RESIDENTIAL RESEARCH

MADRID NEW BUILD 2016

SUPPLY | PRICES | DEMAND | OUTLOOK DEMAND CONTINUES TO OUTSTRIP SUPPLY IN THE RESIDENTIAL MARKET

SUPPLY The new-build market is now clearly on the up. Future supply has increased considerably, but is still PRICES not high enough to meet current demand. This has DEMAND helped to finally absorb the new-build supply that had been dragging its heels and had been on the INVESTMENT market for some years.

This change in trend has also affected increased for the third year running. 2015 developer activity. 2015 saw an 8% fall in saw a 68% y-o-y increase, which will Last year saw the owner and co-operative development, in translate into future transactions between sale of a great favour of more traditional development. 2017-2018. Despite the fact that this is still a However, developers remain cautious, somewhat subdued figure, the outlook deal of stock that trying to find a happy medium that is that this figure will continue to recover allows them to optimise sales prices, had been on the going forward, as and when financing for while also marketing them in reasonable developers becomes more flexible. market for many timeframes. Prices continue to trend upwards, though Available supply in stands at years. growth this year has generally been more circa 3,000 homes. 30% of these are moderate than last year. This is a direct located inside the M-30, where supply is limited due to a lack of development consequence of Supply is on the up, but land. 25% of available supply in this the lack of new is still insufficient to meet area are refurbished properties, while the demand remaining 75% are new-build projects. supply Although future supply of new-build 20% of properties on the market are properties increased over 2015, there located in the area between the M-30 continues to be insufficient supply in and M-40, while the remaining 50% of order to meet current buyer demand. The total available supply is primarily located number of building permit approvals has in the PAUs (expansion areas in the

FIGURE 1 New-build residential building permit approvals Madrid

BUILDING PERMIT APPROVALS END OF WORKS Y-O-Y VARIATION

7.081 % 6.253 6.193 27 6.068 5.698 4.184 4.139 5.299

4.120 68% 3.105 3.196 3.393

2010 2011 2012 2013 2014 2015

Source: Munimadrid/Madrid Municipio

2 FIGURE 2 New build housing supply in Madrid

HACER MAPA Montecarmelo Las 0% Tablas 1%

Arroyofresno 2% Sanchinarro 1% Valdebebas 21% Fuencarral 3% Tetuán 1% 3% 2% 2% Moncloa Chamartín 2% 8%

San Blas Chamberí Ciudad M-40 M-30 5% 1% 3% Lineal 2% 5% 1% 0% Vicálvaro Cañaveral 0% 3% 20% 1% Puente de 1% Vallecas Carabanchel 2% PAU 0% Villa de 1% Vallecas Vallecas 2% PAU 5% Municipio de Madrid 4%

COMUNIDAD DE MADRID

Source: Knight Frank

city suburbs). The number of properties Another change in trend noted in the 15% y-o-y. This property type accounts available in PAUs has dropped by 12% report is the number of new-build for 53% of all available supply. y-o-y, which shows that there has been projects in progress in the cooperative a good level of take-up in these areas as market. This currently stands at 20% of Prices continue to trend they continue to consolidate. the total, which is an 8% y-o-y decline. upwards This figure is confirmation that the market Average take-up last year stood at 37% Sales prices are performing well in is normalising towards a greater balance of total supply. Perhaps most significant central Madrid and are trending slightly between supply from developers and was the sale of stock which had been upwards. The average sales price inside other players. dragging its heels and had been on the the M-30 has increased by 2% since market for many years. This is a direct In terms of the types of home on offer, 3 last year. At the same time, the average result of the aforementioned lack of bedroom properties continue to dominate sales price per sqm outside of Tier 1 has new supply. the market and increased in number by grown by just 1%.

