to rise over the next few years, despite the consequences that this falling population trend will have on the residential market. This is due to a reduction in the average home size, brought on by the greater number of young people leaving home and the increasing number of non-traditional mn structure households, such as young couples or single-parent families. These, along with some additional assumptions form the basis for our analysis on the potential new-housing demand in section 5 of this report Housing accessibility indicators. Mortgage market The total wealth of households, which includes both real estate and financial wealth, started to recover in thanks to the gradual improvement in general financial wealth levels. According to Bank of Spain data, from Q2 28 (when the maximum was reached) to Q3, the sharp drop in housing prices reduced households real estate wealth by 3%, although a slight upward trend has been noted since the start of. The financial wealth of households, which compares savings with debt, hit a high in June. % mar 8 dec 8 sep 9 jun 1 mar 11 dec 11 sep 12 jun 13 mar 14 dec 14 sep 15 Source: Bank of Spain. GRAPH 2 Total household wealth and real estate Gross Disposable Income Gross Disposable Income (moving average) Household real estate wealth. Ratio vs. GDP (right) Total household wealth. Ratio vs. GDP (right) Residential Report 216 CBRE Economic and socio-demographic context 9

6 GRAPH 3 Debt indicators and Loan to Value % Mill % 29 33% 216 Percentage of income that families assign to mortgage payment Household available income started to recover in partially thanks to the gradually improving jobs market, but also thanks to lessening mortgage payment burdens and the drop in oil and housing prices. Spanish families started to deleverage in 212 as a result of lower income, confidence and high levels of mortgage debt. Graph 3 (right) outlines how the percentage of household debt to GDP has gradually reduced since it reached maximums in 211. As average house prices have dropped and financing conditions have improved, the percentage of household income allocated to mortgage payments has also reduced (Graph 3, right), falling from almost 5% in 29 to the current circa 33% the level recommended by financial institutions. In parallel, the percentage of the house price financed by banks (Loan to Value, Graph 3, right) has been recovering precrisis average levels, although in terms of more affordable housing rather than the type of housing financed previously. The economic recovery, favourable financing conditions and households increased level of solvency have been gradually helping the mortgage market to recover since the end of 213, with almost 244, mortgage loans granted in (+2% vs. ), a figure which nevertheless remains a far cry from the 1.6 million granted in 27. In addition, greater disposable income is increasing households spending capacity, which is in turn reflected in the upturn in the number of house sales (+11% in ). Loan to Value Source: INE and Bank of Spain In 216, the mortgage market recovery is expected to continue, heavily affected by the all-time Euribor lows, which are set to remain at around %. If the available income holds firm (2% in ), access to housing will also be favoured, both in terms of ownership and renting Renting vs. ownership Total housing debt (right axis) The number of owned homes in Spain compared to let homes began to rise from the 6s onwards: in 197 the percentage of owned homes stood at 63.4%, while in 21 it stood at 84.5%, according to figures provided by the Bank of Spain. Consequently, over the years an ownership culture was gradually forged, with first-time buyers enjoying tax incentives, while in contrast, tenants did not have any. However, with the onset of the economic crisis, a change in mind-set was detected regarding renting for % income allocated to mortgage payment reasons relating to employment and access to housing, especially among young people. As a result, rented accommodation started to gain ground vs. owned housing. The end of tax incentives for firsttime buyers in 213 and the rebates for rent for people under 3 years of age are favouring the growth in rented housing. The increasing need for workers to be on the move, also means that people are looking for greater flexibility when choosing a home. Consequently, the percentage of rented primary residences is starting to move into line with the Eurozone average (33.2%), although it is still a long off the European average. Market expansion, as well as the gradual professionalisation of the sector is leading to a better and greater stock of developments to let. According to the Bank of Spain, households in rented accommodation rose from 9.6% in 21 to 14.9% in. Their figures also show that home ownership is touching on 78%, with the remainder (7%) being assignments. Housing Price Index 1 Residential Report 216 CBRE Economic and socio-demographic context 11

7 9.6% % The percentage of rented primary residences is starting to move into line with the Eurozone average One of the main reasons that has traditionally dissuaded owners of empty homes from letting them out has been legal uncertainty. In this regard, 213 s Law to Promote Property Leasings (Ley de Fomento de Alquiler) was designed amongst other things to protect landlords against defaults on rent, allow them to reclaim a property for personal use if required and freely negotiate the price with the tenant. It must also be remembered that due to the limited supply of homes to let, some cities such as Madrid, Barcelona, Malaga, Valencia and Palma saw sharp rises in rents in - up to double-digit growth. There are also still CPI-indexed leases, meaning that some tenants rents are reduced annually in spite of the fact that their reference market is on a growth path. GRAPH 4 Form of tenure of primary residences Spain (%) Owned (left) and Rented (right) Spain Portugal Italy Holland Eurozone Average (19 Countries) France UK Germany % % In conclusion, the economic, social and job market changes being seen in Spain are favouring the gradual rise in the rented housing rate. There is still some way to go to fully come into line with the Eurozone s average, which is why we should expect to see the rental market gain prominence over the next few years, both among consumers and investors. Although this process is underway, it must be remembered that four out of every five households still own their primary residence, making Spain the EU country with the highest rate of home ownership. Sources: INE, Bank of Spain and Eurostat. Form of tenure of the primary residence, To Let (%, right) 12 Residential Report 216 CBRE Economic and socio-demographic context 13

8 2 OUTLOOK: RESIDENTIAL SECTOR INDICATORS The majority of residential sector indicators saw strong growth in, even though they had just bottomed out. The general increase in housing prices is the best indicator of this change in cycle, a change mainly brought on by the rising demand for already existing housing in light of the lack of new-builds. The number of mortgages granted also rose and, as the expansive cycle continues, the percentage of financed transactions is also expected to increase. In the main cities, the lack of urban land is already noticeable and is in fact one of the challenges that the sector must face over the coming years. According to the INE, housing prices increased in all autonomous regions in, registering y-o-y growth of 3.5% for the whole of Spain. The number of housing transactions (+11% in on aggregate), also went up in all autonomous regions except for the Basque Country. The urban land market still varies from region to region, showing that the recovery has not yet been consolidated in all of them. Nevertheless, average prices at national level rose 9.7% in Q3 (up to 156 per sqm). 2.1 House prices and forecasts Following six years of consecutive falls, the recovery in the economy and in employment, together with the improving financing conditions sparked a recovery in house prices which bottomed out at the beginning of. The annual increase in the General Housing Price Index in Spain stood at 3.5% in, according to INE. GRAPH 5 Housing Price Index 1% Estimations 5% % -5% -1% -15% -2% Source: INE and CBRE 14 Residential Report 216 CBRE Residential sector outlook: indicators 15

