REPORT June 2017 KEY FEATURES OF THE MARKET AND RESIDENTIAL SECTOR IN SPAIN

Transcription

1 REPORT June 217 KEY FEATURES OF THE MARKET AND RESIDENTIAL SECTOR IN SPAIN

2 CONTENTS EXECUTIVE SUMMARY 4 CONCLUSIONS MACROECONOMIC INDICATORS Recovery in full swing Rising job creation and prices holding back 1 2. HOUSING SUPPLY Residential construction Financing The land market HOUSING DEMAND Effective Housing demand Effective demand profile Overseas demand HOUSING PRICES Housing prices Housing accessibility and financing terms and conditions 4 5. RENTAL HOUSING AND THE RESIDENTIAL INVESTMENT MARKET Rental market The residential real estate investment market 5 6. MARKETS IN THE MAIN CITIES Madrid Barcelona Main cities 59 Contents 3

3 EXECUTIVE SUMMARY Consolidated growth and economic sentiment indicators suggest that we have turned a corner in the property cycle, with consumption and investment set to continue driving aggregate demand. According to forecasts, the economy will continue to expand between 217 and 219. Construction of new-build homes is below the levels seen in the 199s. However, the number of projects undertaken has risen sharply, suggesting that housing production could potentially recover over the next few years. An intense deleveraging process has taken place across the board, with the sector seeing a major shift away from bank financing and towards alternative sources of financing. In the land market, the demand for serviced development land has surged, an asset class that offers limited risk exposure. Demand for land is beginning to pick up again in certain areas, where prices starting to climb considerably. At the national level, prices are not expected to rise given the vast quantity of supply. In the major cities, such as Madrid and Barcelona, there is no longer any quality supply on the market, a situation which could cause prices to spike in specific areas. Housing demand is constantly growing in certain areas, mostly bolstered by the purchase of existing homes and over faster-paced markets (large towns and coastal areas). The weighting of new-build housing has declined since the previous expansive cycle, due to limited supply. The buyer profile has changed dramatically; they are now more financially sound, no longer so reliant on mortgage loans, and is probably oriented to move up the property ladder, [extending/downsizing due to changes in household circumstances, relocating to a better area...] through their housing equity. suggests that banks are starting to mitigate risks. Current banking sector trends suggest a potential hardening of financing terms and conditions on the back of both the recent European Court ruling and potential interest rate hikes. Housing prices remain modest across Spain. The isolated price increases registered are due to the new-build segment, which is recovering given the lack of supply and buoyant demand. Indicators suggest that housing accessibility has improved significantly thanks to reduced prices and lower interest rates. At the local level, prices in some markets are starting to climb sharply. Prices are rising thanks to stronger demand in major cities such as Madrid and Barcelona, as well as some coastal areas. Renting is now an established housing option for a considerable number of people looking for a home. Higher demand has driven up the number of properties to let and professional companies have now started to focus their product offering on rental housing. The upturn in renting is helping to establish the residential market as a valid investment option. Buoyant demand and the upswing in rents are generating attractive gross yields that outstrip equivalent investment alternatives. The professional residential investment market booked 2,1 million in 216, tripling the volume recorded in previous years. The mortgage market is growing, albeit very modestly. We are also seeing a shift towards fixed-interest loans, which 4 Key features of the Market and Residential Sector in Spain CBRE Executive summary 5

4 1.1. RECOVERY IN FULL SWING 1 MACROECONOMIC INDICATORS Continued GDP growth is a testament to just how much Spain s economy recovered in 216. The country s latest GDP figure (3.2%) confirms that Spain s recovery is indeed in full swing, despite the political impasse that overshadowed most of 216 and the muted performance in neighbouring economies. FIGURE 1a GDP ANNUAL GROWTH SPAIN VS. EU % Change (1.) (2.) (3.) (4.) (5.) GDP (Spain) GDP UE-28 Source: Spanish Statitical Office, Eurostat, Oxford Economics Despite current global uncertainty, economic sentiment indicators suggest that the key Spanish market players are now more optimistic in terms of future activity than their European counterparts. These two indicators would suggest that the economy has come a long way in the last couple of years, and despite the challenges posed on the international stage (Brexit, Trump and the threat of terrorism), the financial crisis is now well and truly behind us. 6 Key features of the Market and Residential Sector in Spain CBRE Macroeconomic indicators 7

5 FIGURE 1b ECONOMIC CONFIDENCE INDEX (SPAIN VS. EUROZONE) FIGURE 2 GDP GROWTH AND CONTRIBUTION OF OTHER FACTORS (% CONTRIBUTION TO AGGREGATE DEMAND) % Contribution to GDP 3.% 1 2.% 9 1.% 8.% % -2.% -3.% Source: Eurostat Spain Eurozone -4.% Private Consumption Public sector Investment External Demand GDP Since 213, economic growth has been heavily influenced by stagnating prices and wages, and by favourable financing terms and conditions. Source: Spanish Statitical Office, Eurostat As a result, private consumption and capital investment have been key in underpinning economic growth. Over the last 12 quarters, private consumption and investment in goods and equipment have accounted for an average of 55% and 41% of quarterly growth in aggregate demand respectively. Meanwhile, robust external demand has also contributed heavily to economic growth. Increased competitivity of Spanish goods and services, due to low wages, and the positive growth in tourism helped to bolster the country s trade deficit balance. 55% Private Capital Consumption 41% Investment 8 Key features of the Market and Residential Sector in Spain CBRE Macroeconomic indicators 9

6 1.2. JOB CREATION ON THE RISE AND PRICES HOLDING BACK Job creation is the clearest sign that the Spanish economic recovery is in full swing. At YE 216, the unemployment rate broke below the 2% barrier for the first time in 6 years, and the trend during the first months of this year suggests that it could hit circa 17% by the end of 217. Regulatory reforms have played a major role in lowering unemployment levels and expanding the workforce. The high number of temporary work contracts, severe wage cuts and high unemployment rates among certain demographics (young people and women) remain some of the main challenges facing the Spanish economy. Rising employment levels are not, for the time being, creating inflationary pressures. Stagnating wages and sliding oil prices since 214 fuelled negative growth throughout most of 215 and 216. FIGURE 3 UNEMPLOYMENT RATE SPAIN VS. EUROZONE % Unemployment rate FIGURE 4 CPI SPAIN VS. EUROZONE % Y-o-Y VARIATION % Forcasted unemployment rate for YE , ,5 5. (1.) (2.) Spain Eurozone Spain Eurozone Source: Spanish Statitical Office, Eurostat & Oxford Economics Source: Spanish Statitical Office, Eurostat 1 Key features of the Market and Residential Sector in Spain CBRE Macroeconomic indicators 11

