SERVIHABITAT TRENDS EXECUTIVE SUMMARY. Residential Market in Spain. Current situation and prospects. October Commitment, team, and leadership

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1 SERVIHABITAT TRENDS EXECUTIVE SUMMARY Residential Market in Spain Current situation and prospects

2 Residential Market in Spain Current situation and prospects INTRODUCTION In line with its commitment to sharing its knowledge and market experience, Servihabitat, the main servicer in the real estate and financial sectors, has promoted the drafting of this report to make known the latest trends and the future prospects for the Spanish residential market. This in-depth knowledge and that of its Network of associated real estate agents (APIs) is conveyed in the following pages. In addition, the main conclusions of an analysis on the evolution of the main trends that account for the market s behavior are given, as well as an estimate and forecast provided by the Instituto de Práctica Empresarial (IPE) for Servihabitat. Both the evolution reflected by the data from various sources and the result of everyday work in the field indicate that a gradual stabilization of the Spanish residential market is taking place this year. Expected data by close of 2015: New construction stock -31.5% 462,658 Started housing +5.4% 34,638 Completed housing +12.6% 52,804 Approved housing +24% 72,800 Transactions +26.6% 403,324 Price +2.6% NEW CONSTRUCTION STOCK According to IPE s calculations for Servihabitat, we will go from the estimated 675,411 that constituted the stock in 2014 to 462,658 in 2015 (-31.5%) and 349,377 (-24.5%) in

3 If the market continues along these lines, by late 2016 we may talk about a technical stock in most locations. The composition of the Spanish residential market as multiple micro-markets should be taken into consideration, and therefore at that point, there will still be stock awaiting an effective demand for consumption in some areas. Evolution of new construction stock % of stock This year, residential stock will drop by 31.5%, from 675,411 to 462, E P F Source: INE, MFOM, Network of Qualified Real Estate Advisory, and Real Estate Chair of the IPE Note: E (estimate) F (forecast) PRODUCTION Given this market scenario, production has started to grow in very specific areas associated with prime first and second home markets where the characteristics of the stock do not meet the preferences of demand or where the stock no longer exists. This gradual market recovery will lead to starting the construction of about 35,000 in 2015 and completing more than 50,000. It is increasingly important to adapt the product under development to the needs of demand. Despite the industry s years of crisis, buyer requirements have changed over time, so their analysis for each specific project is increasingly critical in order to ensure the commercial success and profitability of a project. The upturn in new construction work activity also falls within this context: given similar locations and product types, demand prefers new housing as opposed to existing housing, even though, given that lack of new construction, transactions focus more on the latter. At this point, it should be pointed out that official statistics define existing housing as any home that has changed ownership even if it has never been inhabited, which is a very common product in the transactions that have taken place in recent years. + 50,000 In 2015, construction will begin on approximately 35,000 and more than 50,000 will be completed. 2

4 MARKET Transactions will continue an upward trend in the coming months. This year, the volume of reserves and notarial certifications has increased significantly compared to 2014, which has also been reflected in official statistics. Estimates provided by the IPE for Servihabitat predict that more than 400,000 will be purchased in 2015, which will amount to a 26% year-on-year increase. This trend is expected to continue in 2016, ending with more than 460,000 sold (14.5% more than this year). Evolution of housing transactions in Spain % transactions More than 400,000 housing transactions will take place in 2015, amounting to a 26.6% year-on-year increase E P F Source: INE, MFOM, Network of Qualified Real Estate Advisory, and Real Estate Chair of the IPE Note: E (estimate) F (forecast) This positive market evolution would not be viable without the possibility of financing for demanding as a result of the additional business in this regard by financial institutions for the current year forecasts predict a higher number of mortgage transactions and fewer cash purchases. According to a survey conducted among the Servihabitat Network of associated real estate agents (APIs), the currently in highest demand have these characteristics: First home: for the most part, a 3-bedroom flat with a surface area of about square meters, followed by 2-bedroom with a surface area of about 80 square meters. In the case of single-family, the number of bedrooms is 3 or 4 with surface areas ranging from 150 to 200 square meters. Vacation home: 1 or 2-bedroom flats with a surface area of 50 to 65 square meters. The demand for single-family focuses on 3 bedrooms and surface areas ranging from 120 to 150 square meters. 3