9 Source: INE 6% Growth in the Housing Price Index in in Spain in 216 according to CBRE All autonomous regions saw the General Housing Price Index rise y-o-y for both new-builds and already existing housing. In a country where there is a strong tendency for home ownership, the readjustment in prices is making it attractive to buy property either GRAPH 6 Housing Sale Purchases (New and existing). No. of mortgages as a primary residence or as an investment, especially in the main cities, Madrid and Barcelona being the most attractive. The upbeat outlook for the rental market over the next few years (section 3.1), combined with the attractive yields of residential properties vs. other investment products (section 3.2) are further factors contributing to the price recovery. According to CBRE forecasts, the Housing Price Index will grow approximately 6% y-o-y in 216. Although significant hikes in prices are forecast, it must be remembered that the starting point was the lows of. Achieving these forecasts is dependent on meeting estimated economic growth, especially for the jobs market, which directly affects housing demand and therefore prices. Submarket prices will be defined firstly by location, but also by the lack of stock in the reference market, the quality of the housing stock and the intensity of demand among other factors New-build housing Used housing Mortgages (right axis) Housing sales Housing sales were up 11% in (354,132 in all of Spain) versus, the majority being sales involving already existing housing, which surged 37% given the considerable available stock of this housing type. This sharp increase in the existing housing market highlights the lack of available stock of new-builds in some areas. This low demand either delays people buying or makes them turn to the existing housing market with a view to refurbishing. The increased sales of existing housing is also influenced by the tax benefits offered for second hand (Tax on Property Transfers, varies between autonomous regions from 6% to 1%) versus new-builds (1% VAT) and by the greater negotiating power which tenants have regarding the asking price. Graphic 6 displays the rising number of existing housing sales versus the decline in new-build sales. Therefore, the residential market currently has pent-up demand and its recovery is dependent on how employment and income evolve. However, in the medium term it will be difficult to reach the total sales and mortgage figures of 27, bearing in mind the current unemployment rate and rates of household formation and immigration. The fact that buying residential property was seen as a risky investment was also a factor that contributed to the reduced market activity levels during the economic crisis, although it is now once again starting to be seen as a safe-haven asset. Overseas buyers are continuing to gain more market share, acquiring one out of every five homes in Spain in according to the Spanish Development Ministry, mostly in the coastal areas of Valencia, Catalonia and Andalusia, as well as in the Canary and Balearic Islands. 2.3 Urban land transactions As a result of the economic crisis, the low activity levels in the sector quickly put a halt to pre-consented land (suelo en gestión). This, together with the large amount of land that went back onto banks balance sheets, triggered the start of the land drought. The number of transactions and the price of land, dictate the state of the real estate market and in this sense the reactivation seen in this segment over recent months is a very clear indicator of the residential market s recovery. Serviced development land (suelo finalista) in areas with the highest demand is limited, and as a result the struggle between national and international developers bidding for the same plots of land has intensified. 16 Residential Report 216 CBRE Residential sector outlook: indicators 17

10 The number of transactions involving urban land varies greatly at both the provincial and autonomous region level. Graph 7 shows the quarterly average number of transactions. Of the markets shown, y-o-y growth was only seen in Madrid (15%), Barcelona (8%), Valencia (9%) and the Basque Country (14%), although the latter only recorded 65 transactions per quarter in. The sharp upturn in the price of urban plots of land in the provinces of Barcelona (17.7% in Q3 ) and Madrid (38.6%) is also notable. At national level this indicates clear signs of recovery, with y-o-y growth of 4.3%, although these are based on all-time low figures. Banks have started to lend again for purchasing land and the influx of GRAPH 7 Urban Land. Transactions and prices. Quarterly averages overseas funds, either in collaboration with local developers or on their own, are driving the market, thanks to the resources they have on hand and their ability to purchase without the need for financing. We would note that their main focus is on serviced development land in sought after areas, such as Madrid, Barcelona and the Costa del Sol, where there is a strong presence of non-resident purchasers and where the lack of stock of this type of product is already pushing up prices. Once again, everything suggests that the market is getting ahead of the Public Authorities, the fact that the main players are starting to focus on well-located plots of land, even if there are still urban planning issues to be clarified, is a clear example of this. It is therefore important for the various Public Authorities to move forward with these issues and the development of new land in areas where a shortage of future housing stock is expected. This is the only way that the sector will be able to progress and both meet people s needs and avoid excessive price hikes. 2.4 Construction and development The Business Confidence Index in Construction reached a 3-year high at the end of and, despite a slight setback recently, it remains high. The construction forecast indicator has had a similar trajectory to that of the index, although it has not managed to break through the zero barrier, which is when there are more positive answers from the business world than negative. The new developments in Spain should gradually start to fill the void created by the lack of new housing stock. This is expected to happen at the end of 216/start of 217. At this stage, existing available stock is unsellable surplus, meaning that the recovery in the construction sector should be across the board, in order to then meet buyer requirements. Given the large number of building permit approvals in, it is expected that between 6, and 65, new homes will be delivered in Transactions GRAPH 8 Construction Confidence Indicators Malaga (Province) Catalonia Barcelona (Province) Madrid (Community) Basque Country Valencia (Province) /m 2 12 Price National total Malaga (Province) Catalonia Barcelona (Province) Madrid (Community) Basque Country Valencia (Province) Source: Spanish Development Ministry Q1 213Q3 Q1 Q3 Q1 Q3 Source: INE. Business Confidence Index (Construction) Expectations for upcoming quarter (right axis) 216Q Residential Report 216 CBRE Residential sector outlook: indicators 19

11 5.7% Y-o-y growth in residential construction investment 4% 3% 2% 1% % -1% -2% GRAPH 9 Preliminary housing start and completion indicators In terms of development and construction in 216, it is expected that both residential investment, as well as the number of building permit approvals will continue to expand on the previous year s growth, based on the high number of residential building permit approvals in (31% y-o-y). Building permit approvals are a leading indicator for these two variables, due to the time lag between the authorisation of a building project, its execution and registration. In, investment in residential construction grew by 5.7% y-o-y. The recovery has been driven by the ECB s low interest rates, which has made lending more affordable and by overseas capital. The improved outlook for demand has stimulated investment in construction, even if the starting point is a market which is considerably below pre-crisis levels. -3% -4% New-build building permit approvals (Residential) Investment in residential construction Source: Bank of Spain and Spanish Development Ministry. 2 Residential Report 216 CBRE Residential sector outlook: indicators 21