7 However, prices started to pick up during the first few months of 217 as a result of the increase in oil and electricity prices. Economic forecasts suggest that this growth will hold for the next 3 years owing to sluggish market fundamentals. According to estimates published by the Bank of Spain (March 217) and the IMF (April 217), Spanish economic growth will continue to exceed 2% between 217 and 219. This growth will be driven by continued strong domestic consumption and sustained investment levels. The economy will continue to generate employment. The unemployment rate is forecast to reach 13-15% by 22, meaning that between 36, and 4, jobs are expected to be created each year. Lastly, despite the upturn during Q1, forecasts still suggest that any price increases will be minimal. The y-o-y CPI rate is expected to come in at circa % by YE 217, with moderate growth expected up until 219. MACRO-ECONOMIC FORECASTS Bank of Spain (March 217) GDP (Constant Prices) CPI Unemployment rate (year-end) IMF (April 217) GDP (Constant Prices) CPI 2.4 1,4 1.5 Unemployment rate Between 36 K & 4K Annual New Jobs 12 Key features of the Market and Residential Sector in Spain CBRE Macroeconomic indicators 13

8 2.1. RESIDENTIAL CONSTRUCTION 2 HOUSING SUPPLY The bursting of the housing bubble at the end of 27 sparked a dramatic slowdown in new-build construction. Between 27 and 216, the number of homes completed slumped from 615, to 42,, equating to almost 15 times less productivity in the sector. This slowdown was triggered by the sharp drop in demand, the large amount of unsold new-build stock that started to build-up, and the hardening of financing terms and conditions, factors which put the lion s share of developers and contractors of all sizes that had flourished during the boom years out of business. 42K In the current market climate, new-build production is insufficient to satisfy current levels of demand, despite the large volume of unsold housing stock. In recent years, buyers have been taking up a large part of the surplus generated during the expansive phase of the property cycle. However, current production still falls considerably short of levels recorded during previous cycles. Completed new-build constructions currently stand at a quarter of the average figure registered in the 199s. Homes completed in 216 FIGURE 5 COMPLETED HOUSING (OPEN MARKET AND SUBSIDISED) Number of completed Homes Average k 7, 6, 5, 4, Average k 3, 2, Average k 1, Source: Spanish Development Ministry 14 Key features of the Market and Residential Sector in Spain CBRE Housing supply 15

9 New-build construction is mostly focused on markets where demand is more solvent. Large cities such as Madrid and Barcelona, as well as the Mediterranean provinces, which benefit from established overseas demand, account for more than half (51%) of new-build production. FIGURE 7a CONSTRUCTION PERMITS ( ) Num Construction Permits 7, 43% 5% FIGURE 6 COMPLETED HOUSING (OPEN MARKET AND SUBSIDISED (VPO)). DISTRIBUTION BY PROVINCE (216) TOTAL =41,323 6, 5, 29% 4% 3% 2% Madrid 23% 4, 3, 2, -22% 2% 1% 5% -1% -2% Other Provinces 49% Alicante 1% 1, -44% % -4% -5% Single Family Home Block housing % Y-o-Y Variation (right) Source: Spanish Development Ministry Málaga 2% Baleares 3% Valencia 5% Barcelona 8% Source: Spanish Development Ministry However, the levels from which new-build housing production is recovering are extremely low. However, it must be noted that many of the new-build projects where construction has recently begun, were actually approved some time ago. In fact, the number of construction permits granted in 216 (64,) is proof that housing production remains insufficient. Leading indicators for new-build construction show that production levels are bouncing back. In 216 and 215, the number of new-build construction permits granted grew by 29% and 43% respectively, a clear sign of recovery. 64k Construction permits granted in 216, suggests that housing production remains insufficient 16 Key features of the Market and Residential Sector in Spain CBRE Housing supply 17

10 FIGURE 7b CONSTRUCTION PERMITS; MAIN CITIES Construction Permits 18, 16, Y-o-Y variation 78% 9% 8% 2.2. FINANCING Traditionally, the real estate development market requires considerable financial investment and tends to be more highly leveraged than in other sectors. 14, 12, 1, 48% 45% 47% 44% 58% 7% 6% 5% In the last 5 years, the reduction in bank financing has been one of the main culprits behind the slowdown of new-build production. Nevertheless, the deleveraging of the sector and the search for alternative sources of financing has created a new, more sustainable market environment. 8, 4% 6, 4, 2, 22% 13% National average 216 % Madrid Barcelona Alicante Málaga Vizcaya Zaragoza Sevilla Valencia 3% 2% 1% FIGURE 8a OUTSTANDING DEBT IN THE CONSTRUCTION SECTOR (DEBT/ASSET RATIO) Deb /Asset Ratio (%) 3% % Y-o-Y variation Source: Spanish Development Ministry 25% 48% finding annual growth in the number of construction permits granted in Madrid province According to forecasts, new-build production is set to increase, and this should place production levels more in line with current demand. The recovery is being felt in the more fast-paced markets. The number of construction permits granted in 216 was far higher in the provinces of Madrid [48%], Barcelona [45%] and Malaga [47%] than the national average [29%]. In other markets such as Bilbao, Seville, Zaragoza and Valencia, housing production has also started to pick up at differing rates. In our view, new-build housing construction has good upside potential. The current levels of new-build demand [see Fig. 12b] and the limited market supply are clearly correlated. A large number of potential buyers looking for new-build properties are simply not it. 2% 15% 1% 5% % Source: Bank of Spain 18 Key features of the Market and Residential Sector in Spain CBRE Housing supply 19

