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 Elle Draper

Why investing in Barcelona’s property market in 2017 is profitable

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According to a recent survey by PwC, Barcelona comes fifteenth in a list of 2017’s most promising European cities for property investment.

Why investing in Barcelona’s property market in 2017 is profitable

The traditional draws for buyers include Barcelona’s seaside setting, warm climate, zesty and distinctive cuisine, cultural diversity and its well developed entertainment industry. In addition, there are many objective reasons for Barcelona’s recovery from the 2008 crisis and rise as a promising market for property investment. These factors include the following:

  • low interest rates
  • price growth potential
  • rent and yield increases
  • demand exceeding supply
  • rise in the flow of tourists

Low interest rates

The main reason for Barcelona’s market growth is low interest rates. Largely thanks to this factor, the Spanish market in general is recovering, but the Catalonian capital demonstrates growth in excess of other regions on a national level, being the strongest market and the most developed region of the country.

EU mortgage rates are based on Euribor, an interbank offered rate. In March 2016, it reached a negative value, whilst it peaked in October 2008 at over 5% during the onset of the global financial crisis.

Spanish banks provide non-residents with up to 70% LTV mortgages at 2.5% per annum, while for residents the conditions are even more attractive: they can take out a loan with up to 80% LTV at as little as 1.5% per annum.

According to the Spanish National Institute of Statistics (Instituto Nacional de Estadística), in January 2017 the number of leveraged properties grew by 16.9% year-on-year, while the average loan amount increased by 6.4%. Cheap mortgages are fuelling the demand and pushing the growth in sales. If the trend continues, the increased transaction volume in Spain will lead to further increases in residential property prices.

Potential for price growth

Property prices in Barcelona are higher than the Spanish average and are growing faster than other regions nationwide. Its growth potential suggests that this market has been much more resistant to the crisis than the Spanish market overall.

According to Fotocasa.es, as of Q4 2016, property prices in Spain have fallen 42% in comparison with 2007’s peak value. The average square metre price in the country has fallen from ˆ2,862 to ˆ1,649 over the course of a decade.

According to Idealista.com, property prices in Barcelona fell by 37% between Q1 2007’s peak (ˆ4,732 per m2) and Q3 2013’s minimum (ˆ2,957 per m2), after which they grew 31% to ˆ3,879 per square metre in Q4 2016. In Q1 2017, the prices increased by another 19% to ˆ4,100 per square metre. However, the potential for growth does not stop there.

Property prices in Barcelona and Spain in EURO per M2

According to the Barcelona City Council (Ayuntamiento de Barcelona), between Q4 2006 and Q4 2016, prices fell the most in the peripheral districts of the city: Nou Barris (-48%), Sant Andreu (-45%) and Horta-Guinardó (-39%). The most resistant to the crisis turned out to be the central districts — Ciutat Vella and Eixample — where the prices decreased by 8.1% and 9.1% respectively. The decline throughout the city amounted to 18% during the same period.

Residential Property Price Movements

As of Q4 2016, the prices for residential property are the highest in the districts of Sarrià-Sant Gervasi (€4,818 per m2), Les Corts (ˆ4,756 per m2) and Eixample (ˆ4,610 per m2), the lowest is in Nou Barris (ˆ1,945 per m2).

In comparison to other European cities that are attractive for investment, residential property is cheap in Barcelona: the prices are roughly comparable to that of those in Berlin, but on average twice as cheap as in Munich and Paris and three times as cheap as in London.

Rent and yield increase

According to Idealista.com, rental rates in Barcelona have already outpaced their pre-crisis level. In Q4 2016, local apartments were being rented out at rates that were 18% higher than in late 2007. Since 2012, rental rates per square metre per month have gone up 56%: with price increases of from ˆ11.5 to ˆ17.9.

