Luis Corral: “Owning a home implies having a savings discipline”
The residential sector in Spain is currently at a time when the supply of new construction is scarce due to the lack of promotions underway and the high buyer demand. Luis Corral, CEO of Foro Consultores, assures that the failed attempt to market new homes at prices so high that there is no demand to pay them is added to this scenario. Inflation, the war in the Ukraine, the lack of finalist land or the high construction costs are behind this phenomenon.
And in this scenario of so much uncertainty, in order to promote you have to be brave, according to the CEO of Foro Consultores, who adds that “as much as we want to stretch prices so that business plans fit, there comes a time when the buyer of these homes, has limited purchasing power. They are not infinite”.
How do you see the real estate sector in Spain today?
The confinement configured an exceptionally large saving situation for families. And the most important thing is that it changed the habits of living in the houses of many families, who decided to change their homes, which in recent years has invigorated our sector. Not in the same way throughout Spain. There are two Spains, which are the Spains that are losing population, generally a qualified, young, well-prepared population, who do not find expectations in their town of origin to develop their aspirations and decide to go to cities where they do think they find it. A clear example is Madrid, but there are also other cities that are receiving population from others, such as Barcelona, Valencia or Malaga, and there are others that are unfortunately losing a valuable population. Thus, there are places where there are too many houses and in others they are missing.
So, we have found these years with a powerful demand, the result of these savings rates and these changes in habits. And unfortunately, we have found ourselves in those big cities with a certain supply crisis. There was not enough land to meet the demand that was coming, and the land takes time to ‘cook’, to be suitable for housing to be built. So, we have found ourselves with a shortage of supply. I give the example of Madrid, because it is a very dynamic city, which has received a large population and is a truly clear example, but it is also applicable to other cities. Given the low supply and high demand, there has been a rise in prices. To this we must add the increase in construction costs for reasons of crisis, transport, raw materials.
And now, with the war in Ukraine, it has reached levels that have made many promoters see it as unfeasible to carry out their businesses, which further reduces demand. Who has survived this situation better? Those who had the soil in their pantry, which is the raw material that is mainly listed companies and real estate funds. Because in this entire scenario the cost of land has not only not been maintained but has become more expensive.
When you have the need to create an independent home, you have to do it because that is the most important thing and also because your house is where you are going to carry out your family life.
How does inflation and interest rates affect real estate?
I believe that the conflict in Ukraine has disrupted the economic structure, I would dare to say worldwide, and has generated a brutal energy crisis. And in the end, it has meant that all developed countries, Europe and the United States, fundamentally, are experiencing inflation rates that we have not experienced for 30 years. Inflation is a cancer for the economy because it raises prices and in the end, this has a very notable effect on the real estate market, because you have to spend more on basic things, that is, on current expenses. All this takes away resources for the large investments of family structures, which in order of importance is housing as a large number one, despite the fact that there is a significant amount that is normally financed, and cars. So, high inflation, sustained over time, generally affects the weakest economic classes and young people, who generally have an endemically low professional income or salary structure for the times that I may have lived.
With regard to interest rates, since they affect the real estate market, basically in the cost of financing. In recent years, the culture of formalizing mortgages has changed because many have been made, most of them fixed-rate mortgages, so now these families are calm, but we have a variable-rate mortgage portfolio that is still in the majority.
We had been living in a mortgage oasis for a few years, that is, with a negative Euribor and with debt and financing capacities where the money was almost given away, which is another reason that has helped the market in these post-pandemic years to been very dynamic. Meaning that the money was practically free, now it has become more expensive. I have data from the American economy, which is always more resolute in putting in place measures to get out of problems: the mortgage rate is between 5% and 6% and in this scenario, there has already been a resentment or a drop in the demand. It has not stopped, but it has slowed down. We are now at rates of 2% in Spain, which I think is a very reasonable rate. At last, the bank is beginning to be able to have financial margins, but inevitably the one who was paying 100 before now may have to pay 150 or 200.
