Investing in tourist real estate in Spain: risks and opportunities

Investing in tourist real estate in Spain: risks and opportunities

At the moment, the tourism sector in Spain has dropped significantly.

The coronavirus pandemic has drastically reduced the influx of foreign tourists over the past year and a half. This then resulted in an imbalance in the supply and demand in this sector. Moreover, restrictions within the country have further affected this imbalance, which is why domestic tourism has declined considerably in the country.

This and other activities in the economy have all led to a decrease in prices in tourist real estate. What’s more, this price reduction allows people to enter the market profitably, purchasing more for less money. However, the question is not how many properties one can purchase. The question is how much of a return can buyers make on this and how high are the risks.

So these are some of the questions that we’ll be looking at and trying to resolve in this article.

Content:

Investment in tourist real estate — what there is and what to expect

Before COVID-19, Spain was the fourth most popular tourist destination in the world. The country still plays a leading role in the ratings where this is concerned, despite the deteriorating situation in 2020-2021.

In 2019, the total foreign direct investment in the real estate market was reported to be 18.7% of the total number of investments in the Spanish economy. What’s more, the tourism sector owned a great deal of these investments.

In 2020, the size of these investments decreased and barely exceeded 5.1%.

For 2021, it’s still too early to judge this situation. For now, all we can do is study the data on the growth of direct investment in the sector, which is currently at 10%.

Many tourists and investors that visit Spain come from the UK, Ireland, and Nordic countries. Although, in the last year and a half, Chinese investors have also become interested in the market.

Let’s not forget about the residents of Morocco and the regions of North Africa.

In light of all of this, it’s necessary to monitor the national structure of tourists. Especially, since in Spain, these factors affect where tourists want to go and what type of property they prefer to rent or purchase.

For example, the British typically go for semi-detached houses, villas, and apartments.

Spaniards, on the other hand, prefer housing that’s more communal in design – for a group of people.

General introductory remarks

Firstly, it’s necessary to focus on the current situation regarding hotels. Particularly, since the pandemic has changed the psychology of people where public places.

For instance, buyers prefer not to contact strangers. This, in turn, encourages them to change their preferences in the real estate sector.

So most of the tourist real estate, such as hotels, is currently experience a drop in demand, as tourists prefer to rent their housing.

Furthermore, other investors in the country are more interested in purchasing spacious real estate due to low interest rates (up to 3-4%) on mortgage loans and the ability to cover up to 80% of the purchase price with a loan.

This kind of credit climate also encourages tourists who often visit Spain to think about purchase a small-sized vacation property, but not their own permanent home.

Currently, the sector of traditional tourist real estate does not meet the needs of buyers' demand and is declining in the country. Conversely, the property rental sector is growing and an increasing number of people are thinking about purchasing a permanent apartment here while prices are still low and various other payment methods are available.

Investors should be aware that each of the 17 regions of Spain has real estate market rules, a list of available properties, and a national composition of demand.

As a result of this, the central cities are becoming excellent places for the development of the condo market. In the northeast of the country, secluded rural estates such as Masias are popular amongst buyers. Especially, since they provide one an opportunity to immerse oneself into the Spanish way of life. Also, the mountainous regions of the country's south attract tourists to spend some time vacationing in the ancient cave houses.

A great deal of real estate in Spain is communal. For instance, semi-detached houses, quad houses, rowhouses, developments, and so on, are all popular amongst buyers in the country. What’s more, apartments are currently being built for people who prefer to be part of the community of residents, rather than purchasing a high-quality house.

Collectivism plays an important role in the culture of Spain, and this does affect the real estate in the country.

Speaking about housing in coastal tourist areas, developers only began building most of these in the last century. So the closer the property is to the coast, the older it is. Although, this doesn’t act as a deterrent to buyers as they continue to actively pursue such purchases.

Often, housing near the coast, regardless of its age and maintenance costs, doesn’t enter the real estate market, as the demand is high. So people tend to purchase any affordable apartment the moment it becomes available.

Also, as far as the prices are concerned, they are low for tourist properties due to the imbalance of supply and demand. Furthermore, when comparing the tourism figures of 2019 and 2020, it was found to have declined by 80%. In 2021, however, the tourism sector recovered from the crisis with an oversupply in the market.

Interestingly, both the state and pan-European institutions are also investing in this sector. More specifically, they have already invested more than 4 billion euros in hotels and resorts in Spain.

In addition to this, travel companies have received more than 17 billion euros from the state.

It’s worth noting, that there aren’t many investors in the market who are interested in purchasing hotel housing. Despite this, still expect that they will get discounts of 15% of the market value of a property. Currently, this is a complex requirement for the industry.

It is more likely that by the end of the year, most investors interested in this real estate sector will choose other sectors. However, there will be some hotels and resorts that will not be able to meet their requests.

So given the tourism industry, which contributes to an increase in the number of visitors to the country, analysts expect there to be an increase in the number of people by up to 60%, by the end of 2021 (compared to 2019).

Investing in tourist real estate in Spain: risks and opportunities

Current investment situation

Let's take a closer look at the current situation and future predictions for the market.

Investment opportunities in Spain

The tourism industry has presented us with an extremely positive summer season.

During this time, the domestic tourism sector was in high demand. Also, while foreigners might not yet be ready to go abroad and take international trips, there is some gradual growth in this sector.

