Property Bulletin 2/2016 ; Short term development projects - do you need to like the location?

Property Bulletin 2/2016 ; Short term development projects - do you need to like the location?











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Property Bulletin 2/2016
Short term development projects :
Do you need to like the location?

A remark often made to us by investors is that they have no interest in investing in, or may not like, a particular market.  Quite naturally, there are sometimes valid reasons for this. Just as some people won't invest in pharmaceutical or technology shares because they think the sectors will under perform, some people will think the same of certain property markets.  If prices are not going to rise within an acceptable time frame, or the rental income is not attractive, having a passive, capital growth investment property make little financial sense.  
Should the same thinking apply to a short term development project where the return is not determined by capital growth?  Of course, if prices are falling then it makes little sense to develop a property as the downside risk may too great.  The eventual return is likely to fall over the construction period and there is no way of evaluating this properly.   However, if prices are stagnant then as long as there is sufficient demand for the finished product at the prices the developer needs to make a profit, and the project is costed and run properly, capital growth is not a factor. If there is any, it will only enhance the return. Under these circumstances there is every reason to undertake a low risk development project in that market.
The Costa del Sol is certainly an example of a property market that has seen a major correction.    As a result of the property crash prices fell by over 40% and whilst the market is now slowly recovering general property prices are not set to leap forward and show staggering returns in the short term.  The good news from a development point of view is that few, if any, analysts and commentators are forecasting the market to fall further.  For example, the Sociedad de Tasación's new housing market bulletin for 2015 reports that the average price of new housing increased by 2.9% last year, reaching a price level equivalent, in real terms, to those registered in the month of June 2002.   In November 2015, the General Council of Notaries reported that the number of housing transactions carried out reached a total of 34,918, which represents an increase of 7.3% over the same month of the previous year.  This meant 18 months of continuous growth.  
Some investors will argue that there is still a lot of property available on the secondary market so it makes no sense to build new properties.  In certain locations and price points this is certainly the case.  According to a study carried out by Idealista, 59% of the advertised homes are priced at lower than €100,000, while 23% cost between €100,000 and €150,000.   The homes with prices between €150,000 and €200,000 account for 10% of those advertised, and those between €200,000 and €300,000 account for 6% of the total. Importantly, just 2% of these properties are priced at over €300,000.   So if you develop properties that are priced at over this figure there is certainly no oversupply.  
As Mark Twain is commonly quoted as saying, 'Lies, damned lies and statistics'. It is easy to be selective and use statistics to support a point of view.  The fact is, some months the figures (and hence the headlines) are good, some months they are not. This is what happens when the market bounces along the bottom of the price cycle.  However, with the general economy improving and demand from overseas buyers picking up, the worst is behind the Spanish market.  
So what sort of investment returns should an investor expect from developing in Spain?  This will depend on the location, the sector and the risk involved. Securing a change of use for land to be developed may produce an excellent return, but the risks will be too high for most investors.  Refurbishing an existing building will involve much less risk.   It is all about doing the right due diligence, working with the right professionals and adopting a conservative approach.  With an investment period of two years or less, and double digit annualised returns on invested funds, the financial rewards can be attractive. Now is the time to take advantage of market conditions and reap the rewards of low prices and a recovering residential sector.
For more information on short term development projects, and our private syndicates which undertake these, please contact us.
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Regards,
Tony Davies                                                                                                                     
 Managing Director

   



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