How long does it take on average to convert a non-finalist floor into a finalist?
The supply of land, which is the raw material we are talking about, that is, in the production of houses, is something very delicate because it requires cooking, that is, a preparation that has technical and urban components. So, there are examples for all tastes. On average, we could say that we can be talking between three and five years for a land that qualifies as developable at a given time, to be suitable for applying for a license. That would be the floor that we call finalist. There are extreme cases. We have, for example, in Pozuelo de Alarcón (Madrid), a sector that has been known for many years, ARPO, which has been cooking for more than ten years and there are others that come out easier when sometimes the technical or urban components are easier.
The promoters do not hire market studies, new construction projects are being held back, what is happening?
In this scenario of so much uncertainty where we said that the cost of land has increased, that the cost of construction is very high, very high and is also unstable over time, because to promote you have to be brave, because if you go with the very tight numbers, which is normal, you have eaten the margin.
As much as we want to stretch prices so that business plans fit, there comes a time when the buyer of that project has limited purchasing power. They are not infinite. We already know cases where this has been generated. It has been released to the market with prices that fit the promoter, but extremely high, and the market has said no. It is another reason why projects are being withdrawn from the market. They evaluate and if it doesn’t work, they withdraw.
Who has done the exercise of optioning the land, which is a common formula, gambling a little money to see if there is a commercial response, because he loses the value of the purchase option, but he does not put himself at risk anymore because it will not function. It happened recently and I give an example in Madrid, in Sanchinarro, which is a well-known neighbourhood. Here there has been a project that has cost 6,000 euros per m2 and there has been no response from potential buyers.
So, the promotion is not carried out because the demand is not able to pay the prices offered?
Those prices that the developer is telling you about are the result of expensive land, a very high construction cost that leads him, if he wants to keep his structure of margins intact, to an unusually high sale price and the market there are times when that says enough: and I’m here or I don’t get there or I don’t want to pay this price for this house.
How do you think this is going to play out? Because there are signs that construction prices are going to drop
With regard to the expectations of construction costs, the latest information that I have, speaking with clients, is that construction prices are stabilized at a very high level, but it seems that the fears of new increases are already receding a little and therefore as much as they change your step in the middle of the game, which is what does the most damage. Because you can now make a feasibility plan based on a cost of land, you get a margin and a sale price and if the market puts up with it very well, your business is guaranteed. But. But I think that right now, in that sense, the expectations are those. In addition, it is detected that there are raw materials that are already falling in price.
Although transport is still expensive due to all the geopolitical conflicts, the situations that have occurred in China, that exist in certain seas.
To promote you have to be brave, because if you go with very tight numbers, which is normal, you have eaten the margin
What happens if there is an increase in the cost of raw materials during the construction of the houses? Is the increase transferred to the final buyer?
In a promotion, no. You as a buyer have a closed price that goes to mass. Another thing that at a certain moment the promoter says, well look, I resolve the contracts, pay the compensation that comes in the contracts or the penalties and I withdraw. That is not normally done because it also has a very great reputational damage, taking into account that the main operators are also listed companies, large funds, which I think would do them a lot of damage. What is being done is trying to change the construction company, but you are not guaranteed that they will give you a new price, renegotiation and it goes against the margins of the developer itself.
Where is the newest construction being developed right now in Spain?
The places where the newest construction is being developed in Spain are those that have a greater dynamism in demand, which are cities with an economic activity, be it industrial, service or tourist, that make that Spain that is emptying into a houses are left over and in other places they are missing because the demand moves there. Generally, demand for young, well-qualified people. A pity for the places from which they leave and for the places where they come, because there they hope to be able to develop their vital project.
What is the buyer profile of the new construction for sale?