So despite the geographical imbalance and the hotel real estate sector through a hard time, some hotels have still managed to achieve amounts that exceed previous ones, since before the 2019 pandemic.

Such hotels reported room occupancy of 55% and 60% in July and August, respectively.

European countries, especially the United Kingdom, provided most of the tourist flow into Spain. However, travel bans to Spain have been introduced in these countries over the past year and a half due to the COVID-19.

Plus, the UK, Germany, and France have also imposed strict restrictions that have hit the market hard.

However, in recent months, restrictions have begun to reduce due to the successful vaccination program in Spain. Additionally, 70% of the population has already been vaccinated in the country.

So the market is falling in some sectors and regions and growing significantly in others. This situation is risky, but the market has projections in place, along with accumulated growth potential.

Consequently, while most investors are acting cautiously and avoiding investments in the Spanish tourism sector, some are trying to occupy a low-competitive market.

One such investor is Yavuz Yukselir, Chairman of the Board of Directors of Yukselir Group.

As of January 2021, his company has invested more than 1.5 billion euros (approximately $1.75 billion) into the Spanish tourism sector/real estate market. What’s more, he continues to invest in Spain, occupying all the empty spots before other players decide to return to the market.

Yukselir admits that these actions are associated with high risk. But such a risk will allow him to take a leading position in the market in the future and earn more from investors’ increased demands.

Although, the assessment of opportunities depends on Spain’s housing market forecast.

Comparing the current data/figures on the influx of tourists to Spain’s 2019 data/figures, the number of people decreased by 57%. What’s more, the amount of money spent by tourists also decreased by more than 50%.

On the other hand, comparing 2021 with 2020, the number of new tourists increased by 78.3.

For example, the influx of French tourists increased by 46.6%, Germans — by 64.5%, Britons — by 46.5%.

So based on this information, the most popular regions still visiting Spain are north-eastern Catalonia and the Balearic Islands.

Furthermore, the amount of money spent increased by 112% compared to the summer of 2020 and amounted to $6.1 billion.

There is a positive change in the sector that started happening back in June 2021. Moreover, Spain has allowed many people with vaccination documents to stay in the country, while the US government has also approved flights to Spain.

It is reasonable to talk about the strong recovery growth of the sector and positive predictions in the coming years. Nevertheless, our resolve to achieving this will require careful preparation and taking a risk (or two) on long-term investments.

Risks from investing in Spain

Let's look at what risks an investor may face when deciding to invest in this recovering sector, while the competition is low in the market.

The first risk that we’ll be looking at is the COVID-19 virus. Currently, these are new strains of the virus that we’re experiencing. For example, the Indian delta. Also, it’s difficult to imagine if or when an outbreak of a dangerous strain can hit Spain. Especially, since this would most likely lead to the introduction of aggressive restrictive measures on international movements, particularly in Europe.

As with any investment today though, new pandemic outbreaks take precedence over any attempts to invest in the economies of tourist countries.

This can be seen in the demand for real estate in Spain, which has decreased due to the reduction in the influx of foreigners. This situation has also led to a decrease in housing prices.

However, rental rates, even during the pandemic, are still high. It’s been growing since 2015 and is 41% higher than it was 6 years ago.

Tourists don’t want to stay in hotels and prefer to rent housing. This situation leads to an increase in rental rates since the demand for housing in the market is now competitive.

Now is the most suitable time for investors to enter the market because it’s profitable due to low real estate prices. So, despite all of this, one can say with absolute certainty that rental rates are still impressive.

Of course, there are no guarantees that tourists will not refuse to rent hotels and resort real estate to engage in expensive rentals.

This has already happened with the luxury property sector. An excellent example to look at is Ibiza, where 40% of residential real estate consists of elite and ultra-elite houses. However, buyers are not able to afford such expenses. As a result, one of the most popular tourist destinations consists of almost half of the housing that most buyers cannot and do not want to purchase.

Homebuyers should monitor the imbalances, as it is difficult to determine in which direction the market will turn. At the moment, it is at a crossroads and in a state of uncertainty.

Investing in tourist real estate in Spain: risks and opportunities

Conclusions

Spain's tourism sector, like its real estate, is confusing and unclear.

Also, depending on the predictions, the investor may have different assessments on trends in this sector.

So compared to the pre-pandemic 2019, tourist real estate in Spain is suffering significant losses and this makes it difficult to say when it will return to its previous level of normality and predictability.

On the other hand, compared to 2020, the market is recovering quite nicely.

So as one can see, Spain’s real estate market is suffering various imbalances and quite a bit of uncertainty. This includes hotels, housing resorts, and traditional tourist properties, they’re all experiencing difficulties.

While most buyers' attention is on rental housing, high prices and competitive demand can scare away people from purchasing accommodation in the future. This was exactly what happened with luxury real estate.

Alternatively, there is a property sector that only involves purchasing. It’s developing in the shadow of the rental sector. The favorable credit climate gives one reason to believe that soon it will grow, where buyers and transaction amounts are concerned, and start to outshine the other sectors.

Right now, investors have a good opportunity to enter the low-competitive market and purchase the most promising real estate in Spain. There is proof of such investors and the amounts of their investments exceed billions of dollars.

So while there are no guarantees, there does exist a certain amount of security here in Spain regarding this situation.

It has been reported that the worst for Spain is already over. Subsequently, the next question arises, namely, how actively and successfully will this sector recover in Spain?

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