Rental Price Change in Barcelona

Between Q4 2015 and Q4 2016, property prices in Barcelona grew by 14%, and rental rates grew by 17%. Rent dynamics are outpacing residential property price growth, and so the trend for long-term rental yields is an upward one. According to data from Idealista.com, in 2007, property yielded 3.9% per annum on average, whereas in 2016 this figure was 5.5%.

To calculate the yield, we take the annual rental income and divide it by the property purchase value.

Demand exceeds supply

According to the Barcelona City Council, around 90% of transactions involve existing properties, with the remaining 10% concerning new-builds.

Between Q1 and Q3 of 2016, 16% more residential properties were sold in comparison with the same period in 2015. Existing property transactions grew by 18%, while new-build property transactions increased 4%.

Prior to 2013, construction taking place outstripped the pace of the off-plan property sales. However, over the last four years, a reverse in the trend can be observed.

According to CBRE, Barcelona needs 7,900 newly built properties per annum, while less than 2,000 are under construction. Therefore, the demand for newly built properties exceeds the supply significantly. According to Sociedad de Tasación, a real estate appraisal company, the supply of new-build property in Barcelona may be completely exhausted as early as autumn 2017. Moreover, there is a shortage of land to build on: Barcelona is limited by the sea in the south, by the mountains in the north and adjoined by the densely built-up municipalities in the east and the west.

Who buys property in Barcelona?

Percentage of international buyers
According to the Barcelona City Council, between Q1 and Q3 of 2016, the percentage of foreign buyers in the residential property market ran at 15%.

Buyers’ nationalities
According to a 2015–2016 survey by Rightmove, buyers from the UK, the US, Spain, the Netherlands and the UAE prevail in Barcelona. Clients from China and Russia are also investing in the market to obtain a Golden Visa.

Reasons for buying
According to the survey by Rightmove, foreign nationals mainly buy vacation property for personal use (57%) in Barcelona. The other reasons are relocation (22%) and investment (21%).
Popular property types According to the same survey, 95% of foreign nationals buy apartments in Barcelona, the remaining 5% buy detached houses.

Budget
According to Tranio.com, the average property purchase budget in Barcelona is ˆ460,000. This is almost double the average purchase amount in Spain (ˆ250,000).

Transaction structure
According to the Barcelona City Council, between Q1 and Q3 of 2016, 80% of the transactions involving Spanish and foreign nationals were closed by individuals, and as little as 20% involved legal entities.

Growth in tourists

The capital of Catalonia is one of the ten most visited cities in European. According to Statista.com and barcelonaturisme.com, 8-9 million tourists visit the city annually, and this number is on the rise.

Tourists Visiting Barcelona

According to the Barcelona City Council, 80% of all tourists are foreign nationals, leaving 20% of inbound tourism originating from other regions in Spain.

Tourists are also attracted to Barcelona by the city’s well-developed entertainment infrastructure. It has over 170 museums, almost 17,000 sport venues and 20 Blue Flag beaches.

The recent steady growth in the number of tourists in Barcelona suggests that the positive trend will continue in the coming years.

Development prospects for Barcelona’s property market

According to Trading Economics’ estimates, in the near future Spain’s GDP will continue its growth, whilst the country’s unemployment rate will continue shrinking; all the while interest rates are set to stay at record lows. This will have a positive effect on Barcelona’s property market.

In 2017, the main trends in the Barcelona property market will be the following:

  • residential property price and rental rate growth: according to a PwC forecast, in 2017 residential property prices will increase by 3.6% and rental rates are to rise by 3.7%
  • yield growth: as rental price increases will remain ahead of price growth, yields will increase slightly
  • demand growth: mortgage rates are set to remain low, meaning sales will continue to rise
  • new-build property shortage: the supply in the newly built property market at present cannot match growing demand, resulting in investor interest shifting to added value projects in the future.

According to Tranio.com‘s experts, Barcelona’s market is ripe for short-term (on average, 2.5-year) investments in development and redevelopment aimed at making money on future price growth. Such projects yield 11–15% per annum.

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