Mallorca Property Market Update December 2009 - Beware of over priced property in Mallorca

Dec. 18, 2009 - PRLog -- It is always interesting to read the views, news and opinion of those operating in any particular market place, in this case, the Mallorca property market. This is especially the case when the views and news seem to be ever contrasting!

Only a couple of months ago one major agent in the South West of Mallorca, Calvia in particular, spoke about how the luxury end of the market, far from riding out the storm as so many had been maintaining (irrationally in my opinion!) was indeed suffering the same problems as the wider economy and market, with falls in asking prices of 30% or 40% (ie in line with general Mallorca property market adjustments).

Now, courtesy of another "big name" Mallorca agent we are reliably told that the "prime property market" in Mallorca, and specifically the South West where much of this market is concentrated, is in fact doing very well thank you very much! On top of this we have market reports from the big valuation companies like Tinsa that seem to tow the middle line ie things are still bad but improving (or not getting worse to be more accurate!).

So what is really happening and more importantly what are behind these headlines and what does it mean for potential buyers and sellers of Mallorca real estate? The short answer is they are probably all correct but the reality and facts get lost behind headline and the vested interests of the writter. As I have maintained for a long time underlying property values, across the board, have been falling even if "asking prices" have remained, in many cases, stubbornly high.

The result? Initially few appropriatly priced properties and, unsurprisingly, few buyers. This was followed by an increasing number of better priced properties (ie properties where asking prices had been adjusted in line with underlying values) and more buyers chasing these new properties offering "value for money". Agent "one" told us many properties had seen their asking prices reduced by 30 - 40% and that is correct - they are commenting on the properties where the owners have recognised that the only way they can sell is by reducing their sales prices. It is an interesting factor that many of these vendors are British / Sterling denominated and thus can see a currency angle on the sale which allows them to reduce their asking prices while actually taking home (back to the UK) the same as they would have 12-18 months ago when Sterling was 30 - 40% stronger. I wonder whether they would have done this had Sterling not dipped so strongly!

The reality is strong Sterling or Weak Sterling is not really the issue. What is, is that the market has fallen and asking prices must reflect that if a property is to sell or, very importantly for buyers, the price paid is not to be too high (an expensive mistake indeed in this market especially when you add on the costs of purchase of over 10%, which you are always going to need to pay, and thus impact on the "book cost" of the property - the total cost of purchase. It may take many years for the market value to equal or exceed this "book cost" where over paying in a weak market*.

Agent two is commenting on the same situation but putting the typical agent spin of "the market has turned so get in quick if you want to get a bargain"! To be fair it could be argued that the ability and willingness of British vendors to cut their Euro asking prices and negotiate reduced price sales may be less in the future if, as some anticipate, Sterling gathers ground against the Euro in 2010. Beyond that however don't feel the need to rush as the fundamentals of the market are still on the weakside and, in my opinion, prices will bump along the bottom for some little time yet. In many respects I expect at least some of the headlines to express the view that values are still falling, where statistics are based on "asking prices", as many still remain artifically high, out of line with underlying values, and thus in need of downward adjustment. That does not mean that values are falling just artificially high asking prices.

This does however highlight the importance of taking good advice when buying so that you do not purchase one of the overly priced properties or, if you do, you have negotiated an appropriate discount first.

In summary my opinion is as follows:

Mallorca property "values" are at or very near the bottom of the cycle.
A very significant % of the market - probably at least 50% is significantly over valued ie the current asking prices are not in line with underlying values. Dependent on each individual case these properties are unlikely to sell unless their prices are reduced by 20 - 40%. Although this % is falling I expect this to weigh heavily on the market in terms of sentiment.
Properties purchased at market value will offer buyers a good opportunity to invest for the long term in a market that still has good fundamentals when viewed generally and with a medium - long term horizon (controlled supply side and strong demand from lifestyle purchasers).
Expect capital growth to be very limited in the near term but the downside risk of capital erosion, through further market price reductions, limited.
Properties purchased now at some of the inflated asking prices will have significant downside risks. Losses of 20% - 40% are a real possibilty.
For further information and advice regarding how Novi Property Mallorca and Mallorca Chartered Surveyors can assist buyers to find, negotiate and purchase real estate in Mallorca at the best price, please contact David Novi at info@novipropertymallorca.com or info@mallorcacharteredsurveyors.com

*Note: When you buy a property at market value your "book cost" ie the full cost to you, is the purchase price plus costs (say10%). If the market rises by 5% pa (ignoring inflation) it will take 2 years (aproximately) before the market value equals what was paid. If the buyer over pays by say 20% and we add in the buying costs of 10%, it will take between 5 and 6 years for the value to reach what was paid!

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