3 Inside of the M-30, the Chamberí and The number of new-build transactions FIGURE 4 Salamanca districts registered the largest increased by 15% compared to 2014. Percentage change in prices increases in sales prices, with 5% and Forecasts also remain positive for €/sqm (%) 4% respectively, while Chamartín and the next few years, in part due to the Outside M-30 Moncloa have remained flat year-on-year. increase in building permit approvals. 73% of transactions signed in 2015 were PAU VALLECAS 0% Outside of the M-30, we would highlight off-plan purchases, which demonstrates the increase in the average price per PAU CAÑAVERAL 0% buyer confidence in projects under sqm in locations such as Montecarmelo PAU SAN BLAS 0% construction. The remaining 27% related and Aravaca - 8% and 7% respectively to turn-key homes, a 9% y-o-y increase. PAU VALDEBEBAS -1% - and Hortaleza in third place, with a 6% increase. It is worth noting that in terms of demand PAU SANCHINARRO 0% by area, PAUs are out in front with 48%. PAU MONTECARMELO 8% Valdebebas has not seen any major Valdebebas stands out with 20%, and changes and and San PAU LAS TABLAS -1% Ensanche de Vallecas with 10%, partly Blas are the only areas which have seen PAU ARROYOFRESNO -3% due to the amount of more affordable a 1% decrease. homes in the area. PAU CARABANCHEL 0% VILLAVERDE -4% PAUs lead the way Areas inside the M-30 account for 23% of demand. The most sought after 0% Demand, which was already showing districts were Tetuán (6%), followed VICÁLVARO 0% signs of a change in tack in 2014, has by the Centre and Chamberí (4%) and continued to grow for a number of BARAJAS 3% Salamanca (3%) districts. reasons: confidence in the improved USERA -1% economy and the future job market, The tier between the M-30 and M-40 SAN BLAS -1% and the drop in interest rates and ranked third accounting for 18% and improved financing terms and conditions. finally the districts outside the M-40, PUENTE DE VALLECAS -1% In addition, the poor performance of which accounted for 11% of all demand. MORATALAZ 0% traditional financial products such as The buyer profile continues to be LATINA 3% deposits and bonds has encouraged primarily families with medium to 6% investors to acquire property as safe HORTALEZA high purchasing power, looking for a haven assets. FUENCARRAL 0% replacement home located in areas According to the Consumer Confidence with good levels of services and 2% Index, early 2016 saw consumer and good transport links, in well designed CARABANCHEL 3% business confidence in the Spanish homes with good finishings, in gated ARAVACA 7% economy reach levels not seen since developments with communal areas. March 2011. Fuente: Knight Frank

FIGURE 3 FIGURE 5 Supply by type of home (%) Percentage change in prices. €/sqm (%) Inside M-30

ESTUDIO 1 BED 2 BED. 3 BED. 4 BED. 5 BED.

TETUÁN 3% 2% 1% 1% 4% 4% 4% 3% 2% 5% 7% 5% 11% SALAMANCA 4% 13% 13% 14% 13% 24% 18% RETIRO 1% 30% 39% 38% 36% 36% 38% 39% MONCLOA 1%

41% 53% CHAMBERÍ 5%

47% 43% 46% 23% 30% 26% 28% CHAMARTÍN -3% 22% 16% 19% 17% CENTRO 3% 14% 22% 11% 10% 9% 9% 6% 2% 2% 7% ARGANZUELA 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Knight Frank Source: Knight Frank

