Underlying economic conditions remain challenging in Spain. Unemployment stands at 22.4%, slightly down from a high of almost 27% in 2013. In spite of this, at the national level the Spanish residential market appears to have stabilised. Prices stand 28.6% below their 2008 peak and by the first quarter of 2015 the rate of falls had slowed to 0.3% on an annual. A rapid rebound is unlikely given the high volume of new housing, delivered prior to the crisis, still being worked through.

While the domestic market is still suppressed, there are opportunities for homebuyers and investors from abroad. A weak euro makes Spanish property especially affordable to GBP and USD buyers, giving greater purchasing power. Meanwhile, the Middle East is a rapidly growing source market for residential investment in the country – particularly at lower price points.

This has been supported by the rapid expansion of air routes to and from the Middle East with summer capacity up 36.6% over 2014, according to airport operator Aena.

Non-EU nationals have a route into the market via the country’s golden visa scheme, which attracted 530 foreign nationals between September 2013 and December 2014. A €500,000 investment in real estate means the visa holder is automatically granted residence and working rights in the country. Investors may also invest in public debt or share purchases but, so far, the vast majority (92%) have taken the real estate route. The recent stability of nominal house prices and transaction levels may be due at least in part to the golden visa market boost. Investors will do well to consider how vulnerable the market will be to the cessation of this policy.

^{Source: Ministeiro de Fomento}

Housebuilding in Spain

Spain experienced extremely high levels of new development in the run up to the market peak, much of it aimed at second home buyers in coastal resorts. Housing starts peaked at 865,500 in 2006 – almost four times that of recent peak delivery the UK, in spite having a quarter less population. The withdrawal of buyers during the financial crisis put a halt to these high levels of development, but the stock overhang remains. In 2014 just 34,900 units were started in the country.

The national picture disguises some resilient sub markets. The Balearics saw much lower net additions to housing stock, and a dearth of new development in recent years means quality new units are now in short supply. Just 1,186 dwellings were completed in the Balearics in 2014, for a region with in excess of one million inhabitants. It is no coincidence that this region has emerged as one of the best performing in the country, with prices now just 11.8% below their 2008 high, compared to 28.6% below at the national level.

^{Source: Ministry of Development, Observation et Statistiques, Federal Statistical Office, DCLG}

Balearics

Prices across the Balearics have been broadly flat in the last year, after rises of 8.1% in the year to Q2 2014. They now stand just 11.8% below their 2008 highs, having seen relatively modest price falls by Spanish standards during the downturn.

The residential markets in the Balearics have been much more resilient than those of the mainland Balearics thanks to a diverse demand base and limited new supply. During the depths of the recession in 2012, one in every four Spanish properties that were sold to foreigners was in Mallorca.

Germans have dominated the market in recent years, accounting for up to half of all buyers, although the British have recently regained their position as the largest foreign buyer group. Seven of the top ten busiest international air routes at Palma airport are to Germany. Mallorca was one of the better performers through the global economic downturn.

Ibiza has also proved resilient, having refined its image in recent years. The island offers high-end entertainment, retail and restaurants, attracting a diverse range of European buyers. Buyers of second homes here are among the youngest globally, 22% of buyers are aged under 40. Unlike Mallorca, British buyers dominate the Ibiza market, but Spanish buyers are present in the additional home market too.

Marbella & Sotogrande

Marbella enjoys a position as a prime tourist destination, attracting visitors from Europe and beyond, year round. Economic revival in key markets, most notably the UK, has renewed demand so transactions numbers grew by 28% in 2014 alone.

Prices in the Malaga region, in which Marbella is located, are 24.4% below their 2007 high, but the market has realigned and vendors in prime locations are no longer accepting deep discounts on asking prices. The British, followed by French and Russian buyers, are the largest foreigner purchasing groups. There has also been growing activity among Middle Eastern purchasers, though at lower price points than they have historically brought.

Carefully managed, well established resorts such as Sotogrande, close to Malaga have enjoyed renewed demand. With a permanent onsite resident community of approximately 7,000 people (which doubles in number during the summer) and an international school for 620 students, half of its residents are Spanish. The balance is made of British, Scandinavian, German and other nationalities. This ‘small town’ nature of the population can support urbanism and a wide variety of facilities, including golf courses, polo facilities and a marina.

The development received a boost at the end of 2014 when it was sold to US investment fund Cerberus Capital Management.

It is anticipated this will result in more investment into Sotogrande in the short-term, and underlines wider confidence in the scheme. Quality, modern properties in general are in short supply after a dearth of new development in recent years.

Madrid

Madrid, the capital of Spain and important urban centre in its own right, is primarily a domestic market. Well under 1% of all properties transacted in the city in 2014 were sold to foreigners not already resident in Spain. This figure is largely unchanged in the last decade.

This means its residential market is much more closely driven by the national economy and domestic factors. Prices here fell further than the Spanish average – some 33.7% between 2007 and the lowest level at the end of 2013. However, in common with the rest of Spain, stability has returned and 2014 saw prices appreciate 8.1% off their very low base.

Prime Madrid offers the best of city living, with good access to shops, bars and restaurants and cultural attractions. In spite of being the third largest city in Western Europe, prime property is a fraction of the cost of its counterparts in London or Paris – although it is does not attract close to the same levels of international investment – yet.