11 FIGURE 8b VOLUME OF BANK FINANCING GRANTED TO THE REAL ESTATE AND CONSTRUCTION SECTORS Billions Eur 35 FIGURE 9 NO. OF MORTGAGE LOANS OVER URBAN LAND VS. URBAN LAND TRANSACTIONS Transactions 25, , , 1 1, , Construction Real Estate Management Source: Bank of Spain Mortgage Loans over Urban Land Urban Land Transactions According to figures released by the Bank of Spain, the volume of bank financing granted to the real estate sector was cut by two thirds between 29 and 216, from 322, million to 124, million. This reduction in financing has given rise to an intense deleveraging process across the sector. According to the Bank of Spain s Central Balance Sheet Data Office, the outstanding debt in the construction sector [measured as a ratio of debt/on-balance sheet assets] stood below 19% in 215, meaning that the level of debt in the construction sector is at similar levels to those seen in the early 2s. In recent years, the sector has seen a shift towards alternative financing, secured via sources other than banks. Some of these alternatives involve corporate solutions, such as joint ventures with capital injections from companies, profit-sharing projects, cooperatives, etc. In some cases, there is a search for institutional shareholders, followed by stock market listings, as was the case with NEINOR Homes in March 217. The search for alternatives to bank financing is clearly demonstrated by the dramatic decline in the number of mortgage loans granted for land purchases [6,7 loans in 216, down from 55, in 26] Source: Spanish Development Ministry and Spanish Statistical Office based on Property Registry data Furthermore, the figures indicate that securing bank financing for land purchases is once again becoming a rarity. In 24, the number of loans granted for urban plots of land ready for development (39,9) represented just 46% of urban land transactions (86,). In 216, this ratio stood at 39%. This demonstrates that financing for land acquisitions is returning to levels seen during the last property cycle, and this would suggest that the sector s growth is more sustainable. The outlook for the sector suggests greater sustainability in terms of financial resources. The (as yet unresolved) uncertainties surrounding the banking sector will continue to curb the growth of bank loans as a source of financing in the sector. In recent years, these risks are being offset by the arrival of new foreign capital, via funds that directly invest in properties and/or have direct stakes in corporate structures. Over the next few months, it is anticipated that the capital inflow from direct or indirect foreign investment will continue to play a major role in the sector, albeit to a lesser extent than during the last two years. The search for real estate investment capital may start to shift towards institutional markets, as shown by the intentions of some key players to list on the stock market (Via Célere and AEDAS Homes). 39% Of 216 s urban land transactions were financed through mortgage loans 2 Key features of the Market and Residential Sector in Spain CBRE Housing supply 21

12 2.3. THE LAND MARKET Demand for land over the last three years has been focused mainly, and almost exclusively, on serviced development land. The most active players on the market are avoiding projects involving planning and land management in order to minimise any political-structural risks associated with a plot of land over time. The supply of serviced development land at the national level and the limited financing available are not conducive to developing long-term strategies. The lack of bank financing for acquiring land has created a new playing field for the market s key players. The players with equity or immediately available capital are currently the most active, able to identify opportunities and close deals. As well as the sector s major players, the banks and SAREB also still have considerable land banks. Figures released by the Bank of Spain indicate that in 216, the amount of land on banks books was valued at 31,5 million, whilst SAREB s land portfolio was valued at 4,2 million, with a large part of this land in the planning process. In the medium term, the land market s performance will largely depend on the pace at which these two players manage their portfolios. During the last few months of 216 and the first few months of 217, the land market has seen heightened levels of activity. The total number of urban land transactions registered in 216 (17,4) was up by just over 1% on 215, whilst sales and purchases completed by companies (6,367 in 216) equated to a 13% y-o-y increase. As a result, different types of players are breaking onto the scene. On the one hand, the more traditional players [Metrovacesa Suelo y Promoción, Realia, Acciona etc.] hold significant land banks among their assets, albeit at various stages of development. Whilst on the other, the new players [Aedas Homes, Neinor Homes, Via Célere, Q21 Real Estate, AELCA etc.] are building significant serviced development land portfolios, thanks to the capital being injected by international investment funds. Company Assets ( M) Land Bank Est. (Milion. sqm) Realia 2, Metrovacesa Suelo y Promoción SA 1, Reyal Urbis 1, % 216 increase on urban land purchases from developers and property companies Neinor Homes 1, Aedas Homes 1, Via Célere/Dospuntos Total 8, Source: Annual Reports (216 and 215). 22 Key features of the Market and Residential Sector in Spain CBRE Housing supply 23

13 FIGURE 1 URBAN LAND TRANSACTIONS Num. Transactions 2, 18, 16, 14, 12, 1, 17,396 FIGURE 11 VARIATION IN URBAN LAND PRICES BY PROVINCE ( /SQM) (MAXIMUM-MINIMUM ) /sqm , 6, 4, 2, 211 Source: Spanish Development Ministry 6, Corporate Purchaser Urban Land Transactions 1 Madrid Baleares Barcelona Málaga Álava Las Palmas Sevilla Almería Guipúzcoa Santa Cruz de Tenerife Valencia Zaragoza Murcia Cádiz Girona Alicante Granada Córdoba Vizcaya Castellón Ciudad Real Jaén Asturias Lleida Albacete La Rioja Huelva Cantabria Tarragona Cáceres Huesca Teruel Badajoz Navarra Toledo Valladolid Guadalajara Cuenca Ourense A Coruña Pontevedra Ávila Salamanca Segovia Soria Burgos Lugo León Zamora Palencia Source: Spanish Development Ministry 4Q 216 Avg. Urban Land Price ( /sqm) In certain local markets, demand for serviced development land is pushing up prices due to both the lack of this type of land on the market and housing demand forecasts. According to figures published by the Spanish Development Ministry, in Q4 216 the average price of an urban plot of land in provinces such as Madrid, the Balearic Islands and Malaga stood at 27%, 36% and 4% respectively versus the average of the studied period (between the maximum and minimum from ), suggesting that demand is rising in these areas. The land market forecasts for the coming months indicate that we will continue to see demand for serviced development land, especially in the markets where there is greater new-build housing activity. Despite the uptick in demand for land in certain locations, no significant price increases are expected across Spain, given that the volume of potential supply remains relatively high. In addition, following the recent regulation regarding properties on banks balance sheets Bank of Spain Circular No. 4/216, 27 April 216 et. seq (November) a significant amount of product could come onto the market over the next few months and further dampen the prospects of any possible price increases. 24 Key features of the Market and Residential Sector in Spain CBRE Housing supply 25

