With a third of the world’s population in confinement due to COVID-19, an increased global appreciation for the safety of home and the change within the way in which mankind learns, works, interacts and values life is taking place. Engel & Völkers has been established on the Balearic Islands since 1990 and now operates 22 property shops, of which 18 are located within Mallorca. Given the fact that the economy on a global level is walking in uncharted territory, we consider it our obligation to provide relevant, solid and updated information on the real estate market in Mallorca and it’s sister Islands Menorca, Ibiza and Formentera.
Looking towards China
The nature of the challenge in the world economy obliges us to first look at the effects of the Coronavirus in China’s economy, before trying to analyse the potential impact in any area of business around the planet. After 55 days of quarantine, China’s transportation came to an almost full stop, hotel occupancy fell by over 90%, car sales plummeted by 92%, however the number of real transactions dropped only 35% during the months of January and February. At the same, 55% of the planned residential projects started their construction and 77% of the constructions managed to finish during this period. The real estate industry has sectorial weight of 14% within the Chinese GDP. It is fair to say that despite lock-down, the activity in this sector of economy was able to sustain at a reduced level.
Role of Real Estate within Balearic Island’s Economy
The Economy of the Balearic Islands is dependent on two sectors which jointly provide over 50% of its GDP: tourism and real estate. According to official records, Since 2005 the real estate sector in the Balearics (construction and real estate activities) has generated over 20% is the islands’ wealth, whilst Tourism is responsible for slightly over 30% of the GDP. In an interesting similarity with the effect the confinement measure to protect population from the COVID-19 virus in China, in Mallorca, Menorca and Ibiza the real estate market is still producing a reduced number of new sales, whilst purchasers are showing no sign of panic by remaining in their contractual commitments.
Performance of Balearic Real Estate Market in Crisis
In these times mankind is looking for health, safety and trust in order to secure well-being. Fortunately, the real estate market in the Balearic Islands excels in all of these areas. Looking back over the average purchase price of real estate in the Balearics, as recorded by the Notaries and published by the Ministry of Infrastructure, prices are surprisingly strong and largely unaffected by the international crisis of the past. In comparison to the volatility in the financial markets, real estate in Mallorca, Ibiza, Menorca and Formentera follows a steady progression providing a safe investment in a tangible object. Interestingly, the recent outbreak of the Coronavirus in China and its negative impact on the stock markets generated a rapid increase in real estate investment recorded by our property shops on the Balearics. Whilst it is undisputed that COVID-19 will lower the amount of transactions taking place within the next months and that this is subsequently going to reduce the overall movement in the real estate market in the region, the historical records of average prices indicate that very little change should be noted in the value of property.
Fluctuation Average Purchase Price Balearic Islands. Red: All Buyers // Grey: Foreign Buyers Only
Comparison Average Purchase Price Balearic Islands Red: All Buyers // Grey: Foreign Buyers Only
Price Drivers in Balearic Real Estate
Despite the fact that the world is undergoing a massive challenge to which we are all rapidly adapting to, the inherent attributes that have solidified the strength of the real estate market in the Balearic Islands are largely unaffected. The superb infrastructure, outstanding natural environment, a cosmopolitan capital city, extremely short supply of empty building land and the aggregated deficit in housing of 16.000 units are still there and will remain unchanged. In addition, the population of the Balearic Islands has risen by over 40% in the past twenty years, whilst the construction of new units could not keep the necessary pace and it is not expected that this trend will suffer a decline over the near future. In respect to overall debt, it is noteworthy, that since the international financial crisis of 2008 the Spanish financial system has been obliged to strengthen itself by reducing exposure to real estate and reducing leverage within households and business. The number of new mortgages registered during the past three years in the Balearic Islands is 75% lower than the mortgages taken in the equivalent time prior to the international finance crisis of 2008 and existing mortgages have been repaid at a rapid pace during the past years of strong economic lift within the Balearic Islands.
Role of the International Purchaser in the Balearics
During the past financial crisis, the Balearic Islands real estate market followed the principle of “last in and first out”. The steady upward movement we have been experiencing in the past years was initially fueled by international purchasers who have kept a share exceeding 40% of the total market volume during the past seven years. Surely the European Economy will also undergo adjustments in order to adapt to a new global situation, but experts are confident that a buyer market of 750 million people will not completely drop away. The Balearic Islands real estate market has very few competitors: its diversity, close travel distances to all European cities, added to the high level of security make this Mediterranean archipielago very unique. It is absolutely unlikely that the European purchaser will decide to purchase a second home in an environment that doesn't fulfill the highest standards in living quality, safety and trust. At the same time, an owner of a second residence in Mallorca, Ibiza, Menorca and Formentera can be congratulated for enjoying a home in a very stable market where in the past there has never been a panic race to sell. Over 80% of the purchases for second homes in the past years have been made in cash. As happened 12 years ago, bargain hunters will once again have a difficult time finding distressed sales in prime locations under these conditions.
