A brighter future for the Costa del Sol property market?

On 24 April 2007 a long expected correction took place in the Spanish stock market, where significant falls were recorded as the value of shares in many leading construction and property groups depreciated. Here, Chris McCarthy, Managing Director of VIVA Estates on the Costa del Sol, addresses some of the issues surrounding the current state of the Spanish property market.

Who is Chris McCarthy?

CM: For almost 20 years I have lived on the Costa del Sol, working exclusively in the property market. Ten years ago, in 1997, I outlined a business concept for, and founded VIVA Estates. Since then we have sold over 8,000 properties and have become by far the largest listing and multi-branch agent in Southern Spain, serving both pan-European and local clients. During that time I have witnessed an impressive and total transformation of the Costa del Sol, a metamorphosis which has been gaining momentum since the early days of package holidays to Torremolinos back in the 60s.

I can state unequivocally that the Costa del Sol is a completely unique environment both in Europe, and in Spain itself, not simply with regard to property ownership but more importantly its long-term development of infrastructure and investment which has genuinely made the region the California of Europe.

It would be simplistic in the extreme to view the real estate market here in the context of one day’s activity on the stock market, or across one or two years’ rise or fall in overall property sales.

There is a much bigger picture than that, and I would hope I speak not only for VIVA Estates, but for the much wider community of people who, like me, are successfully, happily and permanently working and living life to the full in Southern Spain.

Did the Spanish property boom end last week?

CM: No. Not on the Costa del Sol. The most recent boom actually ended late in the first quarter of 2004, and it is a complete - yet perhaps understandable – misunderstanding on the part of the media to portray anything else.

Real estate sales activity on the Costa del Sol picked up rapidly in 1998 when, after several years of torpor, it began to race along on a wave of investment buying which built up and up to peak in 2003, when prices finally reached their upper limits and after intensive buying, market interest started naturally to decline.

What happened last week was a stock market fall - not a sudden collapse of property prices or interest in buying. The media often relies on government statistics and official analysis, complemented by financial reporting and stock market performance. This data is not necessarily related to current activity, and is more likely to be a culmination of preceding years or a much wider Spanish economy perspective.

The actual reality of this fact therefore impacts on many of the other issues raised and offers the opportunity to look at the situation in a completely different light. If the number of property sales and activity fell from three years ago…

Is the glass now half empty and getting emptier?

CM: On the contrary it is half full and getting fuller. One should look at the mid- to longterm view. A classic example is Málaga Airport which, as the population on the Costa del Sol has exploded, has for years been straining at the seams to deal with 12 million arrivals and departures per annum.

It’s not so many years ago that previous redevelopment drastically improved visitor numbers and general access to the region, but now as anyone who has been through the airport in the past year can confirm, it is literally quadrupling in physical size, and with its new runway, from next year will be able to deal with in excess of 20 million arrivals and departures.

Can you name any other airport, neither serving a major city nor acting as an onward transit hub in Europe, that will handle this level of passengers? It is a staggering development and the project will shortly also be linked to a whole coastal railway system, much of it underground, that will allow people to travel quickly and efficiently from one end of the Coast to the other and right into the heart of the airport itself.

It is development on a grand scale and far exceeds that of any other European or Spanish holiday destination area. Together with the continuing expansion of road infrastructure - which in itself has been an astounding achievement these past ten years - and new high-speed rail links to Madrid and major Andalusian cities, it will utterly transform the whole area still further to become a highly developed cohesive region with a large city mentality surpassing any equivalent area in Europe.

The Costa del Sol is no longer simply a holiday destination, it is also a vibrant, developing residential area that tens of thousands of European and Spanish nationals aspire to live in and relocate to. Because it is completely unique, general issues relating to the overseas property market or to other areas of Spain do not apply.

Which brings us to the next, often misguided question…

Is the Costa del Sol overbuilt and oversupplied with property?

CM: Absolutely not is the unequivocal, clear and definitive answer. You can’t build an airport with 20 million arrivals and departures per annum, unless you have the capacity and scope to deal with that volume.

The build and development explosion that has taken place in the past ten years has been entirely appropriate and, I would venture to say, well planned and thought through from a mid-to long-term perspective.

From an aerial view of vast tracts of the coastal area it can easily be seen that many urbanisations extend no more than a kilometre or so inland, and from there the region is undeveloped all the way to Seville, a two-hour drive away.

We are talking about an immense and largely uninhabited area, for which there is
more than sufficient land to house long-term development for another 40 years or so.

This is not the Costa Blanca where - unlike the stylish and appealing developments on the Costa del Sol with an average of 150 units in any one urbanisation – literally 1,000s of units on vast projects, create huge areas of concrete comprising high density, poor quality, small-sized properties along mile after mile of featureless and arid landscape.

Neither is the Costa del Sol remotely similar to the almost third world backwater of Bulgaria that is only taking its first tentative, some would say spurious, steps towards a future still some 40 years off. I hear the skiing isn’t bad and holidays are cheap enough, but whether that’s enough to make anyone actually want to live there and commute back and forwards as so many happily and so easily do on the Costa del Sol is another matter.