14 3.1. EFFECTIVE HOUSING DEMAND 3 HOUSING DEMAND The heightened effective housing demand is also a sign that the economic recovery is in full swing. Over the last three years, the number of housing sales closed has continuously grown for 12 consecutive quarters, reaching 457, transactions per year at YE 216. FIGURE 12a % VAR. IN HOUSING TRANSACTIONS % Y-o-Y variation 3% 2% 1% % (1)% (2)% (3)% (4)% Source: Spanish Development Ministry Current housing demand, which is still a far cry from the levels recorded during the expansive phase of the property cycle (95, units per year in 26), substantially improved y-o-y. 26 Key features of the Market and Residential Sector in Spain CBRE Housing demand 27

15 FIGURE 12b HOUSING TRANSACTIONS (THOUSAND UNITS) Anual Average (thousands) 1,2 1, New Housing Source: Spanish Development Ministry and Notary Publics Existing Housing The lion s share of housing demand is for existing properties, pushing demand for new-builds down to almost insignificant levels. New-builds represented just 1% of the total transactions closed at December 216. The current lack of new-build housing supply is the main factor driving demand towards existing housing. However, other factors such as location, price and property specifications are becoming increasingly important for new owners. Effective housing demand is located in markets with greatest purchasing power: the metropolitan areas of the bigger cities (Madrid, Barcelona, Valencia and Seville) and the provinces or regions with established tourism sectors (Malaga and Alicante). Larger cities is where there is demand for new-build housing. In fact, the transactions completed in the 5 main provinces [Madrid, Barcelona, Valencia, Seville and Vizcaya] account for almost a third of all new-build transactions. FIGURE 12c DISTRIBUTION OF NEW-BUILD TRANSACTIONS BY PROVINCE (ANNUAL AVERAGE ) TOTAL =51,879 Others 56% Source: CBRE via the Spanish Development Ministry Madrid 13% Alicante 7% Barcelona 7% Málaga 5% Valencia 4% Sevilla Vizcaya 4% 4% Adding the tourist-based markets, such as the Mediterranean provinces (Malaga and Alicante =12%) and the islands (Canaries and Balearics =6%) to the prevalently urban markets, highlights that metropolitan areas and coastal provinces with established tourism sectors account for over 44% of new-build housing demand. 44% Almost half of the demand for new housing concentrates in large metropolitan areas and the provinces of Alicante and Malaga 28 Key features of the Market and Residential Sector in Spain CBRE Housing demand 29

16 3.2. EFFECTIVE DEMAND PROFILE Changes in household sizes and layout, as well as increased life expectancy are just a few of the factors that are impacting home purchase decisions. The supply of new-build homes is adjusting to requirements of current trends, a good indicator of this is the increase in the average size of new housing being built. Various indicators suggest that current effective housing demand is mainly the buyers looking to reposition. These buyers are generally households with a purchasing power that requires little financing and that are often seeking a property that meets their needs in terms of space and/or location. According to data published by the Spanish Development Ministry regarding new-build permits, the average area approved in 216 (138 sqm) is over 17% larger than the average home size approved in 24. This trend of rising average spaces is true for both houses and apartments. Current housing demand is solvent, with buyers no longer so heavily reliant on bank financing to purchase a home. In 216, mortgages were granted for around 6% of housing sales and purchases (281,). Meaning that at least 2 out of every 5 housing transactions were completed without any kind of financing. FIGURE 12d HOUSING TRANSACTIONS / MORTGAGES GRANTED Transactions and Mortgages thousands 1,6 FIGURE 12e AVERAGE BUILDING SURFACE PER HOUSING UNIT Avg. Size (sqm) % average housing surface increase for new homes since 24 1,4 1,2 1, Single family Block 6 Source: Spanish Development Ministry Home Mortgages Housing transactions This effective and solvent demand is being met with a large and varied supply, since the wide range of existing housing types available at affordable prices is broadening purchase options in terms of location and space requirements. Faced with this, the new-build development sector is competing by expanding spaces and improving quality. Source: Spanish Development Ministry and Spanish Statistical Office 3 Key features of the Market and Residential Sector in Spain CBRE Housing demand 31

17 Despite Spain s declining population, the number of households continues to rise. The studies carried out by the Bank of Spain forecast a net average y-o-y increase in the number of households of between 63, and 238, over the next decade, as a result of changing social dynamics (smaller household sizes and people leaving home at a younger age). Bearing this trend, housing production forecasts and the improving jobs market in mind, CBRE s forecasts for new-build demand stand at between 12, and 14, units per year. To a certain extent, housing needs for new households are now being pushed towards renting, given the increased supply of housing to let. However, the continual growth in the number of households expected over the coming years poses a challenge to the sector OVERSEAS DEMAND Overseas housing demand has spiked in recent years, with a total of 74, sales completed in 216. This means that, at the national level, 1 out of every 6 housing purchases in Spain involves an overseas buyer. FIGURE 13 % OF HOUSING TRANSACTIONS INVOLVING AN OVERSEAS BUYER % of transactions with overseas buyer 18% 16% 16% out of 6 housing purchases in Spain involves an overseas buyer OUT OF 14% 12% 1% 8% 6% 4% 2% % Source: Spanish Development Ministry via General Council of Spanish Notaries The lion s share of these buyers look to purchase property in provinces with an established tourist infrastructure. Five provinces, Alicante, Malaga, Tenerife, Las Palmas and the Balearic Islands, accounted for more than half of the annual average number of transactions carried out by overseas buyers between 26 and 216. In these markets, overseas buyers also represent a significant share of the overall market total, accounting for up to almost a third of completed transactions in some areas, such as Alicante. 32 Key features of the Market and Residential Sector in Spain CBRE Housing demand 33

