Key factors for Barcelona’s real estate market after coronavirus

It’s already been more than one month since the state of alarm declaration announced in the Royal Decree 463/2020, March 14th, which resulted in the immediate halt of all non-essential economic activities developed in our country. The real-estate sector has suffered a great impact as a result of it and has been affected in more than one aspect; it has witnessed how all those property transactions, both those for the closure of new rental contracts and those for the signature of purchase-sale contracts, have been abruptly ceased or postponed. In that sense, it is estimated that the property purchase-sale market will not recover its normal pace until the end of this year, beginning of 2021. However, what was the situation before the arrival of Covid-19?

Real-estate market symptoms before Covid-19 crisis

As we can see in the previous graph, statistics were already showing bad numbers regarding the real-estate market for the purchase-sale operations for 2nd hand properties before Covid-19 with a reduction of more than 2000 operations compared to 2017, which translates into a 16% drop. This drop has been motivated by different reasons: a non natural meteoric growth of the property prices (+32% in 4 years) leaving us at 2008 levels, the drop in foreign inversion since 2017 for the purchase-sale of properties (-26%) and, of course, the political situation in Catalonia alongside the legislative turbulences from the three governments (central, autonomous and local). These reasons are not only confirmed by statistics, but I have also been able to verify them myself during my continuous meetings with foreign promoters and investment funds that confirm that, even before the arrival of Covid-19, Barcelona had not only stopped being an strategic city, but that they had also begun to undo their investments in this city in favor of other less belligerent ones. Even though it is true that the purchase-sale market will undoubtedly be affected by the whole situation, the rental market (that closed 2019 with a historical number of 51.294 operations) could be reinforced due to the fact that, as we have already seen in earlier crisis, when the purchase-sale market drops, the rental market grows (look at 2007 and 2017). The present inability to get out on the streets to conduct activities not included as essential ones in the present Royal Decree, make even more difficult the situation for the real-estate sector in Barcelona during Covid-19 crisis; so much so that the visits to properties and the contract signatures with a public notary (unless they consider it essential) have been completely voided.

Outlook to the future after Covid-19 for Barcelona: drop in prices, demand on stand-by and an increase in the number of properties

The outlook to the future for the real-estate sector in Barcelona after Covid-19 crisis will be hard to swallow. According to Proddigia’s studies and statistics center, if we were to resume our activity shortly, my bid is on June, for this year 2020 we foresee an adjustment for property prices of around -18%. That drop will be much higher if our activity gets delayed past that date.

And what about being back to normality?  We are in front of a market board in which the game pace will be very slow. A great part of the demand will be in a stand-by position due to the market uncertainty situation and due to the personal (and work) status of each and every person. And what about the reaction of the amount of properties on offer? Some owners have already started to drop the sale price for their properties amidst the coronavirus state of alarm given the menace of a big market slump. The properties valuations applied until a month ago are now outside the new reality and 5%-10% reductions are being required. In the short to medium term, we will see more properties on offer for sale due to the personal and work situations and for the lack of absorption of the present offer available due to the state of alarm.  The adjustment of €/m2 prices will be a reality almost immediately (a significant difference in comparison to the previous crisis) between June, July and August (included). The third quarter won’t be any help, being already defined in normal situations as the worst one because of the high temperatures and the Summer period, amongst other factors. With this in mind, in Proddigia we foresee a drop of around 45% for 2020 in the purchase-sale transactions. The Spanish Institute of Statistics (INE) already reported a few days ago a -6% year-to-year contraction for January and February. That, alongside the loss of March could result in a -12% contraction. We’ll soon find out. And what can I say about the second quarter; with the state of alarm and everyone stuck at home, the contraction could reach -80% in comparison to 2019. Taking into account the reasons stated earlier, in the 3rd quarter we expect to see a 50% contraction, that has this number guaranteed thanks to the deposit contracts that have been halted. The positive side of all this is that we will start to see the light much sooner than in previous crisis; in this case, during the fourth quarter with an operations level of 70% in comparison to last year (-30% contraction). In short, this will be the year 2020 quarter by quarter: – Q1: INE confirms on April 22nd the closure of 12% less operations than last year’s Q1. – Q2: drop of 80% in the number of operations due to the state of alarm and the inability to move around if not for an essential activity. – Q3: 50% drop in operations compared to the same period in 2019 (due, mainly and as I’ve already said, to the uncertainty situation, the increase of the offer and the personal and work situation of the people who take part in those property transactions). – Q4: light recovery but with a closure with -30% of operations compared to last year. A much faster recovery, remember, that in previous crisis such as the one that we witnessed in 2008.

But there is always light at the end of the tunnel. If we take the real-estate recovery and the present situation in China as an example, those big cities such as Barcelona or Madrid will need less time to witness the rise expected at the end of 2020. However, smaller locations (as we already saw in the previous crisis) will be much more affected by this negative impact post-coronavirus.