4 The most sought after product is 3 Madrid is the most sought after area for bedroom homes within the €230,00 and investors in search of residential product, €450,000 price range located in PAUs accounting for 19% of all investment. or suburban areas. Property prices rise Andalusia, the Community of significantly the closer one gets to the and Catalonia follow with 16%, 15% and Investment in land city centre, up to 167% inside the M-30. 14% respectively. and residential The existing relationship between However, investor profiles have shifted: mortgage rates versus residential rents the traditional investor remains; financing properties means that many buyers contemplate structures are designed using private investing in property either for their own funds for residential development with exceeded all use or to buy to let. local managers while private equity firms and family offices are becoming expectations, Residential investment: more prominent in residential investment reaching €800 and development. This has caused an Madrid is out in front influx of overseas capital for residential million in 2015, development at a time when financial The market for new-build open-market equivalent to institutions continue to offer only modest homes in Madrid is worth €8,000 million. financing for purchasing land and This figure is 23% higher than in the 5,000 homes. residential development offers greater previous year for two reasons: the returns on investment than that offered increase in supply and upward trend in by income-producing properties. prices. Both factors clearly indicate that the market is recovering well. Investors continue to purchase schemes located in the city centre, mainly Investment in the new-build residential buildings that require refurbishment. In market in 2015 exceeded expectations, 2015, properties accounted for 19% of surpassing €800 million. This includes total investment, whereas land accounted the acquisition of land and properties for for 81%. refurbishment for the development and marketing of new open-market homes in One can see that for land available in Madrid. This equates to approximately specific areas, with a high number of 4,500 - 5,000 homes that will come onto homes per project, it is the cooperative the market in the next 18-24 months. managers that are meeting land owners’

FIGURE 6 Demand ranking by area

Source: Knight Frank

1ST ND PAUs 2 RD INSIDE M-30 3 48% BETWEEN M-30/M-40 TH 23% 4 18% OUTSIDE M-40 +DEMAND VALDEBEBAS 20% TETUÁN 6% ARAVACA 5% 11% E. VALLECAS 10% CENTRO 4% FUENCARRAL 4% CAÑAVERAL 7% CHAMBERÍ 4% P.VALLECAS 3% VILLAVERDE 8%

ARROYOFRESNO 4% SALAMANCA 3% SAN BLAS 3% CARABANCHEL 3% ARGANZUELA 2% C.LINEAL 1% BARAJAS 2% LAS TABLAS 3% MONCLOA 2% CARABANCHEL 1% V.VALLECAS 1%

SANCHINARRO 1% CHAMARTÍN 1% HORTALEZA 1% MONTECARMELO 0% RETIRO 1% LATINA 0% SAN BLAS 0% USERA 0% VICÁLVARO 0% - DEMAND MORATALAZ 0%

5 expectations, in exchange for flexibility on FIGURE 7 Positive outlook, but on Evolution of transactions the purchasing timeframes for the plot of stand by due to political Madrid land and mitigating the commercial risk of uncertainty the project. NO. OF TRANSACTIONS BUILDING PERMIT The political uncertainty in , along APPROVALS Residential financing with a politically unstable backdrop, has 14.618 Y-O-Y put a dampener on forecasts for this year. VARIATION For the first time since records began, Euribor rates are negative (-0.025%), There will be a moderate increase in 11.307 which has caused a drop in mortgage supply of new-build homes, despite the rates. According to the Bank of Spain, fact that the current rate of production interest rates directly linked to Euribor stands below acceptable levels. 68% 5.698 dropped considerably to 2.2% in 2015. Production levels will remain stable thanks to investments made by the main market 3.393 This makes it easier for households to 3.096 players and will not create an imbalance acquire financing. However, variable 2.698 between supply and demand. 15% interest rates affect the distribution and perception of risk and can affect the Prices per sqm will continue to increase 2007 08 09 10 11 12 13 14 2015 financial stability of both families and for new-build properties, although more businesses. moderately, due to the considerable Source: Spanish Development Ministry Banks are targeting mid-to high-end increase in land prices. This growth will clients, who have easier access to funds be more marked in the prime districts and to purchase a property, meaning there is a their immediate surrounding areas, while FIGURE 8 lower risk of default. Variable interest rates prices will remain stable in PAUs, where Transactions completed can cause banks to make incorrect risk there is still available development land. assessments. While demand has been active in the The average deposit (effort rate) in order last few months, it could slowdown until 27% to purchase a property currently stands after the results of the coming elections. at 33% of the final sales price, this is the Nevertheless, provided that the outcome best figure on record. of the elections does not result in extreme +9% changes to government, demand should In addition, financial institutions have grow in line with employment, provided that 73% begun to lend again, financing an average there are no unexpected interest rate hikes. of 70% of the final sales price. Investment will continue to increase for Hence, 2015 saw the number of mortgage schemes situated in good locations, with approvals increase by 20% y-o-y. WORKS IN PROGRESS attractive mid to long-term returns.