18 FIGURE 14a OVERSEAS DEMAND (ANNUAL AVERAGE = 54,5) Others 33% Alicante 22% A considerable number of overseas buyers come from the United Kingdom. The new political landscape formed following the formal start of the UK s exit from the European Union in March 217 could have a negative impact on this segment of demand. Heavy fluctuations in the Sterling versus Euro exchange rate in recent months have caused the purchasing power of these normally solvent buyers to effectively decline by almost 2%. Meanwhile, the uncertainty over the legal status of British citizens residing in EU countries is another factor slowing down decision-making. Málaga 11% Up until now, there have been no indicators to quantify what the direct impact would be of these buyers potentially no longer forming part of the overseas buyer pool. That said, as with domestic demand, UK buyers account for a significantly reduced share of new-build transactions [1,6 new-build purchases in 216]. Tenerife 6% Murcia 6% Baleares 6% Madrid 8% Barcelona 8% Since Q1 217, the growth in demand from the UK has ebbed slightly. It would come as no surprise if the number of homes purchased by British citizens continued to fall throughout the year. Nonetheless, the number of overall transactions completed by overseas buyers remains relatively high, suggesting that buyers from other countries are increasing their weighting [Denmark, Sweden and Norway]. FIGURE 14b % HOUSING TRANSACTIONS COMPLETED BY OVERSEAS BUYERS (ANNUAL AVERAGE = 54,5) Spain Almería Tarragona 12% 12% Murcia 17% Las Palmas 2% Málaga Girona 24% 24% Baleares 27% Tenerife 3% Alicante 35% % 1% 2% 3% 4% Source: Spanish Development Ministry 34 Key features of the Market and Residential Sector in Spain CBRE Housing demand 35

19 4.1. HOUSING PRICES 4 HOUSING PRICES Up until now, the market recovery has not put housing prices under any significant pressure. The information published over recent quarters indicates a slight upward trend, largely due to spiking newbuild prices. FIGURE 15 HOUSING PRICE. INDEX 1=27 Index New Housing Existing Homes Source: Spanish Statistical Office 36 Key features of the Market and Residential Sector in Spain CBRE Housing prices 37

20 According to statistics published by the Spanish Statitical Office, newbuild prices in Q4 216 were up 13.7% on the all-time low recorded in Q2 213, whilst the prices of existing homes climbed by 1.9%. However, the subdued variations in prices at the national level do not reflect the upturns that are being seen in some local markets, where demand is thriving and supply, especially of new-build housing, is very scarce. In our view, housing price growth could gain traction during 217, increasing by between 4% and 6%. FIGURE 16a NEW-BUILD HOUSING PRICES BY CITY ( /SQM) (21-216) 4, 3,5 3, 2,5 2, 1,5 1, 5 Madrid Barcelona Valencia Sevilla Málaga Zaragoza Bilbao Palma de Mallorca According to regulated valuations (tasaciones) completed by the Spanish Development Ministry, in cities such as Barcelona and Malaga, the price of new-builds is up 29% and 2% respectively, versus all-time lows. In other cities, such as Palma de Mallorca and Bilbao, price increases compared to all-time lows are in line with the national average calculated by the Spanish Statitical Office. In contrast, the variation in existing housing prices, remains in line with national housing price growth levels. With the exception of Barcelona, where existing housing prices have grown by 18%, in Madrid (1.9%), Malaga (9.2%) and Palma de Mallorca (12.9%), price increases are on a par with those registered across the rest of Spain (1.9%). In any event, price increases at a local level appear to be strongly governed by a lack of new-build housing supply in some specific markets. Forecasts for new-build production over the coming months suggest that prices could well continue to trend upwards. However, these increases are expected to be less intense and are not expected to reach the levels seen during the peak of the last cycle. The current profile of home buyers, the muted growth in the number of mortgage loans and the present level of housing accessibility, discount any possibility of excessive growth over the next few months. 29% Prices of new-builds in Barcelona have increased since the all-time lows Q4 216 Source: Spanish Development Ministry (Via Regulated Mortgage Valuations - Tasaciones) FIGURE 16b EXISTING HOUSING PRICES BY CITY ( /SQM) (21-216) 4, 3,5 3, 2,5 2, 1,5 1, 5 Madrid Barcelona Valencia Sevilla Málaga Zaragoza Bilbao Palma de Mallorca Q4 216 Source: Spanish Development Ministry (Via Regulated Mortgage Valuations - Tasaciones) 38 Key features of the Market and Residential Sector in Spain CBRE Housing prices 39

21 4.2. HOUSING ACCESSIBILITY AND FINANCING TERMS AND CONDITIONS Despite a decline in recent years, the accessibility rate has been steadily growing since the start of 213, when 6.39 was recorded, as a result of wage cuts and the slight increase in housing prices. In absolute terms, the accessibility rate is still at relatively high levels, which forces an important segment of buyers out of the housing market (single parent homes, first-time buyers, etc.). Housing accessibility indicators and the mortgage effort rate have adjusted considerably over the last 5 years, reaching more sustainable levels than during the expansive phase of the cycle. FIGURE 17 ACCESSIBILITY RATE AND MORTGAGE BURDEN Mortgage payment / Gross Income (%) Home Price / Disposible Income (Years) In contrast, the achievable mortgage effort rate stands at much more reasonable levels than during the expansive phase, despite the elimination of income tax deductions (213). Current interest rates for mortgages, combined with a reduction in financing being provided by banks, has driven this ratio down over the last 3 years (1bp since January 213). Mortgage rates in recent years, as well as the shift among buyers towards financing that is less exposed to the volatility of financial markets, confirm that the market is moving towards a more sustainable model. 6.7 Years is the current accessibility rate in Spain FIGURE 18 AVERAGE MONTHLY MORTGAGE RATE 5 4 6,7 8 7 Mortgage Rate (%) , Source: Bank of Spain Mortgage burden (Left) Home accesibility rate (right) The accessibility rate, expressed as the number of full years salaries required to pay for an average home stood at 6.7 years at the end of 216, versus the almost 9 reached during the boom years. During the same period, the mortgage effort rate, expressed as the difference between the monthly mortgage repayment before deductions and gross household income, stood at 33.4% of gross disposable income, compared to more than 5% in 28. Land Registers Source: Spanish Statistical Office and Bank of Spain BoS 4 Key features of the Market and Residential Sector in Spain CBRE Housing prices 41