The foreign client market, another key element for the evolution of Barcelona’s real-estate market

If we want to make an accurate prediction for the evolution of the real-estate market in Barcelona for the rest of 2020 and for next year, we cannot forget to take into account the foreign client, a market that was already seeing a drop of 22% in operations as a result of the Catalan political situation and that is equal to 15% of the transactions closed in the city. The attractions of Barcelona as place of residency for the foreign client could be affected by the protection and contention measures that could be applied by the government, both central and local. Some examples of factors that make a foreigner decide to rent or purchase a property in our city are the privileged situation by the Mediterranean Sea and the local culture of “street life”. With the present state of alarm, those privileges have been completely limited and that could be an issue when trying to “convince” a foreign client about the benefits and attractions Barcelona has to offer.

In these moments, the foreign client that offers the most probability of closing a transaction in the real-estate market in Barcelona does not live in the European Union, is looking for investment opportunities and is following the real-estate market evolution with a keen eye. In this case, this kind of client won’t be as affected for the suppression of “sentimental attractions” that the city has to offer, their decision will be completely linked to the possibility of finding economic benefits in these moments of drop in prices for the property purchase-sale market in Barcelona.

Will this post Covid-19 crisis impact every Barcelona district at the same level?

Each and every one of Barcelona’s districts will be impacted by Covid-19 crisis, but the difference amongst them will be based on the contraction % for their prices and the recovery pace. Those districts that historically have been the richest such as Sarrià-Sant Gervasi, Eixample, Les Corts, following an adjustment on their prices, will see a faster recovery pace thanks to the household income and the personal situation of the people that live or want to live in the neighborhoods that integrate them. Those districts where a significant part of the property transactions corresponds to transactions with foreign citizens, such as Ciutat Vella and somewhat Gràcia, could have a later recovery to the impossibility for them to move, for personal or work reasons, to our city or for any of the reasons stated earlier as well. In the most vulnerable districts, such as Horta-Guinardó, Sants, Nou Barris or Sant Martí, with lower household incomes and a job market at its line of fire, the adjustments and the recovery pace will be worse, and we will see a change of the purchase demand in favor of the rental market.

A real-estate crisis marked by the financial crisis, as in 2007-2014

It is obvious that the duration of the crisis and the job situation will be key factors for the market recovery in 2021. For a person to be able to get a mortgage or a rental contract, they need to have a job and money. No job means no money and no money means no home. The International Monetary Fund expects an 8% drop for the Spanish GDP, even though there are more pessimist opinions that talk about an even higher drop. The growth of the unemployment rate is expected to be 20,8% in 2020 due to this pandemic. At the same time, the IMF foresees a 4,3% growth in 2021 if the pandemic is to be contained during the second half of the year. They also foresee a 0,3% drop in consumer prices during this period. This new crisis caused by the arrival of Covid-19 could be very well be compared to the financial crisis that we suffered between 2007 and 2014 because of its huge and severe impact when the market slump was caused by the Lehman Brothers fall in September 2008. However, unlike that one, this crisis should be much faster in its adjustment. In the previous one, I still remember it as if it was yesterday, before becoming an international crisis, people were talking about a short crisis with minor adjustments and a short-term recovery (look at the drop in prices for 2007-2008). They were wrong. With the unforeseen fall of the investment bank, after some time it was clear that the reaction of those more audacious owners who rapidly adjusted their prices in front of the magnitude of the problem was the most accurate decision (see the green curve in the next graph) since they almost did not lose transaction value because of that crisis. Will we learn from that? Some of us will, some of us won’t. We’ve reviewed some differences, but there are many similarities as well, a real-estate market in Barcelona with exhaustion symptoms due to a very high price increase (2007 and 2017) and the arrival of an unexpected guest (Lehman Brothers in 2008 and Covid-19 virus in 2020).

Which strategy should we adopt as real-estate marketers in order to propel the market recovery after Covid-19 crisis?

In Proddigia, we don’t have any doubts: we must advise our clients for them to be able to make the best decision for their personal situation. Some of them will have to wait to sell in some years from now, others will have to move to the rental market and for those who have no other option but to sell, we will have to encourage them to be bold as those who rapidly updated their prices when they saw the Lehman fall. Those will be the ones who will lose the least value when selling their property. But one thing is clear, they must accept that the starting price they were offering to the market was NOT the real one and, as such, they will have to rapidly adjust that speculative game. To be able to offer the best advice for each situation, the consultant and the real-estate company that help them along this process will be key.  From now on, being poorly advised will have a very high price. Real-estate advisors by calling, this is our moment! It’s a moment to give value to our profession.

Without a shadow of a doubt, we will have to adapt our predictions and strategy to the evolution of the job market, the GDP and the interest rates because, when these variables go down, the price of the properties does as well. Hence, the reduction on the price that the owners will have to apply will be higher or lower depending on the recovery that we will see in the post-coronavirus real-estate market in Barcelona. Given this situation of crisis and these low numbers, I would like to remind you that the market cycles are natural, after a drop, short or long, always comes the recovery. We have an exceptional city, weather conditions that are the envy of many and a gastronomy in full catharsis. We cannot lose that. As always, if you have any comments or doubts, do not hesitate to contact me; it will be my pleasure to talk to you about your opinions about the future of Barcelona’s real-estate market after Covid-19. KRISTIAN JOHANSSON PARTNER & SANT CUGAT SALES MANAGER 935894536 linkedin.com/in/kristian-johansson-59297420 kjohansson@proddigia.com @kjechaide