12 3 SOCIMIS TOWARDS A MORE PROFESSIONAL SECTOR: THE ROLE OF FUNDS, SERVICERS, SAREB, AND DEVELOPERS Following the economic crisis and the banking sector reorganisation, a new and improved real estate sector is starting to emerge in Spain. With a large number of national players no longer in the picture, international funds have assumed a significant role in the market, often joining forces with local developers, servicers and Socimis. These new players, who injected liquidity at a time when it was difficult to access financing are currently actively involved in the professionalisation of the sector, heading up value-add projects. Foreign investment funds are now playing a pivotal role in the new Spanish real estate scene, whether it be as owners, debt-holders, servicers, developers (with or without jointventures with local developers, both in refurbishments and new-builds) or investing via Socimis. Owners Socimis Overseas investment funds Debt-holders Developers Servicers 22 Residential Report 216 CBRE Towards a more professional sector... 23

13 In stark contrast to the previous cycle, one of the positive offshoots of the extensive transformation of the sector, thanks to new players coming on the scene (funds, socimis, etc.), is the professionalisation and greater specialisation being seen. During and at the start of 216, developers first started to see banks lending to the sector again and financing terms and conditions gradually improved, although equity requirements have remained stringent (more selective credit scoring for developers and homebuyers), and financing large percentages of land purchases was avoided. 3.1 Investment funds The difficult times that the sector suffered at the hands of the crisis, opened up a window of opportunity for overseas investors. In 213, the big European and US funds began to take up positions in the battered Spanish residential sector. Goldman Sachs and Blackstone began to acquire large portfolios of rented housing, when prices were very low, to then work them out and in the future, acquire capital gains on the sale. In addition to rental housing, they also acquired property secured loan portfolios, which the banks, including Sareb, planned to sell. Shortly afterwards, some funds (Blackstone, Cerberus, Kennedy Wilson, TPG, Värde Partners and Apollo) began to acquire the sales and management platforms that the banks had created, known as servicers. At the same time, and for several months now, other overseas funds (Lone Star, Centerbridge, HMC, Eurostone, Castlelake, Pimco, AKM and Patrizia AG, among others) have been investing in a residential recovery in the best areas of Spain, although via different strategies. Thereby making them the new developers. In light of the expected economic recovery, and given the lack of new-build housing in sought after areas, these funds have sufficient capital in place to develop, but in spite of having risk-controlled strategies in place, in the majority of cases they also require minimum levels of pre-sales and the majority of the developments are aimed at medium-tohigh earning buyers. Investment fund profiles have quickly shifted from opportunistic to value-add, focusing on development, property refurbishment, or given that funds have noted the construction potential in the market, they will gradually move to managing urban plots of land, with the goal of achieving greater returns. In many cases, they work in conjunction with a well-known local developer, with the structure and size to carry out the project. 3.2 Servicers Today, Altamira, Haya Real Estate, Servihabitat, Solvia and Aliseda are the biggest servicers in Spain s real estate sector. The first four have signed sales agreements with Sareb, in order to help it speed up the administration and sale of its loan and property portfolio. The servicers were created by the large banks during the crisis years to speed up the sale of the large number of assets that had built up on their balance sheets. Of the servicers analysed, the large majority of them have either been fully or partially sold to specialist overseas funds (Blackstone, Cerberus, Kennedy Wilson, TPG, Värde Partners and Apollo). Servicers have moved on to multi-client platforms, where in fact Sareb itself features, as well as multi-service platforms which manage financial, as well as real estate assets. As a rule of thumb, banks have passed the debt recovery and sales business to the funds, leaving the real estate assets on their own balance sheets. Recently, Solvia and Haya Real Estate have opened retail units to sell their products in Alicante and Madrid, to GRAPH 1 Stake of funds in main servicers % Haya (Cerberus) Altamira (Apollo) Servihabitat (Texas Pacific Group) Aliseda (Kennedy Wilson and Värde Partners) Solvia sell not only assets contained within their portfolio, but also assets acquired from third parties, in exactly the same way as traditional real estate agents. Over the next few years, the number of servicers is expected to decline, given that the key to the sector is having the largest possible volume under management with a multi-client focus. % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% 24 Residential Report 216 CBRE Towards a more professional sector... 25

14 In 216, Neinor Homes invested over 8 million in land on which it plans to develop up to 1, homes over the next few years 8 mn 3.3 Developers The economic crisis devastated many investors, and even homeowners, who at the height of the boom decided to turn their hand to development. But major real estate agents of the size and likes of Metrovacesa, Martinsa- Fadesa, Reyal Urbis, Vallehermoso, Nozar, San José and Realia were also severely affected and some finally ended up in insolvency proceedings (Martinsa-Fadesa, Reyal Urbis, Nozar), while others were restructured, returning millions of square metres back to their bank lenders balance sheets, both in terms of land, as well as all types of constructions. We would highlight Metrovacesa in this group, which was once one of the biggest Spanish and even European real estate firms. It is now primarily controlled by Banco Santander, although BBVA and Banco Popular are also majority shareholders, and has now separated its rental portfolio business (Offices, Shopping Centres and Hotels) from the Residential business with the creation of Metrovacesa Suelo y Promoción (Metrovacesa Land and Development). By doing this, they have transferred assets worth over 1,2 million. As part of its restructuring plan, Metrovacesa approved a 1,64 million share capital increase, to reduce and restructure its debt and thereby ensure the company s viability. In, Lone Star completed the largest transaction in this sector, buying 5% of the Kutxabank real estate portfolio and acquiring Neinor Homes. The company acquired the management team and assets valued at 93 million, as well as a servicing contract from the bank for the assets remaining on its balance sheet. Neinor Homes s new plan is to become the leading residential developer in Spain, exacting the highest standards in quality and focusing on the product and the service provided to the homebuyer. Their aim is not just to develop the plots of land contained within the acquired portfolio, but to also acquire new land over the next few years in Madrid, Barcelona, The Balearic Islands, Andalusia and The Basque Country. Investors, national and mainly foreign, are showing a growing interest in the development market. A further example of funds interest in Spanish real estate is the case of the San José group. In mid- the San José construction group reached an agreement with its creditor bank to divest its real estate arm, San José Desarrollos Inmobiliarios, removing more than 1,3 million of debt from its balance sheet. Shortly after, the US fund Värde Partners acquired Banco Popular s stake (25%) of the real estate firm, with the aim of increasing share capital and starting to develop. Inmobiliaria Habitat is another real estate agent that was unable to meet its debt obligations and in was taken over by a group of funds (Bank of America Merril Lynch, SP11 Finance Ireland, Capstone and Goldman Sachs, among others). At the end of Neinor Homes announced that it had invested more than 8 million of its shareholder equity in land on which it planned to develop up to 1, homes over the next few years, thus amassing the largest good quality serviced development land bank in Spain. According to the developer s calculations, they will deliver between 2,5 and 3, homes per year. So far this year, it has 1 projects currently 26 Residential Report 216 CBRE Towards a more professional sector... 27