COMPLETED

VARIATION COMPARED TO 2014

Source: Knight Frank

FIGURE 9 FIGURE 10 Investment in open-market va Effort rate to purchase a home (%)

19% 61% 58% 28% 53%

43% 44% 41% 42% 41% 16% 37% 36% 35% 8% 33%

14% 15%

MADRID CATALUÑA ANDALUCÍA P. VASCO

VALENCIA REST OF ESPAÑA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Spanish Development Ministry Source: Bank of Spain

6 TRIBUNA

The world economy continues to back Spain

Though growth in Spain is expected extent, the introduction of various to slow in the coming years, lowering budgetary measures. the strong position it currently holds in the Eurozone, and the unemployment In terms of the job market, the increase rate remains high at around 20%, it in the number of workers affiliated continues to drive growth. This year to Social Security suggests that Spain will be the developed economy employment levels will continue to with the highest growth this year, even grow as in 2015. There has been a ahead of the United States. GDP will considerable fall in the unemployment increase by 2.7%. And although the IMF rate in , where it has reduced its growth forecasts for all currently stands at 16.5%. the main economies, Spain has seen the lowest adjustments, just one tenth of a In terms of prices, the CPI is expected per cent. It is worth noting that private to fall to 0.1% in 2016. The first months consumption and residential construction of the year have seen the CPI return to It appears that the global economic are the two areas in which the greatest negative year-on-year levels. slowdown is now a fact. The IMF growth is forecast. has been forced to cut world growth The Euribor is at an all time low, the forecasts by two tenths of a per cent Nevertheless, political uncertainty Consumer Price Index and inflation have for 2016, leaving them at 3.2%. We continues to cast a shadow over Spain’s remained flat and the unchanging market are faced with a backdrop of volatile future. This is one of the factors of most activity rate in 2015, all contribute to a financial markets and somewhat lethargic concern to the IMF, in particular if this scenario that supports the continued international trade. situation continues to drag out over time. recovery of the residential market in the medium-term. The oil crisis is directly affecting Madrid grew by 3.4% in 2015, with the emerging markets and their growth, service sector being one of the main deepening recessions such as that of drivers, in which there was increased job Brazil, which could have a knock-on creation, while the construction sector Ernesto Tarazona effect on the rest of Latin America. also saw a considerable improvement Partner, Head of Residential & Land The economic slowdown in China has growing by more than 4%. [email protected] unnerved the rest of the world and, +34 600 919 065 though it has recently improved slightly, The improvement in GDP has been the halt in consumption is worrying. driven by good household and business spending, which has, among other Meanwhile, in the Eurozone these factors, improved financial terms and concerns appear to have further affected conditions. Household income the outlook of emerging economies. The in particular has been financial instability seen at the beginning bolstered by the fall of the year and the economic information in oil prices, the at hand, point to lower growth for the increase in first quarter than previously forecast a employment few months ago. and, to a lesser The outlook in the medium term seems to indicate a gradual recovery, with monetary policy continuing to show signs of expanding. In addition, the recent worsening of the international geopolitical scenario and the increase in uncertainty of the changes to the Eurozone economy suggest that these forecasts could be subject to a downturn.

7 RESEARCH

Ernesto Tarazona Partner - Head of Residential & Land [email protected] +34 600 919 065

Nuria Serranos Deputy Director Residential & Land [email protected] +34 600 919 056

Davinia Benito Research Residential & Land [email protected] +34 600 919 087

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