5 FOREIGN BUYERS An important matter regarding demand is the growing relative weight of foreign buyers. 16.7% of housing transactions in 2014 were conducted by foreigners, most of them residing in Spain, which accounted for a total of 61,095. Non-resident foreigners purchased only 1.2% (4,397) of the total number of sold. This situation has remained stable in the first quarter of the year, with similar percentages to those described. Taking first into account, more than 12% of the professionals in the Servihabitat Network of associated real estate agents (APIs) sell their home portfolio primarily to foreign buyers. This ratio jumps to more than 25% if the products commercialized are vacation. Percentage of professionals in the Servihabitat Network of associated real estate agents (APIs) selling their primarily to foreigners, according to the use of the home. 12.2% of APIs sell first primarily to foreigners 25.4% of APIs sell vacation primarily to foreigners 12,2% 12.2% 87.8% 87,8% Vivienda First home habitual (% of APIs) 25.4% 25,4% 74.6% 74,6% Vivienda Vacation vacacional home (% of APIs) More than 12% of the Servihabitat Network of associated real estate agents (APIs) sell most of their first home portfolio to foreign buyers. This percentage jumps to 25.4% with vacation. Foreign Spanish PRICES The gradual recovery of the residential market will also be reflected in prices. It is very difficult to generalize in such a diverse market, and averages are rarely an accurate view of reality. However, Servihabitat s estimate, given the current market trend, is that by late 2015, the national average will rise by 2.5%. An average 6% increase in housing prices is expected for In the survey conducted among the Servihabitat Network of associated real estate agents (APIs), most think that prices will stabilize during the last half of the year. In the case of first, 11.1% of agents expect prices to rise in the area in which they operate. This percentage increased to 17% in the case of vacation home transactions. 4

6 According to the Network, most of the prices for first home transactions will range from 79,000 to 167,000, primarily due to the geographical location of the product; the minimum price at which transactions will be closed is 15,000 with a maximum of 3.5M. In the case of vacation, the price of most sales will range from 73,000 to 144,000; the minimum closing price for this type of home will be 20,000 and with a maximum of 1.5M. More than 80% of the Servihabitat Network of associated real estate agents (APIs) think that prices will stabilize or grow in the next half-year in the areas in which they operate. Expected evolution of first home prices in the next six months by the Servihabitat Network of associated real estate agents (APIs). Expected evolution of vacation home prices in the next 6 months by the Servihabitat Network of associated real estate agents (APIs). By more than 5% 6.8% By more than 5% 6.1% Will decrease 17.2% Will remain stable 71.7% By 2% to 5% 8.3% By less than 2% 1.7% Doesn't know / Won't answer 0.4% Will decrease 15.0% Will remain stable 68.0% By 2% to 5% 6.2% By less than 2% 1.9% Doesn't know / Won't answer 0.8% Will increase 11.1% By more than 5% 1.6% By 2% to 5% 6.2% By less than 2% 3.2% Doesn't know / Won't answer 0.1% Will increase 17.0% By more than 5% 2.9% By 2% to 5% 10.9% By less than 2% 2.9% Doesn't know / Won't answer 0.3% THE RENTAL MARKET The rental option is gaining strength in the Spanish housing market as a residential model as opposed to purchasing, especially among younger customers. This situation, which started practically at the beginning of the industry crisis, will continue in the future according to almost 40% of the members of the Servihabitat Network of associated real estate agents (APIs) who took part in the drafting of this document. In their view, the number of rental transactions that they will conduct in their daily business will increase in coming months compared to the number of sale transactions. Moreover, 55.3% think that the current trend will at least remain stable. As in the case of purchases, foreign demand is also significant in this market. The lessee in 13.4% of rental transactions conducted by the Servihabitat Network of associated real estate agents (APIs) is a foreigner, mainly from Romania and Morocco, but also from various South and Central American countries such as Brazil, Colombia, Ecuador, Peru, Bolivia, Cuba, and Argentina. The average home rental price in the coming months will range between 360 and 600 per month, depending on the location. 77.9% of the interviewed agents think that prices will remain stable. 5

7 CONCLUSIONS The scenario configured by the expected evolution of the main variables, as well as the view of those who work in the field and are most aware of supply and demand, is considerably better than a few months ago. Our goal is not to be optimistic, but rather to convey a reality that is backed by statistics and perceived by commercial agents. Their view on sales evolution in coming months mostly foreshadows an increase in the number of transactions conducted, both in the first home and in the vacation home segments. Sales evolution in the vacation home purchase segment in the area in which each agent in the Servihabitat Network of associated real estate agents (APIs) operates. 41.9% 3.8% 0.9% 10.9% 42.5% will significantly increase will increase slightly will be maintained will slightly decrease will significantly decrease Sales evolution in the first home purchase segment in the area in which each agent in the Servihabitat Network of associated real estate agents (APIs) operates. 33.2% 3.2% 0.6% 10.6% 52.4% will significantly increase will increase slightly will be maintained will slightly decrease More than 63% of the Servihabitat Network of associated real estate agents (APIs) think that the number of transactions in the first home market will increase in the next six months; 53.4% of interviewees have the same view of vacation. will significantly decrease Taking first into account, the markets showing a major improvement are the prime areas in large Spanish cities and their areas of influence, where the market has been traditionally more active. In these areas, the land market has started to reactivate, and new construction projects are being started. Given the lack of alternative options and the improved rental market, there is a growing investment component in demand, both from large investors as well as from private investors. However, there are still regions with high levels of stock in which the market will take some time to recover. The vacation home market is particularly active along the coast of Alicante, Costa del Sol, the Balearic Islands, the Canary Islands, and certain areas in the Costa Brava. In most of these areas, foreign buyers account for a large number of transactions, but Spanish demand is also giving rise to this reactivation, which will have similar consequences for production as those described for the first home market. 6

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