In fact, could it really be the place where the notion and frenzy of overseas property investment will have its Waterloo? It is naive and ill-informed to talk about overbuild or oversupply of property on the Costa del Sol. On the contrary, one could argue that the mid - to long-term boom has yet to begin.

This begs the next ongoing issue…

Is property overpriced?

CM: Property prices peaked on the Costa del Sol at the end of 2003, having soared in value due to several factors. First; because in 1998 the market had been undervalued and had been quiet for several years following the negative equity crisis in the UK and due to the fact that there was little build activity in terms of new projects.

Secondly; with a resurgent British market, and the beginnings of considerable development activity on the Coast due to low land prices, property began to look very attractive indeed, most especially as developers sought to sell off-plan in their initial stages and clients saw that early purchase would allow a sell on before completion and an opportunity to make a substantial profit.

Thirdly; a proliferation of marketers then responded to a welter of positive TV coverage in Britain on the merits of owning property overseas, with their own exhibitions and substantial advertising campaigns across the UK.

The market took off, and for everyone involved - vendors, buyers, developers, lawyers, banks, estate agents, and countless associated suppliers - there was a long and sustained boom that mirrored a similar scenario in the UK. Yet for the Costa del Sol, that boom finished at the end of 2003, due to higher land prices, construction and labour costs, together with increased marketing costs.

This was inevitable. The market had risen for six long years. It couldn’t last forever. We have now had three years where the market has stabilised. Government statistics may appear to show that prices have increased but in large part this is due to many developers selling on reservation in 2003 and completing on purchase up to 2006, when the transaction was recorded.

The truth is that the sheer volume of buyers has decreased externally by around 60%, which has not been a bad thing at all. Developers have got on with completing their projects, many agents who sold solely on price point and investment have been off elsewhere pitching their whole off-plan, flip to win scenarios in Bulgaria et al, and quietly and happily thousands have been enjoying holidaying, living and working on the Costa del Sol.

A new dynamic has been progressing, and the future of the Costa del Sol is yet again about to transform itself still further, but not for those with their heads buried in the sand.

Prices rose to dizzying heights in 2003, but what people fail to understand is that developers then pulled back from those heights, and quietly engaged in price reductions of phases, discounting units on completion, and gradually stepping back from the brink.

Vendors reselling their properties over the past three years have recognised that they would not be able to achieve the three or four times value that they could have expected if they had purchased before 1998, and were happy to sell on at a level below that of the new builds for a reasonable and sensible price, knowing that buyers would be receiving real value.

If the market was overpriced, we would not be able to sell property. Yet we continue to do so, and now with higher recorded sales levels and appointment activity than in the past two years. We are actually seeing a resurgent and new market appearing, and for very good reasons…

Has it become a buyers’ market?

CM: Yes it has. There are any number of projects still in construction on the Costa del Sol, which have had to become price competitive and react to the market they are in; while developers are building a higher quality and standard of product that is available to buy on, or near, completion.

Purchasers can see, understand and use what they are buying. They simply won’t buy, nor need to, unless it is the right property at the right price. Finance packages, and many other creative or supportive purchase elements are all the more readily available and are shown to be affordable. There is a real excitement now about what is on offer.

As developers have levelled out their expectations, and far fewer cranes and build projects are visible on the Coast, then, too, the resale vendor has to appreciate that he must also compete in the market. If he or she truly wants to sell, then they must offer great value, too.

Are there huge numbers of distressed vendor sales?

CM: No there are not. We can see this most clearly in the fact that over the past seven years, and despite huge sales volume, we have seen no appreciable change either in interest or in the number of vendors wishing to resell their properties with our own company, VIVA Estates.

There is no panic selling, it just does not exist. In the early to mid 1990s there were distressed sales - through auctions, repossessions and the like - but that has simply not returned and nor is it likely to.

Why?

CM: Well, interest rates have remained low, and while they will inevitably increase over time, they have not made the original decision to purchase unaffordable or too heavy a burden on the owner.

Those who have bought on the Costa del Sol gain massive use and personal lifestyle fulfilment and benefit hugely from their purchase. The extent to which people love the Coast, and love living or having a home here, is perhaps not completely understood or accepted by those who do not.

All the reasons why people bought here – beyond a simple investment – are being improved upon year in and year out, not only as we said before the overall infrastructure, airport expansion and the like, but in the local development of hospitals, schools, shopping centres, amenities and all the facilities that have again utterly changed the face of the Coast in recent years.

Remember, you can fly here from the UK in a little over two hours, and we have around 320 days of sunshine each year. Yet you can watch the same TV programmes as you would back home, work on your PC or lap top and be reached on your mobile phone in just the same way as if you were in your UK office.

People do not want to sell. They want to own a property here, and they want to literally sit on their investment. Relaxing on their terrace, looking out over the sea, golf course or the stunning countryside, and savouring a glass of vino tinto, not only are they appreciating their investment, but their lifestyle experience, too. Could they say the same about the stock market, pensions or some far-flung, undeveloped overseas alternative?