The new-build buyer profile of the few new-builds that we have had for some time and have now is a repository profile, that is, they are families who have their home, who can monetize it and take a leap based on a Until now, cheap debt and getting the house they want, because they have realized that life is very short and that they have to enjoy it and that they want to live better.
Do young people rent housing because they want to or because they cannot buy?
I think we all see buying as an investment and renting as an expense. So, I think that mostly the trend is to buy. Then they are forced to rent, despite their will.
Owning a home, whether you are young, mature or older, is that you generate a patrimonial element, that is, you have a saving discipline that you transform into a patrimony that at a certain moment can allow you to improve your housing levels because your life has prosperous or that you can reach retirement, where you have a home where you can enjoy your last days peacefully because at that age you already have the mortgage paid off or there are even formulas to monetize that heritage and be able to have a mattress to enjoy your final days.
Potential home buyers have never before been better informed when they go to see the commercial at the point of sale and before being shown the qualities and solving a series of doubts
What about the sale of NPL? Has the sale of mortgaged property packages been paralyzed?
No, no, there are still sales. What happens is that this situation of uncertainty, not only in the national territory, but at a European level, at an American level, makes new investment inflows more prudent. We are finding that the fashionable phrase of recent months in the investment environment is “wait and see” which literally means “we are going to wait a bit and see how this evolves”.
Is the sale of second homes still on the rise?
The second home has been a real estate typology that has been very dynamic for the same reasons as the first home. Teleworking has configured or has been part of the configuration change in the way of living in houses. And furthermore, speaking of second homes and the offer that a country like Spain has from the tourist point of view, this has been extended not only to the national market, but also to the international market. So up to now there has been a very dynamic market for second homes and what’s more, in recent months, unfortunately, as a result of the war in Ukraine, we have noticed an increase in applicants from neighbouring countries, such as Poland, Slovenia, Slovakia.
And in what area do they usually look at a home?
Where we have verified it directly has been in the Canary Islands, but we know that it is also operational on the Costa del Sol, in Cota Brava and Alicante.
How has the pandemic changed the way of selling a house?
What the pandemic has caused is the consolidation of what was already in the making, which is the online world. In our case, approximately 30% of the contacts generated are online, but in the end the way of marketing remains the same. In the end, the online world has to connect with the physical world and there, with rare exceptions, the sale is closed in the physical world. What has been gained a great deal is in the generation of contacts and in the transmission of information to interested people, which right now is remarkable. In other words, potential home buyers have never before been better informed when going to see the salesperson at the point of sale, before being shown the qualities and solving a series of doubts. That is, when an interested person goes to a physical point of sale, he has already done a lot of homework for all the information that is previously provided.
Are houses easier to sell now than before thanks to technology such as virtual home staging or video visits?
With all the development of modern technologies, in the end the common denominator is that a project that does not exist, what you have to do is to give the interested person the greatest facilities so that their imagination arrives as soon as possible at what that project is going to be like as the future home. So, to the extent that this is achieved and there has been a particularly important technological development in this regard, since all of this facilitates the entire sales process and at the same time makes it more competitive, because in the end the key to competition in marketing It is no longer having that technique, but not having it. Why? Because in the end it is a competitive element that has already become common, and that deterioration is not having it.
Is it a good time to buy a house or is it better to wait?
When you have the need to move in, to create a family, to create an independent home, you have to do it because that is the most important thing and also because your home is where you are going to carry out your family life and you are going to enjoy it. So the moment of the market does not matter a bit, you have the need, which is the priority. It is true that you have to be prudent and that you have to be able to buy something that you can pay for, although the bank will take care of reminding you. If the motivation for your purchase is a second-needy home, such as a tourist home, or if it is a reason for investment and there are certain threats on the market, it might be best to follow them closely and see how things evolve, especially to see what path they follow: if we are going to get worse, if we are going to stabilize or if, as Brussels says, Spain at the end of 2023 is going to have an inflation of 3.4. And that is my positive note for today.
Source: idealista.com
