The challenge for property investors in Spain is to find a property investment that could produce the highest rental yield in locations where price drop is close to reaching rock bottom. A rental yield above 4.7% is achievable. By picking the right investment it could be secured a cash flow from the very beginning and a capital growth in the mid to long term despite the market crash.

Main cities are the target for the search for an investment if you want to guarantee a local demand and an exit strategy. Please be aware that it will take a few years until prices start picking up. Therefore, any investment strategy should be on the bases of mid to long term.

Specific locations in cities such as Madrid, Barcelona, Bilbao or Valencia could generate gross rental yields above 4.7%.

We have stated a 4.7% rental yield borderline following the latest report on rental yield published by idealista.com. In the mentioned report, the city where gross rental yield is higher is Lleida (4.7%). Average gross rental yield in Madrid is 4% and in Barcelona is 3.6%, according to the report (view graph at the bottom).

If purchasing price, local demand and yield are optimum, property investors could easily rent the property and wait for a few years until property prices pick up to a discreet level in order to sell and gain a profit. How much could the prices rise within ten years in those  ‘prime locations’? We understand that it is still too early to estimate a mid-term growth, but what we can say is that it will not be a large growth as during the property bubble. What we can also say is that the estimation will depend on the ‘micro-location’ in which the investment is placed.

Selling prices still falling

Regarding property prices, they are still falling at a lower rate. According to idealista.com, in the 1Q/2011 they fell by 2.2% on average. This average is on the basis of a sample of 170,202 properties.

Rental prices

The property portal idealista.com has recently released the Q1/2011 rental report. The conclusion is that Madrid is the city with the most expensive rental market (€12/sqm), followed by Barcelona (€11.7/sqm) and Bilbao (€11.6/sqm). The rest of the cities are below €10/sqm.

The most remarkable point is that Barcelona is still very close to being the most expensive rental market despite the fact that during Q1/2011 the average price of the rental market dropped by 2.1%. Bilbao has experienced an increase of 3%.

On the whole, the good news is that the rental prices have increased in more than 50% of the main cities. The analysis has been elaborated according to the asking price of 25,446 properties in the mentioned period.

CONCLUSIONS

The Spanish property market still is an interesting one for property investors. Prices in main cities have dropped during Q1/2011, probably due to the urgency to sell in the onset of dramatic increases of mortgage payments. We have the feeling that prices will reach rock bottom in key locations that we expect to spot in the coming months.

Key: alquiler anual: Annual Rent, precio compra: Purchase Price, rentabilidad bruta: Gross Profit, anos de alquiler en pagar el inmueble: Years of paying Property Rent.

Daniel Talavera www.thespanishbrick.com