Prospects for residential property investment in Spain

Investment in real estate in Spain – is it a good time to buy property in 2021?
One of the basic principles of investment is diversification. This means that when configuring a strategy to maximise returns, it is necessary to think not only about how many stocks and bonds should be included but also about other assets (private equity, derivatives, etc.), including real estate assets.

For example, the Norwegian Government's Global Pension Fund has investments of 1.3 trillion euros, as much as the Spanish GDP. Currently 7% of the funds are invested directly in real estate assets. The target is to reach 10%.
city in Spain
Other investors, such as Warren Buffett, are not in favour of investing directly in real estate assets, although they do so indirectly through real estate investment trusts (REITs). But one way or another, real estate investment is always part of a professional investment strategy. Indeed, much of the recovery of the Spanish real estate sector after the disaster of the financial crisis was based on the rebalancing of the portfolios of international funds that had unloaded positions in Spanish real estate assets when the crisis began.

Real estate investment includes various types but residential is an essential part, especially among non-professional investors. What are the prospects for residential investment in Spain? Real estate assets provide returns in the form of capital appreciation and leasing. In terms of appreciation, it is interesting to note the great dichotomy that exists between the evolution of house prices in Spain and in other countries.

Globally, property prices are experiencing the most important boom of the last two decades. In the US and the Netherlands prices are growing at 15% and the proportion of countries showing price increases is the highest since 2000. For the OECD as a whole, nominal house price growth exceeds 8%. Therefore, globally oriented real estate investment funds are providing high returns.

In Spain, property prices have slowed down during the pandemic to stabilise, in stark contrast to many other countries. In fact, the latest data for Madrid and Barcelona showed falls of 1.5%. This is quite a new situation given that house prices in Spain tend to be more volatile than in other places. However, it is difficult to believe that the low returns on deposits and low-risk assets, and the elevated risk in equity markets, will not drive investors back into the residential sector, although the geography of price increases may change as demand shifts in the aftermath of the pandemic.

chart of changes in property prices in Spain
On the other hand, rental yields have also fallen significantly in the most important markets (Madrid and Barcelona). Data for the first half of 2021 shows a 10% drop. This effect has moderated gross rental yields, which are at their lowest levels in recent years. Even so, in Madrid it reaches 6.2% and in Barcelona 5.8%, with smaller cities (Zaragoza, Valencia, Seville, Malaga) exceeding 7%. These yields clearly outperform those obtained by other types of assets and will continue to attract investment, which is necessary given the high demand for rental housing and scarce supply. However, during the pandemic there has been a reduction in housing investors in large cities, particularly in Barcelona, from 30% to a meagre 16%.

It is clear that a key factor behind this situation is the growing legal uncertainty. Catalan legislation changes frequently and it is uncertain whether or not it will finally be applied. Moreover, the okupa movement has turned Catalonia into a hotspot for this type of activity where organised mafias find an easy source of income. It is difficult to find a factor more detrimental to investment than legal uncertainty. In the case of Spain as a whole, it is still uncertain what type of regulation will emanate from the new housing law, which does not favour real estate investment decisions to increase the stock of rental housing.

To sum up, the Spanish residential real estate sector will continue to be an attractive investment opportunity as interest rates are expected to remain very low for some time. However, legal uncertainty and unpredictability of the future regulation of the rental market limit the attractiveness of this asset type in Spain.


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