This analysis focuses on the real estate market in the Canary Islands, Spain. In order to understand the current situation and the real estate opportunities emerging from the health pandemic, the analysis introduces the reader to a historical summary of the islands’ property market. Only by understanding the evolution of the market can investors have a clear understanding of what to expect from investing in high-return vacation properties in the Canaries.
The Early Days
While the Canary Islands grew as a top EU tourism destination during the 80s (2.5M visitors) and 90s (10M visitors), the real estate market followed (Wikipedia). It provided highly valuable opportunities for early investors, and attracted foreign real estate investments, reaching a historical share of +30% of all ownerships. While the early 90s recession did affect the flow of tourists to the islands, it bounced back pretty quickly.
With the deregulation of land that came during the end of the 90s and early 2000, the Canary Islands, like most of the country, jumped on the mass construction wagon. As the market had never contracted since the 50s, speculators used this environment to build, buy, and resell, making impressive returns and contributing to the real estate bubble.
The Financial Crisis (2008-2010)
As the financial crisis hit in the second half of the 2000s, the real estate bubble burst. While owners who had invested in properties in established locations saw a loss of up to 10% of the value, investors of properties in new areas of development saw up to 40% loss of value, both less steep than the country’s average. That was of course the case for those who bought near the meltdown, while those who maintained properties bought in the 90s or before just saw a reduction in value, still way above the original investments they made. The main reasons for this debacle were (1) a complete collapse in demand, (2) an excess on the supply, (3) and the collapse of the credit bubble.
The Recovery and the Role of Regulation
Starting around the middle of 2014, the Canary Islands real estate market started recovering. Apart from the global and national macroeconomics recovery, there were some crucial legislative reforms by the local government to create investor confidence, and regulation to prevent it from happening again. To control real estate speculation, the handling of licenses for new properties were tightened, exercising control on the supply, as can be clearly noticed on the chart below. Due to the strong direct relationship with the tourism industry, the development of new tourism beds was also more tightly controlled, only giving licenses for very few high-standard hotels and resorts.
These measures proved crucial not only to reactivate the market but to provide the ground for the investors to become interested in buying properties to rent on the vacation market through raising-star platforms like Airbnb. As old mass tourism hotels and apartment buildings closed, and very few more luxury types were allowed to open, 90% of the growth of tourism between 2010 and 2020 came from vacation rentals of private residential properties. Most agree this is the main factor that has contributed to curing the local real estate market, providing a steady supply, and adding value back to the properties based on their vacation rental return potential.
The Situation Today and Current Opportunities
In 2019, the Canary Islands reached 15M tourists, becoming Spain’s top tourist destination. To understand the magnitude of this statistic, you have to be aware that Spain is the 2nd biggest tourist destination in the world, and according to the World Economic Forum, the first in the travel and tourism competitiveness report since 2015 (Travel and Tourism Competitiveness Report. World Economic Forum, 2019). These facts do not leave much room for speculation and clearly confirm the long-term sustainability of the tourism industry in the Canary Islands. And although the islands have been hit hard by the lack of tourists due to the health pandemic, their status and history put them in the best position for fast recovery.
While international investors are holding on thinking that the real estate Canaries market prices will continue going down and there will be plenty of opportunities during 2021, real estate experts agree the time to buy is now. In fact, you are already running a bit late (Is it a good time to buy property in Spain? Idealista, 08/2020). This can surely prove right in other areas of Spain, especially regions not benefiting from year-round tourism, but everyone agrees it won’t be the case for the Canary Islands. As the pandemic becomes more under control and tourism becomes more of a reality (and that is expected to initiate its upside trend starting in April 2021), owners who are now in the need to sell will either increase the sale price or put their properties back on the vacation market. In fact, one way that current owners have managed to mitigate the need to sell has been to move their properties to a healthy long-term rental market that enjoys high occupation and high prices. It is estimated this is the case for 20% of the properties that were on the vacation market and are now doing long-term rentals.
The Critical Role of the Vacation Property Industry
Since the vacation rental industry has become one if not the top factor on the real estate residential market, it is interesting to know that despite the horrendous year (1) vacation industry properties on prime locations targeting non-budget travelers, with lots of in-house amenities, have managed to keep their 2019 profitability at least till the end of October (according to AirDNA.com, a vacation property industry intelligence data provider). Another interesting factor (2) is that the temporary closing of hotels and apartments relying on European tour operators left a group of travelers with the only option to do vacation rentals. Last, (3) because of the perception of higher infection probability at places like hotels, those who traveled preferred to stay in properties with for example private swimming-pools (Covid-19 drives down holiday-rental occupancy rates on the Spanish coast. Spanish Property Insight, 08/2020). DNA expects this trend to continue for a while or become the norm if the pandemic is not totally controlled soon, or for other potential health crises in the future.
Take-Away: It is a great time to invest!
Leaving the current situation aside, it can be concluded that the Canary Islands year-round tourism industry provides not only safety to the investment but a source of high-return for residential real estate investors (+25% ROI). The control over new constructions helped clean the market, and the vacation rental industry allowed for the value of properties to recover to healthy levels.
Considering the current situation, it is a great moment to invest. There is around a 10% decrease in prices and the vacation rental industry is expected to thrive even more than in these last years. The pandemic has resulted in an increase in demand, and there has been a reduction in the supply (since around 20% of the supply has moved to long-term rentals). Also, experts agree that these opportunities won’t last long. As the tourism industry recovers, prices are expected to increase again to the levels of early 2019. And historically, the islands have remained in the top 5 of best places to buy property in Spain, and still ranks that high.
Sources & Further Reading
Hogaria.es: Average Square Meter Price in the Canary Islands
Idealista: Price evolution of housing for sale in Spain
Kyero: Canary Islands property data
Global Property Guide: Spain’s house price rises decelerating, but outlook remains upbeat.
The Property Finders: The Spanish Property Martket 2021
Canarias, 1800-2000: la singularidad de la historia económica isleña
Precios de la vivienda en España 1985-1994. Incidencia del coste del suelo.
Idealista: PIB Turismo Canarias
ISTAC Gobierno de Canarias: 2019 Tourism Statistics
Diario de Avisos: Histórico licencias obras
Diario de Avisos: 2021 market growth expectations
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