22 The difference between the effective mortgage rate (according to Property Registry entries) and the average mortgage loan rate granted to households to purchase a home according to the information presented by banks to the Bank of Spain, highlight a 1bp gap that has remained virtually unchanged since 213. This would suggest, among other things, that the banks are exercising caution when it comes to valuing credit risk and granting mortgages to households. The amount of fixed interest mortgage loans has significantly grown since 215, now accounting for 38% of all financing granted. The considerable narrowing in the gap between the interest rates for these loans, compared to variable rates is fuelling this trend. FIGURE 19a TOWARDS FIXED-INTEREST MORTGAGE LOANS % of Total Mortgage Signed FIGURE 19b SPREAD BETWEEN FIXED AND VARIABLE MORTGAGE RATES Morgage rate (%) Fixed rate Source: Spanish Statistical Office (Via Land Registry) Variable rate Source: Spanish Statistical Office (Via Land Registry) According to Property Registry figures, the credit market for housing purchases is now favouring minimising risk. The shift towards fixedrate products reduces exposure to monetary market volatility and a possible reversal of the ECB s expansive policy. The new products launched by the banking sector in recent months offer rates of between 1.4% and 1.9% for 1 and 3-year mortgages respectively. The narrowing of the gap between fixed-rate and variable-rate products (22bp on average between March16 and February 17) suggests, among other things, stability in terms of mortgage interest rates over the coming months. Forecasts do not suggest there will be any major variations in accessibility levels over the next few months. This said, financial effort rates may be affected by a hardening in financing terms and conditions. The recent European court rulings with regard to the mortgage floor clauses and deposits are hardening access, still just moderately, to mortgage loans. 38% Mortgages granted are on a fixedinterest rate 42 Key features of the Market and Residential Sector in Spain CBRE Housing prices 43

23 5.1. RENTAL MARKET 5 RENTAL HOUSING AND THE RESIDENTIAL INVESTMENT MARKET Although Spain remains a more home-owner based market, the rental segment is growing steadily. The number of households renting (as a rental market tenant or via assignment) rose from 19.5% in 27 to more than 22% in 216. Nevertheless, the number of households renting in Spain remains very low compared to neighbouring countries. Therefore, there is still significant upside potential for the rental market and its establishment as a go-to option. FIGURE 2a RENTAL MARKET % of housing to rent Source: Eurostat 44 Key features of the Market and Residential Sector in Spain CBRE Rental housing and the residential investment market 45

24 FIGURE 2b % OF HOUSING TO LET VS. TOTAL IN THE MAIN EU COUNTRIES FIGURE 21a AVERAGE RENTAL PRICES IN MADRID AND BARCELONA Avg. monthly rent ( /sqm) Germany 48.1% United Kingdom 36.5% 17 France Eurozone (19 countries) Italiy 27.1% 35.9% 33.6% Portugal 25.2% 11 Spain 21.8% Source: Eurostat Madrid Barcelona Source: Idealista Household mentalities towards renting have changed due to greater job mobility and the elimination of tax incentives for purchasing homes. However, above all, renting has provided an alternative to homeownership, especially for population groups with lowpurchasing power (first-time buyers, single people and single-parent families) who during the last expansive cycle found themselves forced out of the homeownership market. Rental housing supply has increased significantly during the last few years due to regulatory changes. Modifications to the Spanish Landlord & Tenant Act (LAU - Ley de Arrendamiento Urbano) to simplify the eviction process have reduced the perception of risk that landlords traditionally associated with renting. However, banks have fuelled this increase in supply via their management strategies for foreclosed properties. Mortgage default negotiations and the deed in lieu proposals for foreclosed homes explain why banks such as CaixaBank, Santander and Sabadell are among the largest landlords in Spain. During the last 18 months, strong demand for rental housing and other higher yielding renting alternatives such as tourist letting have been putting upward pressure on rents in major cities. According to figures published by Idealista, in 216 the average rent in Madrid and Barcelona increased by 15.6% and 16.5% to 14.4 and 17.9 per sqm/month respectively. FIGURE 21b % RENTAL VARIATION FOR THE CENTRAL DISTRICT (MADRID) AND CIUTAT VELLA (BARCELONA) Y-o-Y Var % 25% 2% 15% 1% 5% % (5)% (1)% Source: Idealista Ciutat Vella (Barcelona) Central disctrict (Madrid) 46 Key features of the Market and Residential Sector in Spain CBRE Rental housing and the residential investment market 47

25 The tourist districts of Madrid s city centre and Barcelona s Ciutat Vella are experiencing the most upward pressure on rents. Rental prices in Madrid have been rising sharply for the last 18 months, while in Barcelona signs of upward pressure on rental prices started to emerge 6 months earlier. FIGURE 22 GROSS YIELD: RENTAL HOUSING VS. ALTERNATIVE INVESTMENTS % Yield ,36 Gross profitability housing (left) 1 year Spanish bond (left) IBEX 35 (Right) Source: Bank of Spain % Y-o-Y Index variation The changing face of this market, along with the robust demand and rental increases is pushing up yields. The average yield of a rented home traditionally stood at around 2.5-3%. However, according to figures released by the Bank of Spain, at the start of 217 the average gross yield came in at 4.3% y-o-y, well above conservative alternative investments, such as the stock market (IBEX35) or sovereign debt (1-year bond). As a result, housing has entered onto the radar of small investors who traditionally perceive it as a safe asset class, one that today even produces attractive yields. A large share of the buyers looking to purchase housing are likely highly drawn by the potential yields that housing can generate as an investment option. Nevertheless, the rental housing segment poses significant challenges for the upcoming years. On the one hand, the management and regulation of new forms of leasing; short-term leases, holiday lettings- etc. As previously indicated, these segments are putting upward pressure on rental prices, mainly in cities tourist districts. Some City Councils have started to regulate this business activity in order to protect certain areas. In our view, this business activity should be aligned at the national level, both in fiscal and regulatory terms, with other existing hotel activities in order to protect not only the free market, but also free competition. In addition, the Spanish rental market is an extremely fragmented and a very non-professional sector. The number of property owners with large rental housing portfolios is relatively small; the vast majority of stock belongs to individuals or small rental property companies. Furthermore, the service infrastructure in this sector (agents, managers, brokers, maintenance services, boards of arbitration, etc.) is still limited. 4.3% Average annual gross yield for rental housing at the start of Key features of the Market and Residential Sector in Spain CBRE Rental housing and the residential investment market 49