They are neither distressed nor desperate, they are enjoying themselves. When they do want to sell, for whatever reason, they recognise that it is a buyers’ market, and that they should price their homes accordingly. And now that’s precisely what they do.

Is it safe to buy in Southern Spain?

CM: In the past two years, both the regional Junta de Andalucía and the national government in Madrid have launched a massive crackdown and campaign against corruption, planning irregularities, money laundering and tax evasion.
Special prosecutors have been appointed, town halls have been turned upside down and taken over, and all manner of public officials, businessmen, developers, lawyers, notaries and others have either been arrested or called to account for their affairs or actions.

It has become a fascinating soap opera of events, with blanket coverage on national television as well as filling the pages of the international press as each wave or operation is launched and fresh activity undertaken.

What does it all mean to the local resident, the potential buyer?

CM: Quite simply it means that Spain is demonstrating in considerable measure its status as a mature, stable and wholly democratic country, with all the attendant care and concern for the rule of law and therefore the protection of the individual’s civil and personal rights.

In truth, it has been a fantastic time for the future of Southern Spain. The country is still a relatively new democracy - many people forget that it only became so less than 30 years ago, and that since 1992 Spain has been rapidly developing as a full and increasingly equal partner with the major economies of the UK, Germany and France.

Now, the full weight of that democracy and care for its future has been applied. Planning abuses are being tackled, banks are becoming far stricter in their secured lending, and lawyers have to be rigid in their professional practice to ensure that clients’ rights are fully protected in purchasing a completely legal and fully registered property.

The various scandals and reports of corruption have given all involved in property and construction a cold shower, and the dénouement is simply; that Southern Spain is now one of the safest and most secure places in Europe in which to buy.

In fact, what has occurred in the past few years may well be viewed as the real making of the Costa del Sol, bringing about a level of confidence and security which frankly would be hard to equal anywhere beyond the major European states.

When is the right time to buy? Are prices going to crash?

CM: In our honest opinion, the right time to buy is when the purchase is affordable, makes good sense to you and your family, when the property is the best available in its price range, works for you as an investment, is something that you know you will able to live in (or rent out), sell on, and which fulfils your financial, lifestyle and future aspirations.

The time to buy is now, if your inclination to purchase is matched by the above criteria. If it is not, then simply do not buy, but what is available today, may not be there tomorrow. Nor can you automatically expect it to be at the same price, and most importantly the real value of time itself, and the benefits of ownership and usage, will have certainly passed irrevocably by.

Property prices are not going to crash, they have already fallen in real terms over the past three years. We know this from our own detailed accounts which have been fully audited by KPMG these past six years.

We are at the frontline of what happens in the property market, we deal with the buying and selling of homes day in and day out, we are months, even years ahead of any government or other statistical analysis, which is drawn ultimately and belatedly from our own revenues and performance.

Is the average value of a UK home going to fall 30% from £200,000 to £140,000? No, it is not, and the same can equally be said for our own area. We have again an increased demand, we do not have an oversupply, we have a clear and dynamic future, and we do not have clients in desperate need to sell.

What we have, which was the purpose of this press release to rationalise, is a media which quite naturally wants to feed on the headline-grabbing notion of an end to the property boom, and which is beguiled by the drama of a stunning property collapse.

Well, we have already said our boom ended three years ago. We do not have a collapse in prices and we do have a great future, but this does not mean that the market did not downturn or that people are not being practical and cautious.

However, that in itself presents a great opportunity for those who are buying property here today. There is a time to be smart and ahead of the field, or not to go where others are following the pack.

Warren Buffett, the world’s richest man for many years, and acclaimed as the greatest investment guru and practitioner ever known, had it right when he said, “Most people are interested in stock when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

Then, too, Mr Buffett had some other perspectives on our position, when responding to a supposed doomed market situation he said his philosophy was that “We simply attempt to be fearful when others are greedy and to be greedy when others are fearful..”

And not to belabour the point, but perhaps to round off our view on when is a good time to buy, if we take the liberty to paraphrase Mr Buffett by substituting the word ‘company’ for ‘location’ to match our purpose, “It is far better to buy a wonderful location at a fair price, than a fair location at a wonderful price.”

The last ‘best time to buy’ on the Costa del Sol was probably between 1995 and 1998 prior the last boom. Perhaps logically, it will be the case that those buying today, will in time to come, be judged to have been the smartest of all buyers. Especially when you consider the future that lies ahead.

What is the future of the Costa del Sol?

CM: Golden, it’s as simple as that. It will have its ups and downs, which is only natural and cyclical. Yet for all of the above and so much more that could be said, the Coast could easily be described as being at the culmination of decades of preparation, and therefore now in a state of readiness for an explosion of growth and continued development as the ‘California of Europe’ that it already represents for thousands.

Its progression has been ever upward and onward, and mid- to long-term that is quite frankly unstoppable by any stock market correction or a momentary lull in the property market. Ask the people who are successfully, happily and permanently working and living life here to the full, and you will find a consistent and resounding answer that they just do not wish to be anywhere else.