Why investing in Barcelona´svalue-added projects in 2017–2018 is a must

Having recovered from the crisis, the Spanish economy is regaining ground: if in 2009 the GDP growth rate fell to a historic low of −3.57%, since 2012 this figure has been demonstrating a steady increase, having reached 3.2% in 2016.

Catalonia is the most developed of Spain’s regions, with its GDP share being around 20% of the country's total. The unemployment rate in Barcelona has steadily remained lower than the national average: in 2016 the gap amounted to 3.7%.

However, despite the positive signals, it is difficult to be sure about Spanish and, consequently, Catalonian long-term economic stability. Unemployment rates in Spain and Barcelona remain relatively high, while incomes throughout the country remain low when compared with other European countries: for example, the average salary is 86% higher in Germany and 47% higher in France.

According to Tranio´s experts, under these circumstances, Barcelona's market is ripe for short-term investments in value-added projects aimed at making money on future price growth. You purchase a home, office or hotel in poor condition, fix it up or change its function so as to increase its value, and then sell the property for a profit in a few years. If the yield ceiling for rental business is 5–7% per annum, redevelopment projects allow investors to make 12–20% on their investment after management company fees and local tax expenses.

Value-added projects imply a greater number of risks for investors in comparison with simple rental business. Among the major risks is that of the property depreciating whilst the project is ongoing. However, a number of factors indicate that the prices for property in Barcelona will be growing over the next several years. These factors are the following:

Low interest rates

The main reason for growth market Spain-wide and, particularly, that of Barcelona, is the low interest rates.

EU mortgage rates are based on Euribor, an interbank offered rate. The rate has been falling continuously since June 2014, and in October of the same year it reached a negative value for the first time; contrast this with a value above 4% at the onset of the 2008 crisis.

Spanish banks provide non-residents with up to 60% LTV loans at 2.5% per annum on average, whilst 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.

Price growth potential

As of Q1 2017, 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 €2,862 to €1,664 over the course of a decade. However, in 2015, the prices stopped falling and began recovering gradually: by almost 3% by the beginning 2017.

According to Idealista.com, property prices in Barcelona fell by 37% between Q1 2007’s peak (€4,732 per m²) and Q3 2013’s minimum (€2,957 per m²), after which they grew 39% to €4,123 per square metre in Q1 2017.

Real estate in Barcelona is more expensive than in Spain on average: in 2017, the average square metre price turned out to exceed the national average by 2.5 times. Furthermore, price increases per square metre are growing more rapidly: in Q1 2017, the prices for property in Barcelona increased by 6% more than the 2016 average, which exceeds the Spanish average by 6 times. However, prices have still not reached the pre-crisis maximum and this is why there still is a potential for growth.

Yield and rent increase

According to Idealista.com, in Q4 2016 the average rental rate in Barcelona ran at €17.9 per square metre per month; exceeding the pre-crisis (late 2007) level by 19% and the level where the price bottomed out in 2013 by 57%.

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%.

Demand exceeds supply

Prior to 2012, the volume of construction taking place outstripped the pace of new-build sales. However, since then, a reverse in the trend can be observed. In 2014, the gap was the biggest: the number of transactions involving new-builds exceeded the construction volume by 111%, but as early as in 2016, the difference shrank to just 1%.

Both figures demonstrate positive dynamics after the dramatic fall in 2013. Between 2013 and 2016 the number of transactions involving new-builds increased by 2.1 times, whereas construction volume increased by 1.9 times.

According to CBRE, Barcelona needs 7,900 newly built properties per annum, while fewer 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 of 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.

Population and private consumption increase

Barcelona's population has been gradually recovering after a decrease in 2014. From this trough, the amount of inhabitants in the city increased by 0.4% and reached 1,608,000 by 2016, whereas the population of Spain ceased growing in 2012.

Private consumption has been growing in Barcelona since 2013. It amounted to €22.88 billion by 2015; an increase of 5.4%. According to the Barcelona City Council, as of 2015, household spending was 14% higher than the national average.

The unemployment rate is gradually decreasing after reaching a peak of 23.7% in 2013. In 2016 it dropped to 14.4%.

Growth in tourists

According to European Cities Marketing, a non-profit organisation, the capital of Catalonia is one of the ten most visited cities in Europe. According to Statista and Turisme de Barcelona, around 8-9 million tourists visit the city annually, and this number is on the rise.

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 50 museums, 22 Michelin-starred restaurants and 28 Blue Flag beaches.

Development prospects for 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 are set to remain ahead of price growth, yields will increase;
• 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 value-added projects in the future.

Rental property investments are perfect for those who plan on relocating or sending their children to study in Barcelona. By obtaining incomes in the currency of their future expenses, these investors minimise the consequences of inflation risks.

We recommend considering the scenario of buying real estate in small towns and municipalities around Barcelona such as Badalona and L’Hospitalet: more undervalued properties at affordable prices can be found there.