26 5.2. THE RESIDENTIAL REAL ESTATE INVESTMENT MARKET Housing is now seen as an attractive investment option, even by institutional investors. The uncertainty of sovereign debt and stock market volatility has pushed many investors to diversify their portfolios into the residential real-estate segment. Yields are higher compared to those of other alternative assets and the potential value uplift, although still moderate, remains very attractive. All of this has greatly spurred residential real estate investment among investment funds and other investment vehicles, as shown by the growing number of transactions and the rising investment volume seen over recent months. FIGURE 23 RESIDENTIAL INVESTMENT IN SPAIN millions 2,5 In 216, the estimated amount of real-estate investment in the residential segment hit 2,1 million, up over 3% y-o-y. Two transactions (the SOCIMI Merlín Properties acquisition of the Creta portfolio as part of the merger with Metrovacesa and Blackstone s acquisition of Banco de Sabadell s Empire portfolio) accounted for 75% of the market s total investment volume. Discounting these two transactions, in most cases residential investors are formal vehicles (SOCIMIs or rental property portfolio companies) that are Spanish (6% of investment volume in 216) and looking for an asset that generates immediate returns, but that has medium-term value uplift potential. Transactions are small-medium sized (between 1 million and 15 million). Sellers are generally Spanish and either banks, small property companies or private owners. As mentioned previously, the housing rental market is still a fairly non-professional sector and the interest being shown by major international funds (with the exception of Blackstone) has not translated into any major deals or the creation of large portfolios. Therefore, the residential investment segment holds many opportunities yet to be explored. 75% Two transactions accounted for 75% of the market s total investment volume 2, 1,5 1, Q1 217 Source: CBRE 5 Key features of the Market and Residential Sector in Spain CBRE Rental housing and the residential investment market 51

27 6.1. MADRID 6 MARKETS IN THE MAIN CITIES Madrid s housing market has hit cruising speed, and its effect is rippling out to the rest of the city. The Rising demand in areas with the greatest purchasing power following the drop in prices has been a major factor in reactivating the city s housing market. Since 29, the number of housing sales has jumped considerably in the neighbourhoods of Salamanca, Chamberí and Retiro. This demand currently remains at relatively high levels (between 2,2 units sold per year in Chamberí and 1,8 units in Retiro), indicating just how buoyant these micro markets are. FIGURE 24a MADRID HOUSING DEMAND IN DISTRICTS WITH HIGHER PURCHASING POWER Average anual transactions 2, 1,5 1, Salamanca (Madrid) Chamberi (Madrid) Chamartín (Madrid) Source: Statistics from Notary Publics 52 Key features of the Market and Residential Sector in Spain CBRE Markets in the main cities 53

28 Salamanca FIGURE 24b MADRID HOUSING DEMAND IN DISTRICTS WITH LOWER PURCHASING POWER Average anual transactions 1,4 1,2 1, 8 6 FIGURE 24c HOUSING PRICES BY DISTRICT (MADRID) (27-Q3 216) Average price ( /sqm) 6, 5, 4, 3, , 1, Source: Statistics from Notary Publics Villaverde (Madrid) Barajas (Madrid) Vicalvaro (Madrid) Chamartín Chamberí Retiro Centro Moncloa-Aravaca Arganzuela Hortaleza Fuencarral Barajas Tetuan Vicálvaro Q3 216 Moratalaz Ciudad Lineal San Blas Carabanchel Villa de Vallecas Latina Usera Villaverde Puente de Vallecas Since 214, demand has rippled out to other areas of the city. In the districts with a lower purchasing power (Villaverde, Vicálvaro and Barajas), housing sales have also grown significantly over recent quarters. However, activity in these areas is considerably lower (Barajas and Vicálvaro registering 6 transactions per year). Source: Statistics from Notary Publics Prices (both for new-build and existing housing) have increased notably in districts where the demand is greater, and which are traditionally more expensive in any case. In districts such as Salamanca and Chamartín, which are traditionally the most expensive, housing prices in Q3 216 stood midway between the maximum and minimum of the last 1 years. According to notary publics figures, demand in periphery districts, such as Puente Vallecas, Villaverde and Usera does not, for the time being, look set to raise prices significantly. Other sources, such as Idealista, also confirm that prices, as a result of the amount of supply on the market, edged up in these districts through Q Nevertheless, since the beginning of 217, strong demand has started to drive up the price of new-builds. In districts such as Hortaleza (Valdebebas) and Villa de Vallecas (PAU de Vallecas) prices are rising significantly and are likely to continue doing so. 54 Key features of the Market and Residential Sector in Spain CBRE Markets in the main cities 55

