Mallorca Property Market Report March 2010 – What now for Mallorca property prices?

Por: Novi Property Mallorca  10/03/2010
Palabras clave: Mallorca property market


I opened a Newsletter this morning from a “top end” Mallorca real estate agent confidently pronouncing that the Mallorca real estate market has been in recovery since mid 2009, which by my calculation is some 9 months ago. Before a snort too loudly let’s give them, and everyone else talking the market up, the benefit of the doubt. In many respects I would concur that mid – late 2009 did see an important change to the market, although rather than talk of “recovery” I would describe it as “the bottoming out of values” ie the correction in underlying values had probably reached the bottom of the cycle.
But what does that actually mean and what has the impact been? Firstly we need to look at the terminology – ie I am referring to ”values“ notasking prices”. Sorry to bore regular readers but if you are you will know I have maintained for some time that there has been in a significant number of cases a decoupling of the fundamental relationship between asking prices and “real underlying property values” (in a normal market one might expect to find a difference of circa 10% but where this goes to 20% – 30% or more the simple conclusion is that owners maintain unrealistic expectations). While an increasing proportion of properties are having their asking prices adjusted, a large number have not something that not only creates a two tier market – appropriately priced properties and over priced properties, but also is undermining liquidity as in effect the supply side is being significantly restricted. On the positive side this is to some extent putting a floor under the values of those offered at market prices although I would hesitate to say the “floor” is that strong while the demand side remains so weak – lack of mortgage finance, weak Sterling and simple cautiousness. Certainly it is not going to push values up!
Secondly we need to look at what is “real value” ie where should prices be? As a rule of thumb values have, in my opinion, fallen by between 25 – 40% or to put it another way fallen back from the peak in 2007 to levels of circa 2004 (dependent on how realistically they had been valued in the first place). Again to put it simply we need to take off all the excessive “froth” generated by the market during the preceding 3 or 4 years to the so called “top” of the market in 2007. Official statistics (see below) seem to suggest that the market still has to adjust further to get back to the levels of circa 2004 which is to some extent correct ie where we are now is that correctly priced properties are at or around the circa 2004 levels while others however remain over priced and will “appear” to fall further. On the other side however it is important to understand that the further you go back with official registered figures the more unrealistic they become because they are artificially low (it was common for properties to be registered at anywhere between 60% – 80% of the real value ie 20% – 40% below actual sales price) while today, if this is done, it is unusual for it to be more than 10% below. The result is that the earlier figures are artificially lower than the comparables today.   
So if compare actual 2009 prices with 2004 levels, and find an appropriate relationship, something which is a reality in some cases, particularly in the new built property market (developers have generally been more aggressive in cutting their prices be it due to a new sense of realism or simple “desperation / need” – liquidity, interest payments etc), then indeed we can call the bottom of the market in 2009.
But is calling the “bottom” of the market the same as saying that the market is in “recovery”? Without getting into semantics I personally feel that “recovery” requires a number of factors to come together few of which currently exist – availability of mortgage finance; appropriate supply side pricing and thus wide range of available properties; demand side confidence – ie not just bargain hunters and “vultures”;  and the start of a very modest tendency to hardening of prices. But again what does this mean in practice, this time looking forward?
One of the most interesting debates will be when and where future capital growth will come from. Clearly this has a lot to do with the supply side but also the release of new development land and, importantly it’s price. On the mainland, or at least certain areas of the peninsula, there is a huge supply overhang that some argue will take until circa 2016 to clear, leaving very little hope for capital growth in the meantime. In Mallorca and the wider Balearics the supply side has been more constrained due to the relatively more controlled speculative development boom of the early years of this century. Furthermore being a small Island certain segments of the market have and will increasingly have a more restricted supply side – eg front line villas or large rural fincas / country houses, simply because the availability of front line plots is limited and planning regulations on development in rural areas, especially in the Tramontana Mountains, have become increasingly restrictive.
That said looking at the market as a whole and the values of development land / plots in particular it is clear to see that while developers have reached, in many cases, their limits in bringing down the asking prices of existing stock – they have eroded most if not all their margin in a rush for “liquidity”, it is possible to see that in the future they will be able to create new stock with a reasonable built in margin at today’s prices or potentially even less. Palma is perhaps the worst effected area with Ministry of Housing figures putting the price of development land in the Capital at the end of last year at 453€m2, the lowest since records began, and below the historic peak of 716€ recorded in early 2008.  Wider development land values do not appear to have suffered as much in the main, as I highlight above, because of a long term shortage of supply which will ultimately put a floor under the market for these sites. Growth in values are, however, unlikely to be forthcoming in the short medium term and particularly while wider economic conditions – unemployment, lack of or very restrictive financing options etc are prevalent, and the over supply (even at the more restrained levels found in Mallorca) remains.
In conclusion expect:

  1. Underlying values to bottom out at current levels
  2. The evolution of asking prices to vary dependent upon whether they have been set realistically / adjusted sufficiently to account for the significant falls in property values.
  3. Future growth in values to be non existent in the short term and very limited and restricted to underlying inflation in the medium term ie no real growth in the next couple of years. Modest growth over above general inflation levels in the economy to follow thereafter at levels of 1-3%
  4. Special properties with “unique” qualities – front line; very good sea views; restrictive planning conditions – rural fincas; high quality developments etc to perform better / out perform the market in the medium / long term. 
  5. Land values to hold down prices in the medium term as developers take advantage of cheaper land to sell at these new lower levels for the medium term. Long term shortage of supply, save for those in urban areas and for “mid range” apartments, like Palma, Inca and Manacor, should see values rise 

Our advice:

  1. If you are a lifestyle purchaser or investor with an income return bias start to look at the emerging buying opportunities BUT..
  2. “BUYER BEWARE” it is all about value and ensuring that you buy at an appropriate level and don’t over pay on unrealistically priced properties.
  3. Look at new build where good discounts are available (but beware of off plan unless your deposit(s) are backed with a bank guarantee)
  4. Look at properties with “defensive” qualities, as set out in (4) above, for greater short term security
  5. Look at land to hold as a long term investment / to build a home. Particularly rural plots, front line or with very good sea views etc
Contact David Novi for further information and advice.
See also and
Some Statistics

While official statistics are notoriously unreliable (not least due to the historic tendency to “under declare” the real value of a purchase on the deeds and thus the official value registered at the Land Registry – Registro de la Propiedad)  figures from the Ministry of Housing still make interesting reading, and give us a crude benchmark against which to look at asking prices and property values.

Average Price of Housing in the Balearic Islands

Year                   New Build                    Second Hand

2005                   2,020€m2                     1,942€m2

2006                   2,301€m2                     2,200€m2

2007                   2,468€m2                     2,340€m2

2008                   2,692€m2*                   2,339€m2* 

2009                   2,329€m2                     2,025€m2

Source – Ministry of Housing

*Interesting that although the common consensus is that the market peaked in 2007 developers were able to register higher sales prices due in main from customers that had bought off plan and paid sizable deposits. The figures from the second hand market show at least the “acceptance that the market had peaked even if statics did not yet reflect that the market had / was about to fall

Average Price of Land in the Balearic Islands

Year                      Palma                     Balearic Islands

2004                     677€m2                      243€m2

2005                     605€m2                      295€m2

2006                     640€m2                      337€m2  

2007                     655€m2                      352€m2

2008                     716€m2                      331€m2 

2009                     453€m2                      316€m2 

Source – Ministry of Housing

Average Price per M2 of New Build Property

Year        Properties < 300,000€               Properties 3-450,000€                Properties > 750,000€

2008              2,220€m2                                3,294€m2                                      3,349€m2           

2009              2,062€m2                                 2,922€m2                                      3,103€m2

Source – Ministry of Housing 
Average Price per M2 of Used Property
Year        Properties < 300,000€               Properties 3-450,000€                Properties > 750,000€

2008              2,107€m2                                2,497€m2                                      3,210€m2           

2009              1,936€m2                                 2,255€m2                                      2,707€m2

Palabras clave: Mallorca property market