15 SAREB 1, Housing units. Remains the main market player. in the process of being launched and a further 21 planned for before the end of the year. At the start of 216, Neinor Homes signed an agreement with Solvia to market a portfolio of 6,2 properties, 6% of which is housing. Despite the large cut in the number of national developers, some of the survivors hold a very strong position in today s market. Amongst them are: Pryconsa, Vía Célere, Aelca, Metrovacesa, Quabit, ACR and Construcciones Amenábar. In addition to these, cooperative management companies, with Ibosa and Domo Gestora leading the field, have played and still play a significant role in the construction of new-build developments. Servicers are focused on the economic and real estate recovery, with greater activity in the development sector, prior to the analysis of the plots of land and demand in each area. Altamira for example, currently has 217 newbuild development projects underway and has announced that it will deliver 8, new homes by 218. At the end of, Solvia announced that it will develop 6 new homes for Sareb over the next few months in various Spanish cities, whilst Anida is planning to build 45 homes in Seville in a joint venture with a local developer Insur, as well as other developments in Madrid and Levante due to get underway soon. The international fund-national developer joint ventures round everything off. These are investment vehicles that combine the developer s skillset and their local developers market knowledge with the investment capacity and solvency levels of the funds that do not have the structure required to take on the construction. Grupo Lar and Pimco, Renta Corporación and Kennedy Wilson, Momentum Real Estate and HMC, Aquila Capital and Inmoglaciar, Mina Inmobiliaria and Eurostone, Aelca and Varde and Q21 Real Estate and Baupost, are just some of the partnerships that have been forged over the last few months. 3.4 SAREB In terms of housing stock, SAREB remains the main market player, boasting a stock of almost 1, units at mid-. The entity has had to restructure itself in order to deal with changes in the accounting framework, and has also transferred the sale of its best assets (the remaining stock may be difficult to sell) to the servicers. Nevertheless, Sareb has now gone one step further from just managing the assets from the banking sector reorganisation, as demonstrated by the recent acquisition of Quabit shares which turned it into the group s second largest shareholder, with a 7.7% stake. Its 216 targets include completing unfinished developments and placing those that have already been completed but that have not yet been bought. 3.5 Socimis To date, Socimis (equivalent of REITs in Spain) have only dabbled in the residential sector, but that is expected to change over time. Other European capital cities, such as Paris and London, who have a long track-record in the Socimi market, hold the upper hand in terms of destinations for this type of investment compared to Madrid and Barcelona. Among the Socimis that have invested in the residential sector, we would note Fidere Patrimonio, Blackstone s Socimi, which listed on the Alternative Stock Exchange (Mercado Alternativo - MAB) in mid. Fidere only has residential housing in its portfolio (2,7 rented affordable homes). Thanks to its acquisition of Testa, Merlin Properties now has more than 1,5 rental homes in its portfolio, most of which are located in Madrid. Hispania has 684 rental homes in its portfolio, spread between Madrid and Barcelona and is creating a high-end residential rental portfolio via the private wealth manager Azora. Given the percentage of homeowners (84.5% in 21 and 78% in ) and those letting (9.6% to 14.9% for the same timeframe, with the remainder being assignments), the expected increase in the percentage of rented housing over the next few years, would suggest that Socimis will play a much more prominent role in this sector, therefore meaning that this sector will naturally become similar to other European markets, where the rental market plays more of a defining role. 28 Residential Report 216 CBRE Towards a more professional sector... 29

16 4 When HOUSING INVESTMENT The Spanish real estate investment market in general, including the homeowners market in particular, is currently more attractive than other options. The expected upturn in housing prices will mean that there will be capital gains in the medium to long-term. Meanwhile, rental housing has become a stable investment, with greater landlord protection. Secondary locations in large cities appear to be where the greatest yields are to be had. comparing housing as an investment versus other alternatives: equity investment is exposed to factors beyond the Spanish economy s control, as well as political uncertainty, whilst investment in fixed income is exposed to sovereign debt risk, as was seen with 1Y bond performance during the Euro crisis. Meanwhile, investment yields in the Spanish residential sector offer stable returns, with little exposure to external shocks unlike the previously mentioned investment options. GRAPH 11 Risk premium and Residential and Alternative Investment (Spain) 7 6 Basis points % German-Spanish bond yield gap (1 year) % 18 5, 16 4, 14 3, 12 2, 1 1,, 8-1, 6-2, 4-3, 2-4, -5, year bond yield (Spain) Monthly IBEX 35 yield (right axis) Gross rental yield Housing yield (rent + capital gains) 216 Residential Report CBRE 3 Residential Report 216 CBRE Housing investment 31

17 According to the Bank of Spain, alternative investment, such as the stock exchange or 1 yr government bonds are yielding annual average returns of 1.22% and 1.75%, respectively. Given the recovery in prices, housing as an investment has regained its appeal thanks to the increased capital gains, which vary depending on location and quality. In this respect, prime locations in Madrid, Barcelona and the Costa del Sol are the most sought-after locations by investors as they are viewed as the safest options. Purchasing housing yields high returns during periods of stability in the residential sector, however, as the previous crisis showed, it also carries risks in times of adjustment. Hence why market analysis is fundamental in order to ensure the investment is profitable in the medium and long term. The tax reforms introduced in and 216 relative to the indexation and amortization coefficients which affect the capital gains resulting from the sale of a property must also be taken into account when investing in housing, even though there are some exceptions (e.g.: people over the age of 65 are exempt, capital gains assigned to the purchase of another home). 32 Residential Report 216 CBRE Housing investment 33

