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Banks are starting to reinvest in Balearic 'Bricks and Mortar' and are lifting their veto on Palma and Ibiza

Suburbs of Madrid or Valencia and Murcia are still regarded as being scorched earth by financial institutions as far as investing in new housing projects is concerned. The consequence of the "disasters" created during the boom years of the construction scene is that investment in the real estate sector in these communities is slow. But the situation in other parts of Spain is beginning to brighten up: the risk of financing the building of apartments for residents is becoming low enough to encourage banks to become more generous with regards to mortgage credits. In this second group, two names immediately spring up as the clearest examples that funds for the construction scene can be re-allocated: the Balearic Islands and Malaga.

This does not mean though that developers in the islands already have opened doors to revive an activity that has been practically paralyzed for five years. But it does imply that there are two Balearic municipalities where banks say they are willing to finance developments aimed at first residences for locals: Palma and Ibiza.

As noted by representatives of some of the most important financial institutions of the archipelago, the projects for the construction of homes with selling prices of between 150,000 and 200,000 Euros in these two cities are granted access to credit again, being also the areas with the highest demand. As far as Palma is concerned, due to the shortage of new housing, the risk of a new promotion is becoming increasingly lower, and in the case of Ibiza, it is an open fact that its economic recovery is several steps ahead of the rest of the islands. This means, that there is sufficient demand again for a product at an affordable price in both areas.

Thus, when the president of the islands builders association, Eduardo Lopez, said in an interview with Diario de Mallorca a few days ago, that as far as banks are concerned, everything that smells of “bricks” remains cursed, the financial institutions respond that the "good brick" has already been granted pardon in the archipelago.

That does not mean that the banks are not noticing dangers in the Balearic real estate sector. However, this fear depends on areas. For example, it is no secret that the municipality of Campos will be regarded as a "risk zone" for residential investments for some years. Not one euro will be dedicated to new buildings as first homes in that area. The situation in Sa Pobla is not much better. And in general, the rest of Mallorca’s Part Forana (central area) is still being observed with certain reluctance, and the projects presented are analyzed very closely before funds are injected.

"Probably no one will want to invest in a development of 50 homes in Inca," says a representative of financial institutions. But instead, yes credit is being granted to individuals who decide to build their own properties, in small developments of one or two homes.

Funding of the construction scene does have another open door in the Balearic Islands: that of the second home developments in municipalities such as Andratx, Calvià or Pollenca. The demand for second homes by foreigners is "rocketing" according to the real estate sector. And that assessment is shared by banks, who also emphasize the current strength of the demand by German and British buyers, while at the same time minimizing the presence of Scandinavians, because although the percentage might seem very spectacular, it started at very low levels.

In the opinion of the representatives of the Balearic banking scene, looking in from the outside, the confidence in Spain as a country has been regained. Prices of second homes have become more moderate and are now regarded in countries beyond our borders as affordable, even among those most luxurious products; it is a proven fact that the Balearic Islands are a safe destination for investment and there has been no form of "cataclysm" due to the economic crisis.

Thus, it is confirmed that it is relatively easy to obtain funding for a project of this nature in the aforementioned areas.

 

Mortgages are increasing

This recovery of the Balearic Islands as a destination for property investment is reflected in one fact: during the first quarter of this year, compared with the same period in 2013, mortgage lending has increased on the islands by between 4% and 5% according to representatives of this sector.

This recovery of the Balearic Islands as a destination for property investment is reflected in one fact: during the first quarter of this year, compared with the same period in 2013, mortgage lending has increased on the islands by between 4% and 5% according to representatives of this sector.

Indeed, this last fact is qualified, noting that the comparison is made with respect to the first three months of last year, which are defined as "rubbish" considering the volume of mortgages granted. But at least a trend change can be detected.

This increase is much lower than that given in consumer credit, which shows rates close to 15%. The explanation is simple, as made clear by the Balearic banks. Families still have an intense fear of incurring long-term debts, given the huge uncertainty that has been generated in the labor market. There is fear of job loss or reduced income, and this maintains the consumer in a situation of strong fragility. Therefore, the islanders are becoming more courageous when they request a loan to buy a new car or to renovate the kitchen of their house, but there still is a significant aversion to commit to a debt that will take decades to pay off. And this in spite of the fact that 40-year mortgages have become history.

Therefore, the bank indicates that the myth they are the ones who are holding back the real estate business by keeping the credit tap closed is only partly true. It is obvious that many financial institutions still have a strong aversion to the construction business (the ones who showed it most before the crisis), but there is a significant drop in potential customers asking for first residences.

Finally, the banks do not deny that there is another branch of the Balearic construction business which is still in the recovery period and which no one wants to get involved in yet: industrial facilities and offices. One assumes that viability to grant credit to companies closely linked to the food industry is given by the momentum of the sector, but be warned that nobody is willing to give one euro for a project in an industrial area. This product remains under close observation.

 

Changes in the real estate developers

In any case, banks remember that the real estate sector has gone through a few years in which its position needed nothing short of "scrapping", stressing the necessity for companies to change and become more professional. Thus, it underlines the fact that the times are over in which anyone could become a real estate developer. And another warning issued is that no entity is going to start financing the acquisition of land, after the debacle that its value has suffered.

And broadly speaking, the analysis of banks is shared by the association of Balearic developers, since recognizing the initial indications that developments are receiving funding again in Palma and Ibiza, they being the municipalities where currently increased demand is concentrated and least investment risk is involved.

With regards to this, one has to remember that the growth of developable land in the Balearic capital is exhausted, hence the insistence in negotiations with the Consell de Mallorca to open its hand in this direction and modify the territorial plan, that the sector be aware of the reanimation of the construction of first residences in Palma's territory, notes its president, José Luis Guillen.

Given the demand by the banks that developers be more professional, Guillen shares this desire, but remembers that for many years they funded anyone who wanted to build and allowed this activity become full of opportunistic intruders, a fact which led to the already known "disaster".

By F. Guijarro. Palma.

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