29 6.2. BARCELONA In Barcelona, unlike Madrid, demand is more spread out across all the city s districts. There is a strong effective demand (average in terms of transactions) in districts such as Eixample (Ensanche) and Ciutat Vella (Centro), with the number of housing sales constantly increasing since 211 FIGURE 25a BARCELONA. HOUSING DEMAND IN DISTRICTS WITH HIGHER PURCHASING POWER FIGURE 25b BARCELONA. HOUSING DEMAND IN DISTRICTS WITH LOWER PURCHASING POWER Average anual transactions 2, 1,8 1,6 1,4 1,2 1, 8 6 Average anual transactions 4, 3, , 2,5 2, 1,5 Source: Statistics from Notary Publics Ciutat Vella (Barcelona) Sants-Montjuïc (Barcelona) Nou Barris(Barcelona) In other districts (Sarrià, Gracia, Sants and Nou Barris) demand is ticking up at a more moderate rate and at much lower levels (at Q3 216 Sarrià = 1,1 and Nou Barris = 1,426 units per year). Source: Statistics from Notary Publics Gràcia (Barcelona) Eixample (Barcelona) Sarrià-Sant Gervasi (Barcelona) The more uniform nature of Barcelona s market is reflected in housing prices from area to area and their performance throughout the cycle. At Q3 216, prices in Barcelona s most expensive districts, Sarria and Eixample, stood halfway between the maximum and minimum for the property cycle. 56 Key features of the Market and Residential Sector in Spain CBRE Markets in the main cities 57

30 FIGURE 25c HOUSING PRICES BY DISTRICT (BARCELONA) (27-Q3 216) 7, 6, 5, 4, 3, 6.3. MAIN CITIES Housing demand is beginning to gain traction in Spain s main cities. However, for the time being the healthy demand has not put any upward pressure on prices. In cities on the Islands, such as Palma de Mallorca, Santa Cruz de Tenerife and Las Palmas, the y-o-y increase in the number of sales and purchases (31%, 25% and 23% respectively) is a sign that effective housing demand is bouncing back. Cities on the Mediterranean coast, such as Malaga (16%), Alicante (19%) and Valencia (23%), have also experienced a considerable increase in demand. Figures suggest that the market will perform positively, likely spurred by robust overseas demand. 2, 1, FIGURE 26a HOUSING TRANSACTIONS IN THE MAIN CITIES - Transactions Sarrià-Sant Gervasi Eixample Les Corts Source: Statistics from Notary Publics Ciutat Vella Q3 216 Prices in Barcelona s most peripheral neighbourhoods, Nou Barris, Sants and Sant Andreu, may not have reached high levels, but they have broken above the cycle s lows, indicating demand has turned a corner and is impacting prices. Since the beginning of 217, prices have risen sharply across all districts. Gràcia Sant Martí Horta Guinardó Sants-Monjuïc Sants Andreu Nou Barris 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, 5,523 6,796 5,99 5,36 Málaga Sevilla Zaragoza Palma de Mallorca 2,64 Las Palmas de G.C. 1,159 Santa Cruz de Tenerife 9,14 4,586 3,625 Alicante Valencia Bilbao Source: Statistics from Notary Publics 58 Key features of the Market and Residential Sector in Spain CBRE Markets in the main cities 59

31 According to figures released by the Spanish Development Ministry, as yet the increased demand has not put any upward pressure on prices. Not one of the three cities registering the highest growth in terms of demand (Palma, Alicante and Valencia) have seen any upward movement in prices. It is possible that segmentation criteria applied to the Ministry s statistics for new-builds - housing less than five years old - does not reflect the upturn seen in terms of new-build housing since H Our market view does not coincide with this trend. CBRE s hands-on experience in sales-marketing of developments in Valencia, Alicante, Zaragoza and Bilbao shows that there have been significant spikes in new-build housing prices, particularly sharp in some cities [Valencia and Alicante]. FIGURE 26b AVERAGE PRICE OF NEW-BUILD HOUSING ( /SQM) MAIN CITIES Average price ( /sqm) 3, FIGURA 26C AVERAGE PRICE EXISTING HOUSING ( /SQM) MAIN CITIES Average price ( /sqm) 2,5 2,5 2, 2, 1,5 1,5 1, 1, 5 5 Alicante Zaragoza Valencia Las Palmas de G.C. Málaga Sevilla Palma de Mallorca Bilbao Alicante S. C. de Valencia Zaragoza Málaga Las Palmas Sevilla Palma de Bilbao Tenerife de G.C. Mallorca Source: Spanish Development Ministry Source: Spanish Development Ministry The forecasts for these cities also suggest that current demand will experience further growth. There are no signs to suggest a significant upturn in existing housing prices in areas further out from city centres. Prices of new-build housing could spike further, if supply in city centres remains at current limited levels. 6 Key features of the Market and Residential Sector in Spain CBRE Markets in the main cities 61

32 CONCLUSIONS The housing market has changed dramatically in recent years, and this has allowed the market to correct some of the imbalances caused by the last expansive cycle. The market s current supply and demand dynamics are proof that this correction is indeed taking place and that the recovery is in full swing. The new players entering the real estate development market are less dependent on mortgage financing and this is allowing them to acquire large banks of serviced development land. These players also appear to be adjusting their product type to suit the effective needs of today s buyers. the urban landscape of cities, hence why it is important to satisfy a good proportion of current demand with a higher percentage of new-build properties. On the other hand, accessibility to housing could be affected by the price increases being seen in certain markets and by the hardening of financing terms and conditions. Public housing policies have focused strongly on rental housing in recent years and this market would benefit if they were to turn their attention back towards homeownership. Current effective housing demand is also less dependent on mortgage financing, indicating that buyers now have a greater understanding of the risks involved in taking out a mortgage. Meanwhile, the growing rental market has provided an alternative solution for buyers unable to get a foot on the property ladder. These processes suggest that the market is starting to grow amid a more sustainable environment, and that the imbalances caused by the market slowdown seem to have been confined to the past. Housing has now become an attractive investment option. Higher yields on rental properties in the last three years have been driven by the significant upswing in demand. Housing as an investment option, is not only now catching the eye of small-scale owners, but it is also drawing in institutional investors (Funds and REIT) who are beginning to diversify their portfolios in favour of this asset class. However, the residential market will face various challenges over the course of the next few years. On the one hand, new-build housing production is currently at extreme lows. Housing construction renews both housing supply and 62 Key features of the Market and Residential Sector in Spain CBRE Conclusions 63

33 Para más información puedes contactar con: Javier Kindelan Vicepresidente CBRE Samuel Población Director Nacional de Residencial y Suelo de CBRE samuel.poblacion@cbre.com Lola Martínez Directora de Research de CBRE lola.martinez@cbre.com 64 Key features of the Market and Residential Sector in Spain CBRE