Alastair Kinloch MRICS from Property Works Mallorca gives his views on the property market in the Balearics for 2023.
He starts with a general historic picture of the Balearic property market and then goes on to look at how things are shaping up for 2023.
The basics of the Balearic Market
In my opinion, the fundamentals of the Balearic market remain somewhat more robust than many of the Spanish mainland areas, as a result of some historic planning restrictions and a more limited supply of available land. Furthermore, Mallorca, Ibiza, and Menorca have not suffered the same level of speculative development as the mainland.
Political initiatives, such as development restrictions on rustic land, and limiting holiday rentals and second homes, have been introduced to curb profit-driven businesses. This, in the short term at least, has limited excessive development, but in the longer term, ironically, may have increased demand on the islands due to a better quality environment.
At the moment, much of this demand (aside from that generated locally) comes from “lifestyle” purchasers seeking either a new principal residence or a secondary holiday home.
Various factors continue to draw purchases including the excellent airports within three hours of most European destinations, excellent international schools, relative political and economic stability, outstanding landscapes and beaches, and good housing stock.
When trying to understand the Balearic Market, it is essential to recognize it is made up of two distinct segments. It is split between properties in demand by overseas investors and those that are not.
The first group includes high-quality apartments and detached dwellings with “premium” characteristics, such as sea views and large gardens with facilities in prime locations. In Mallorca and Ibiza, areas such as Palma, Ibiza town, Santa Eulalia, Andratx, Pollensa, Deia and Soller are showing astronomical prices, sometimes up to 25,000€ pm2. This is comparable with some of the most expensive blue-chip real estate in the world such as London, Paris and New York.
These properties remain popular with investors from Germany, Sweden, France, and Denmark and non-EU investments from the UK, USA, China and the Middle East. Currently, these make up a large percentage of year-on-year transactions, being in the region of 30% during 2022.
At the top end, properties bought are not just second homes, but often fourth or fifth properties. A purchaser might be looking for a summer home close to the beach. They may, for example, already have a flat in a major city, a country retreat, and a winter chalet. This would probably put them in a net worth group of at least +50m€.
At the other end of the spectrum. there are lower-value village or urban apartments. Sales remain depressed for many reasons, including local unemployment, stricter lending, and low local wages. The knock-on effect of foreign investment has also pushed prices up, sometimes unrealistically, limiting sales.
The middle market (perhaps between 750,000€ and 3,000,000€), once popular with the middle classes and professionals a few years ago, has entered into a period of lower demand than previously. Many factors are to blame, including overpricing and economic instability are to blame which are discussed below.
So, to summarize, we are seeing an extreme polarization of the market between properties in demand with certain characteristics and those that are not. This is a reflection of the current world economic scenario and not a particularly healthy one.
Looking to 2023 and beyond
There are four principal ingredients to the current economic situation – Covid, Brexit, the war in Ukraine and economic uncertainty. Some might say a perfect storm. So is the outlook as bleak as it appears?
On the demand side, 2022 was a good year for vendors and agents, the latter having commented that record sales have occurred and at present, prices have yet to fall and remain inflated. In our opinion, purchasers have often been wealthy “ lifestylers” happy to buy with less regard to the true value and the usual due diligence process, etc.
We are seeing, for example, a sharp rise in properties bought without a “certificate of habitation” in rustic land. This is never recommended and may lead to future conflict (building permits, loans, etc) something to avoid when trying to relax in your new home.
Other purchasers are also looking at “bricks and mortar” as a safe long-term shelter for their savings.
We also need to recognize the worldwide general trend of moving out of the cities and looking for properties with outdoor spaces. The Balearics has outstanding countryside so will tick the box for many buyers.
Multinational corporations and investment funds, such as Blackrock are also encouraging residential investments as a good way of diversifying portfolios.
It appears the majority of purchasers are looking for a secondary home and not to reside on the island. For the first time in many years, popular and political unrest is now an issue with this model. There is anger at the rising house prices for locals.
On the supply side, agents complained in 2022 that quality property stock has been limited and overpriced. It now appears more properties are being put up for sale due to, amongst other things, owners’ economic hardship, prudence etc.
The interest rate hikes clearly make owning a property less attractive. The estimated rise in the average variable mortgage is about 300€. We believe rates will continue to rise for the next six months or so, before levelling out.
Post-Brexit, the 180-day residence rule is clearly putting off UK residents from buying property in Europe. UK owners are not prepared to own a property that can only be used for 180 days a year. Issues such as security and maintenance are important and now have to be subbed out at considerable cost as it cannot be managed all year by the owner.
It’s been a big year for USA investors, with new direct flights from New York to PMI opening up the Balearic property market. The Scandis, Germans and French continue to invest though at a slower rate than previously.
In our opinion, we do not foresee a significant crash in sales values, but a possible period of continued weakness with a fall in investors’ confidence. It is anticipated that the general property market, within the national and international economic context, will remain relatively flat over the next few months and will stabilize over the next few years.
The extent of this decline is difficult to assess at this stage. We do not believe a long-term recession similar to 2009 will occur. House prices in the 2009 recession took approximately ten years to recover. In our opinion, the Balearic property is more aligned to the global economy, which is expected to start recovering in mid-2023.
Some may argue that the Balearic market has been overpriced for too long and a readjustment is necessary to allow local first-time buyers into the property market without having to raise significant deposits or debt.
What is clear is that, in time, those in a position to buy may be able to pick up a decent property at a more reasonable rate than we have seen in recent years.