Irea’s Warning: Carmena’s Policies Will Drive Up House Prices

29 March 2016 – El Economista

The shortage of land in Madrid and the blocks against several major urban development projects have brought a familiar face back to the Spanish capital, in the form of: speculation. This situation has not gone unnoticed by the opportunistic funds, who have unpacked their bags as they plan to stay in Spain for a while.

According to Mikel Echavarran, the CEO of the real estate consultancy Irea, “within a couple of years, we are going to have a serious problem in terms of the availability of good land in Madrid for the development of homes and, therefore, we can expect to see inflation”.

As well as the shortage of land, we are also seeing blocks imposed against most of the major urban planning developments in the capital. “These projects still require a push and the Town Hall is not up to the job”, says the CEO, who warns that with its new policies, the Town Hall led by Manuela Carmena (Ahora Madrid) “is going to cause exactly the opposite of what it seeks; house prices are going to increase”. Echavarran forecasts that developable land prices will rise “by at least 10% over the next two years, and in some cases by even more”.

Some players are already speculating

“Housing developments inside the M30 are almost anecdotal” and the funds are aware of this situation, which is why some are already speculating with land, although not in an obvious way. “They have purchased land to develop some of it and sell the rest”, explains Echavarren.

That was a common practice during the boom years. Developers used to buy up large plots of land, develop one phase and wait for that phase to push up the value of the remaining land. With the sale of that remaining land alone, they would recover all of their investment.

According to the CEO, another tactic being employed in the development sector is the purchase of office buildings for conversion into residential use. “Financing is available for end buyers with very good conditions and also to developers looking to convert properties into homes for buyers of a certain level”.

And it is not only changes of use that are being financed, developments themselves are also being funded. “If you purchase land, the bank will only give you financing when you have received sufficient pre-sales, normally around 30%”, explains the CEO of Irea. “Once you have made the 30% pre-sales, the bank gives you 100% of what you have left and may even lend you up to 50% of the cost of the land. As such, you are really well funded, for between 60% and 75% of the final sales price”, says Echavarren, who adds “if I were managing an opportunistic fund, I would recommend buying land in Madrid”.

Original story: El Economista (by Alba Brualla)

Translation: Carmel Drake