Future Development of the Local Market
There is certainly more concern regarding the performance of the local market during the next months. It is unavoidable that the full-stop in the tourism industry will have a negative effect within unemployment rates and that an increased level of economic uncertainty is going to slow down that first home market. However, we must highlight the macroeconomic conditions governing the real estate market in order to understand that this is only transitional and that soon, the local demand of housing will recover, driven by scarcity of supply, increase in population and a tourism industry that will recover. The Balearic Islands are a world leader in tourism, we have great faith in the capability of its companies and Local Authorities to rapidly adjust to the new conditions with the aggregated experience of over 50 years innovating the leisure and travel industry on an international level. In addition, it is imperative to understand the behaviour of an island population towards real estate as a generator and guarantee for wealth. The culture and tradition of the people of the Balearic Islands is to preserve the land that produces crops and keep the apartment or shop that generates rental income, even if this means making an additional effort during a certain period in time.
Construction and Future Development
In fact, all of the large residential real estate projects are moving forward and are not lacking financing in order to do this. The sharp rise in quality within construction on the islands over the past ten years, added to the fact that developers and building companies have made a huge effort in listening to their clients in order to shape attractive and innovative real estate products that cover a very large range of requirements, will secure the value of future constructions. A great level of interaction is performed in order to shape and position these new developments in a product landscape engineered to deliver living solutions to all tastes. This is undoubtedly one of the largest assets of the Balearic Islands: four islands that are so close and at the same time so different to each other and a real estate market with a myriad of options all unique and beautiful in their own style.
A New Era for Nature and Environment
This global wake-up call is going to transform many aspects of life, aspirations and our human responsibility towards the planet. The Balearic Islands have for many years dedicated efforts towards protecting the local environment and its tourism companies, that have presence in many countries and with many thousands of employees around the world, have taken sustainability to the heart of their business. Locally, we are turning strongly towards local, sustainable and responsible action in our actions and consumption. The Balearic Islands have a bright future in setting an example and supporting local producers which are now receiving the deserved interest not only from the local population, but also from visitors that cherish the nature of the Balearic Islands and wish to protect it. This global turn towards health, responsible consumption and protection of the environment will also have a positive effect on the Balearic real estate market and will become an increasingly determining factor in new developments which already take a significantly larger respect for energy consumption and responsible use of building materials.
Medical Facilities and Healthcare
No article would be complete these days without a mention towards the incredible effort that the global healthcare system is making in combating the effects of COVID-19. Spain has a universal public healthcare system which operates on a very high level. In addition, the Balearic Islands deliver a strong network of private hospitals and doctors that speak all imaginable languages. The Balearic Islands have one of the lowest Coronavirus infection rates in Spain and both hospitals as well as the region’s healthcare system are coping really well with the challenge. There is neither a collapse of the health services nor lack of space within the hospitals in the Balearic Islands. Surely, this superb healthcare infrastructure will in future become a growing point of interest for touristic and residential developments on the islands. Our warmest gratitude goes out to the professionals which are fighting this battle on behalf of us all.
Interest Remains Unbroken
Jointly with many personal messages of care, concern and comfort exchanged between our hundreds of clients and our team members, we now know that practically all persons consulted wish to return to the Balearic Islands as soon as this situation passes. The statistics from our websites and social media actions also confirm only a minor drop which, given the level of global uncertainty, has even surprised our marketing experts. Therefore, all indicates that the desire for owning or renting a home on the Balearic Islands is stronger than the threat of a pandemic such as COVID-19. Like any place in the world, the Balearics will also not be exempt from changes, however the spirit of its people joined with the awareness of the Authorities will promptly materialise action in protecting the local economy.
Our Commitment in Challenging Times
Engel & Völkers has a shared responsibility and commitment towards the real estate market, home owners, developers, construction companies and funds who have put their faith and money into real estate in the Balearic Islands. A very significant investment in resources and manpower goes into producing the annual Engel & Völkers Market Report, but in order to respond to the increased demand for information, we go into extra length in order to provide reliable data, analytics and trends so that everyone can feel updated and secure about their decisions. In addition, Engel & Völkers is watching the real-time performance of the market via an exclusive research tool that is scanning the market on a daily basis. The total measure of actions, tools and contacts engaged with Associations, Local Authorities and Cross-Industry Leaders is of an unparalleled reach and we will do everything necessary to preserve the real estate industry and local economy in these difficult moments.