18 5 ANALYSIS OF DEMAND FOR NEW-BUILD HOUSING IN SPAIN 5.1 Housing construction potential between Given the need for new-builds in Spain s most consolidated markets, new housing development is expected to recover over the next few years. The remaining stock of Spain s largest provincial capitals can be considered to be somewhat surplus, hence a growing number of buyers are already starting to have difficulty finding the range of offer that meets their requirements. housing will either be located in highly specific locations or be unsellable surplus housing, which will give rise to new developments, something which is already being seen in more consolidated markets. The population analysis highlights the construction potential in these markets. Based on the assumption of increasing household formation (despite the decline in population forecast for Spain by INE), as well as on other demographic and socio-economic assumptions detailed in appendix 1, demand for new housing between 216 and 225, especially in the Madrid province, is expected to stand on average at around 24,591 new homes per year. As for Spain as a whole, there is a need for new housing, given that the large stock of housing yet to be sold is largely formed of housing built pre-crisis, and almost 3% of this is considered off market, or in other words, assets for which there is no demand due to their location, quality or legal status. It is therefore a given that at the end of 216 or at the start of 217 the available stock of new 34 Residential Report 216 CBRE Analysis of demand for new-build housing in spain 35

19 Using INE population forecasts, as well as a series of other demographic and economic assumptions detailed in Appendix 1, we have calculated the construction potential for the markets shown in the following map. Potential new-build housing demand will stand at around 18, units per year between 216 and 225. Approximately one in seven will be built in the autonomous region of Madrid, where the new-build housing demand will be the highest of any other region analysed. The Basque country will need almost 5, new homes per year, meanwhile demand for existing housing and foreign demand is set to keep rising in the Balearic Islands, which will translate into a need for almost 7,5 new homes per year. 18, units MAP 1 Potential New-Build Demand (Annual Average )* The provinces of Malaga, Barcelona, Seville and Valencia will require around 1,, 8,, 6, and 5, new homes respectively to cover their annual potential demand. Annual housing demand in Spain Madrid 24,591 Basque Country 5,79 Valencia 5,293 Barcelona 7,94 Balearic Islands 7, Supply and demand: a necessary adjustment Given the new requirements of housing demand, a substantial amount of the new-builds in the future will have fewer bedrooms, larger average sizes and will be aimed at clients within a wide range of income categories. Also, in markets where the housing stock is low when compared to the estimated household formation rate (as in the case of Madrid), the construction requirement will be greater. importance. This new cycle will also force developers to become more aware of delivery schedules and cost optimisation. Developers have adapted to this new market environment in which clients are seeking higher quality homes, hence why funds with a value-add strategy have increased their stake in the development business. Seville 5,769 Malaga 1,626 The new market backdrop and the shift in demand are forcing developers to study their potential clients needs in more depth, meaning they require housing of a higher quality than before the crisis and which is personalised and sustainable. Features such as home automation, availability of services and amenities for residents and energy-saving systems (the latter will be a mandatory requirement as of 22 according to current European regulations) are also gaining Source: CBRE * Study carried out for selected provinces and Spanish aggregate. 36 Residential Report 216 CBRE Analysis of demand for new-build housing in spain 37

20 6 RESIDENTIAL SECTOR IN SPAIN S MAIN CITIES 6.1 Madrid As would be expected, the residential market recovery has been most notable in the centre of Madrid. In effect, central Madrid, along with Barcelona, is the most active market in Spain, where the scarcity of available serviced development land means that all developers are bidding for the same plots of land in the most sought after areas. This is evident from the interest being shown at auctions. The lack of product has meant that investment funds are now focusing on acquiring land that requires going through the planning approval process to then achieve a serviced development plot of land, primarily in the north of Madrid. According to the Spanish Development Ministry, in the city of Madrid, openmarket housing prices increased by 3.5% in. The upturn in prices on a provincial level (INE), calculated using notary figures, is a more accurate reflection of the increase in sales prices, rising by 5.1% in (4.4% for newbuild sales) at the autonomous region level, clearly demonstrating the market recovery. The average price for new-build housing stands at approximately 3, per sqm in the capital, although prices vary considerably depending on the districts. The average price in the Tetuán and Ciudad Lineal districts stands at around 2,5 per sqm, while the average price in the Salamanca district reaches 6,8 per sqm. The lack of plots of land and properties to refurbish in this district, mean that the price of new-build developments can reach up to 1, per sqm. In contrast, in the PAUs (city expansion areas) to the south and southeast of the city, prices do not exceed 2, per sqm. GRAPH 12 Number of mortgage valuations and open-market house prices (Madrid) HPI (Madrid) Mortgage valuations /sqm Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Central Madrid Central Madrid Housing Price HPI Aut.Com Madrid (right) HPI New, Aut.Com Madrid (right) Source: Spanish Development Ministry, INE. 38 Residential Report 216 CBRE Residential sector in Spain s main cities 39

21 Map 1 Average price and number of new-build developments by district in central and out-of-town Madrid Las Rozas 2,577 /sqm Majadahonda 2,45 /sqm Boadilla 1,842 /sqm Pozuelo 3,956 /sqm Mirasierra (Arroyo Fresno) 3,263 /sqm Aravaca + Valdemarín 4,816 /sqm Montecarmelo 3,13 /sqm La Moraleja 3,7 /sqm Tetuan 2,546 /sqm Las Tablas 3,29 /sqm Sanchinarro 3,669 /sqm Chamartín 4,565 /sqm Chamberí 5,764 /sqm Ciudad Lineal Salamanca 2,836 /sqm Moncloa 5,959 /sqm 3,464 /sqm Centro 4,96 /sqm Retiro 3,77 /sqm Delicias 3,53 /sqm Puente de Vallecas 2,53 /sqm Valdebebas 2,27 /sqm Villa de Vallecas 1,848 /sqm No. of Developments >15 >1 a15 >5 a1 1 a 5 Source: CBRE. The upturn in the number of mortgage valuations in central Madrid, up 13% in according to the Spanish Development Ministry, is an indication of how much residential activity has increased. Demand for new-build housing is primarily focused on the northern area of the capital, and these buyers tend to have a medium-high purchasing power. The highest number of developments under construction (31) are currently located in Valdebebas. Arroyo del Fresno and Peña Grande (7 works in progress), has become a new hotspot of activity, alongside other more consolidated areas, such as Montecarmelo (3) and Las Tablas (6), where the amount of serviced development land is now running out. There is also development and refurbishment work going on in the Tetuán district, which currently has 12 developments for sale, with prices ranging significantly depending on the scheme s proximity to the Castellana and the type of home. In the Salamanca and Chamberí districts and some locations in the Central District, there is a great deal of demand for luxury housing, which is causing a shortage of product on the market. The vast majority of projects in this area are refurbishments, given the lack of serviced development land in these locations. To the south of Madrid, the PAU de Vallecas (La Gavia) saw an upturn in activity thanks to an adjustment in the price range ( 1,8-2, per sqm), an area where people had paid 5, per sqm and there is now very little available space. Of particular note to the south-east are the Ahijones and Cañaveral developments that are currently under construction. In terms of the future, Valdecarros will be the largest development to the south-east of Madrid (48, homes). 13% The upturn in the number of mortgage valuations in central Madrid is an indication of how much residential activity has increased in the city 4 Residential Report 216 CBRE Residential sector in Spain s main cities 41

22 Map 2 Main sales transactions in Madrid ( and Q1 216) 26. Alcobendas S.S. de los Reyes Land / New build Refurbishment Standing investment 14. Cantalejo 23. Montecarmelo 19. Arroyo del fresno 29. PAU Sanchinarro 22. Valdebebas Year Address Area sqm buildable (land) and sqm constr. (refurbishment); or housing (millions) Buyer Type of transaction 1. Génova 7 6,5 sqm constr. 15 Eurostone Refurbishment 2. San Jerónimo, apartments na Platinum Estate Refurbishment 3. General Oráa, 9 5,2 sqm constr. na Platinum Estate Refurbishment 4. Españoleto, 9 2,5 sqm constr. 11 nd Refurbishment 5. Postigo San Martin, 3 4,83 sqm constr. 11 Renta Corporación-K.Wilson Refurbishment 16. Cocheras Metro Cuatro Caminos 13. Paseo de la Habana Raimundo Fdez. Villaverde 11. Espronceda Fdez. de la Hoz Españoleto Fuencarral Jacometrezo 4,6,8 7. Puerta del Sol 9 1. Genova 7 6. Grán Vía Postigo San Martín 3 3. General Oraa 9 8/12. Claudio Coello Juan Bravo 3 9. Menendez Pelayo San Jeronimo Gran Vía, 68 7,6 sqm constr. 4 FMS Wertmanagement Refurbishment 7. Puerta del Sol, 9 3,93 sqm constr. 3 Renta Corporación-K.Wilson Refurbishment 8. Claudio Coello, 18 5,318 sqm constr. (incl.precio op 9.) Lar-Pimco Refurbishment 9. Menéndez Pelayo, 41 3,644 sqm constr. N.A. Mina Inmobiliaria/AKM Refurbishment 1. Jacometrezo, 4,6,8 8,9 sqm constr. 23 Platinum Estate Refurbishment Espronceda, 32 8,37 sqm constr. 32 Mina-Eurostone Refurbishment Claudio Coello, 18 5,318 sqm constr. 22 Patrizia AG Refurbishment 13. Habana, 75 2,25 sqm buildable 11 Martell Inversiones New build warehouse 14. Cantalejo 5,7 sqm buildable na Pryconsa Land / New-build 15. Juan Bravo, 3 26,2 sqm buildable 12 Lar-Pimco Land / New-build Source: CBRE. 2. Villaverde 24. San Jenaro 21. Legazpi 27. Méndez Álvaro 28. Embajadores 16. Cocheras Metro Cuatro Caminos,4 62,512 sqm buildable 88 Ibosa Land / New-build 17. Raimundo Fdez Villaverde 54,225 sqm buildable 111 Domo Gestora Land / New-build 18. Fdez de La Hoz, 63 5,45 sqm buildable 18 Urban Imput Land / New-build 19. Arroyo del Fresno 42 apartments 64 Grupo Amenábar Land / New-build 2. Villaverde 1,2 apartments 45 Inmo Glaciar-Aquila Land / New-build 21. Legazpi 6,4 sqm buildable 1.5 Neinor Homes Land / New-build 22. Valdebebas 93, sqm buildable 56 Pryconsa Land / New-build Three large residential land deals were completed in Madrid last year: Cogesa (23), Pryconsa (22) and Inmo Glaciar-Aquila (2), in Montecarmelo, Valdebebas and Villaverde, respectively. The most notable land/properties for refurbishment transactions in the centre of Madrid in /216 were located in Cuatro Caminos (16), Raimundo Fernández Villaverde (17), Legazpi (21), Fernández de la Hoz 63 corner with Plaza San Juan de la Cruz (18), Menéndez Pelayo, 41 (9), Espronceda, 32 (11) and Juan Bravo, 3 (15). In terms of future developments within the M-3 ring road, we would note the Méndez Álvaro Norte development, where 1,9 homes are expected to be built. The large amount of serviced development land that is expected to 23. Montecarmelo 1,7 sqm buildable 2 Cogesa Land / New-build 24. San Jenaro 1,835 sqm buildable 6.7 Vía Célere Land / New-build 25. Fuencarral 77 8, sqm buildable 21 GreenOak Land / New-build 26. Alcobendas - S.S. de los Reyes 7,815 sqm buildable 64.5 Neinor Homes Land / New-build Méndez Álvaro 17, sqm buildable (32 apartments) 2 Grupo Amenábar Land / New-build Embajadores y Móstoles 9,8 sqm buildable 1 Vía Célere Land / New-build 29. Sanchinarro 284 apartments 61 Hispania Standing Investment 42 Residential Report 216 CBRE Residential sector in Spain s main cities 43

23 imminently come on to the market, has sparked great interest in what is one of the last batches of this type of land now left in the city of Madrid. The current average new-build price in this area stands at approximately 3,5 per sqm. As we previously mentioned, there are a large number of refurbishment projects underway for residential use in the city centre (for example, developments 1 to 12 on the map on the previous page), as well as projects in the Justicia neighbourhood (Fernando VI, 1 and 19; Barquillo, 12 and 49; and Longoria, 1), which are period buildings that are being refurbished and sold as luxury apartments. Regeneration of neighbourhoods in Vulnerable Municipal Areas (Áreas Vulnerables Municipales AVM) will benefit from the subsidies that the Community of Madrid will grant over the next two years, mainly aimed at improving buildings energy efficiency. The vast majority of residential developments in progress in the centre of the capital are refurbishment projects under construction, primarily in the city centre, where the lack of serviced development land has meant that refurbishment is virtually the only option when it comes to meeting demand for new homes. In the northern area of the capital, as well as in the Salamanca and Chamberí districts, buyers have high levels of liquidity and good credit scorings when it comes to requesting financing. These areas, which have better value uplift potential, are starting to see off-plan buying return, with some developments selling out very quickly. We would also note the upsurge in overseas buyers, who are primarily searching for prime properties and locations. Finally, we can confirm that the recovery of the city s residential market activity was consolidated in and that the spike in the number of newbuild permits is laying the way for a consolidation of development activity in 216, especially in the north and the city centre. 6.2 Barcelona As in Madrid, the majority of sector indicators in Barcelona were positive in. Among some of the more notable factors, was an increase in overseas residential investment, as well as an increase in interest from non-resident buyers. The lack of serviced development land in the city centre has meant that new-build properties are primarily refurbishment projects. Districts such as Ciutat Vella (5 developments in progress), Eixample (12) and Gràcia (8) frequently have projects where properties have their use changed to residential, such as Gran Vía de les Corts Catalanas, which was recently acquired by the fund AKM. In secondary and out-of-town areas (primarily Hospitalet and Badalona) there has been an increase in demand for serviced development land. The lack of land for construction, has had a direct knock-on effect on prices, as demonstrated by the 4.3% Mortgage valuations Central Barcelona Source: Spanish Development Ministry, INE. y-o-y increase in the valuation price of open-market housing in the city. On a regional level, Catalonia registered an increase of 3.7%, making it the third autonomous community in terms of price increases, only surpassed by Madrid and the Balearic Islands. The price upturn is primarily due to strong demand in coastal areas, where overseas buyers were particularly active in search of a high-quality second home. During, land transactions increased by 7% in the province of Barcelona. 3.7% On a regional level, Catalonia was the third autonomous community in terms of highest price increases GRAPH 13 Number of mortgage valuations and open-market house prices (Barcelona) HPI (Catalonia) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 /sqm Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Central Barcelona Housing Price HPI, Catalonia (right) HPI New, Catalonia (right) Residential Report 216 CBRE Residential sector in Spain s main cities 45

24 According to figures from the Spanish Development Ministry, mortgage valuations increased by 27% in, making Barcelona the Spanish city with the highest increase. The metropolitan area, where there is the greatest amount of available serviced development land, accounts for a large part of the demand. Neighbourhoods such as Poble Nou, also have good potential, as the industrial spaces that have been freed up can be converted into residential use. Out-of-town areas such as San Just Desvern, San Cugat del Vallès and Hospital de Llobregat are also in high demand and prices there stand at between 2,8 and 3,2 per sqm. The Marina in Sants area is seeing a similar turn of events, and as you can see in the following map, it is now one of the busiest development areas. We would particularly note the Can Batlló residential project with almost 1,5 homes planned, of which 184 relate to Vía Célere (Célere Magoria project). Chenavari and Vía Célere started the Residencial Célere Fórum development with an initial investment of 56 million. The development site is located on Calle Narcís Roca, and was acquired by Vía Célere in March for 2 million, and comprises a 16,7 sqm plot. Local developers also upped their activity in the city centre, as shown by the developments on sale by Nuñez i Navarro (Gràcia), Vertix (Ciutat Vella and Vila Olimpica), Corp (Sarrià and Sants), Elix (Gràcia), Vía Célere (Eixample), AAA (Ciutat Vella), and AKM (Corts Catalanas). Map 3 Average price and number of new developments by district (Barcelona) Sarriá - Sant Gervasi 6,8 /sqm (5) Gracia 4,7 /sqm (8) Sant Marti 3,3 /sqm (12) Les Corts 5,4 /sqm (3) Eixample 6,2 /sqm (12) Ciutat Vella 3,8 /sqm (5) Sants - Monjuïc 3,8 /sqm (7) Source: CBRE. 46 Residential Report 216 CBRE Residential sector in Spain s main cities 47

25 Map 4 Main sales in Barcelona ( and Q1 216) 8. Bruniquer, Pintor Alsamora, Avda Diagonal, Provença, Casa Burés 9. Girona, 2 3. Balmes, Gran Via de les Corts Catalanes, Carrer de Muntaner, Roma, Urgell, 6 Land / New build Refurbishment 1. Via Laietana, 4 Standing investment Year Address Area sqm buildable (land) and sqm constr. (refurbishment); or housing (millions) Buyer Type of transaction 1. Urgell, 6 1,3 sqm constr. 2.5 Renta Corporación Refurbishment 2. Casa Burés 8,63 sqm constr Bonavista Developments Refurbishment 3. Balmes, 45 2,985 sqm constr. 9.7 Confidential Refurbishment 4. Pintor Alsamora, 29 3,468 sqm buildable 2.1 Neinor Homes Land / New-build 5. Av. Diagonal, 119 4,21 sqm buildable 6.3 Neinor Homes Land / New-build 6. Roma, 135 2,4 sqm constr. na Tauro RE Standing investment 7. Provença, 24 3,129 sqm constr. 4.6 na Standing investment 8. Bruniquer, 41 2,12 sqm constr. 1.2 Private Standing investment 9. Girona, 2 2,985 sqm constr. 12. Bonavista Developments Standing investment / Via Laietana, 4 3,6 sqm constr. 7.2 na Standing investment / Gran Via de les Corts Catalanes, 64 4,825 sqm constr. 17 Eurostone Standing investment Carrer de Muntaner, Residencial Muntaner Standing investment The Spanish buyers between the ages of 3 and 4 that did not purchase a home in the crisis years, showed signs of increased buying activity in. Overseas buyers (2% of total) have strong purchasing power and continue to play a defining role in the jump in demand, attracted by the attractive housing prices and the yield this offers as an investment. The percentage of overseas buyers is very high in some areas such as Eixample and neighbourhoods near to the beach. 48 Residential Report 216 CBRE Residential sector in Spain s main cities 49

26 6.3 Valencia In the city of Valencia saw a marked fall in new-build housing supply, due to the lack of new developments and the sale of housing stock that has been in the hands of the banks. Mortgage valuations Source: Spanish Development Ministry, INE. In there was a slight increase in the number of mortgage valuations and in this trend increased with 7.3% more mortgage valuations in the capital. The average y-o-y prices per sqm ( 1,16) still fell by 3.6%, although there are signs of prices trending upwards for prime properties and areas and figures are up on an Autonomous Community level (2% y-o-y), due to consolidated second home demand, with strong demand coming from overseas buyers. In this respect, the province of Alicante which saw a great leap stands out, with house sales up 9.7% y-o-y (26,771 in ), 46% of which was accounted for by overseas buyers. The south of GRAPH 14 Number of mortgage valuations and open-market house prices (Valencia) HPI (Community of Valencia) Q1 Q2 Q3 Q4 Q1 Central Valencia Q2 Q3 Q4 /sqm Q1 Q2 Central Valencia Housing Price Q3 Q4 Q1 HPI Community of Valencia (right) Q2 Q3 Q HPI New, Community of Valencia (right) Alicante has the largest number of new developments where the growing demand for land in prime locations points towards an upcoming drought in stock. In fact, buyers are now taking into consideration factors such as the sustainability and energy efficiency of properties although quality and location remain their main concerns. The areas with the highest demand are in the city centre, where buyers look for larger, higher quality homes (mainly 4 bedroomed-apartments of over 15 sqm), and in newly developed areas where most buyers look for residential complexes with a swimming pool, gardens and some sports facilities. 26,771 Alicante registered a 9.7% y-o-y increase in housing sales and purchases 5 Residential Report 216 CBRE Residential sector in Spain s main cities 51

27 6.4 Malaga Malaga s market is very disparate and bearing in mind the large variation in its inhabitants purchasing power, it has the widest price-range in Spain. The Teatinos, Parque Litoral and Western areas head up the recovery, with new developments springing up and available new-build stock is showing the first signs of running out. Tourist apartments in the city centre are driving the market, where there continue to be limited numbers of primary residences. The growing interest for serviced development land in Malaga s coastal towns, continues to drive prices upwards, and would suggest that we can expect to see strong developer activity in the region during 216. Meanwhile, the average mortgage valuation value for homes in the capital grew by 1.8% in (up to 1,322 per sqm), and continues to grow at a lower rate than Andalusia prices (INE), where the y-o-y increase stands at 3% and 5.4% for new-build homes. The growth is being sustained by the increase in demand for second homes in coastal areas, thanks to a large number of overseas buyers (which accounted for 18% of all transactions). We would also highlight that these are based off record low prices achieved in in inland areas, where increases have been significant in terms of growth rates, but not in absolute value terms. Mortgage valuations in central Malaga saw a sharp spike of 22.4% in, which demonstrates the heightened level of activity in the market and the strong demand, of which 4% was accounted for by overseas buyers. On a provincial level, the Costa del Sol, with 2, mortgage valuations (Spanish Development Ministry) in Marbella in, continues to lead the way, which is heavily linked to luxury second homes for overseas buyers. GRAPH 15 Number of mortgage valuations and open-market house prices (Malaga) HPI (Andalusia) 18% Mortgage valuations /sqm Transactions by overseas buyers 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Central Malaga Source: Spanish Development Ministry, INE. Central Malaga Housing Price HPI, Andalusia (right) HPI New, Andalusia (right) 52 Residential Report 216 CBRE Residential sector in Spain s main cities 53

28 6.5 Palma de Mallorca In Palma, there continues to be a lack of existing properties for refurbishment, that are located in an appealing location and at a reasonable price, in order to then be able to construct good quality homes. The improved economic outlook and financing terms and conditions are helping to spark more interest in the land market. Housing mortgage valuation values grew by 3.5% in and the number of mortgage valuations increased by 5%. The highest prices are found in the Old Town, where the price per sqm can reach between 7, - 9, per sqm, due to the strong overseas buyer demand for luxury second homes. In the Balearic Islands, overseas buyers continue to be behind the robust housing price growth (6.4% in - INE), with new-build homes achieving 7.8% growth in the same period. 5% of transactions in the Balearic Islands were above Mortgage valuations GRAPH 16 Number of mortgage valuations and open-market house prices (Palma) HPI (Balearic Islands) T1 T2 T3 T4 Source: Spanish Development Ministry, INE. T1 Central Palma T2 T3 T4 m T1 T2 Central Palma Housing Price T3 T4 T1 HPI Balearic Islands (right) T2 T3 T4 HPI New, Balearic Islands (right) In terms of housing sales prices, circa 5% of transactions in the Balearic islands were above 15,, while on a national level less than 3% were over 15,. Between 213 and two significant land transactions have been completed, such as the Ca n Domenge plot of land where over 3 homes are set to be built over several phases, the first of which comprising 4 units is already underway, and the Son Simonet plot of land located on Carretera de Valldemossa that was sold by the Ministry of Defence and that has a buildable area of over 25, sqm. 15, There have been some transactions for clients with a medium level of purchasing power, while transactions for wealthy buyers have continued. 54 Residential Report 216 CBRE Residential sector in Spain s main cities 55

29 APPENDIX 1 According to INE s population forecasts, Spain s population will gradually decrease over the coming years. However, the number of households will probably increase, if a number of demographic assumptions come to fruition, which will then negatively affect the average household size: The expected ageing of the population and drop in birth rate. Over recent years, Spain s average household size has moved into line with that of its surrounding countries. This process is expected to be further boosted by this as levels of education and per capita income converge with those of neighbour EU countries. More non-traditional household structures, such as single-parent families or young couples. The potential housing-demand scenario ( ) is based on the INE population forecasts for this period and assumes that the average household size will decrease at around the average annual rate for 23-, a trend which seems realistic if we consider how the rate has been moving into line with those of other Eurozone countries over the last few years and bearing in mind the aforementioned demographic factors. To determine potential new-housing demand, potential household formation is multiplied by 44%, which is the ratio of new homes sold versus total house sales between 27 and in Spain. The same method is applied for Barcelona (33%), Madrid (42%), The Basque Country (4%), Malaga (45%), Seville (36%), The Balearic Islands (45%) and Valencia (39%). foreign residents and non-residents. The average from the last 1 years is used, based on the Spanish Development Ministry s transaction statistics. In the same way, a similar reasoning is adopted to estimate the demand of new second-home housing, using the data for the number of second-homes collected in the last available census at provincial level (INE, 211). Following on from this, and founded on this base scenario, a second scenario then materialises, in that, given the aforementioned demographic trends, it is expected that the economy will improve significantly, which will then help to create more households, thanks to more young people leaving their parents homes (household atomisation), higher population growth and stabilised migration, including more internal migration to large cities. Based on these assumptions, the number of households in Spain will increase over the coming years and this will fuel the need for more housing. To further endorse this new-housing demand figure, a growth factor is applied to the previous estimates to forecast, depending on the province, the housing demand from GRAPH 17 Average size of homes by country (Eurozone) 3, 2,8 2,6 2,4 2,2 2, 1, Eurozone (18) Germany Spain France Italy Portugal 56 Residential Report 216 CBRE Appendix 1 57

30 For more information, please contact: Samuel Población CBRE National Director - Residential and Land samuel.poblacion@cbre.com Lola Martínez CBRE Research Director lola.martinez@cbre.com 58 Residential Report 216 CBRE