How to Value Spanish Property
March 3rd, 2009
My article last week about valuing Spanish property attracted a fair bit of attention – not least from Property Pulse reader, David Jesner – who suggested a completely different method of doing so.
David’s method is best suited for valuing a detached property, and is based on the assumption that a property, newly built to your own specification, would command the highest possible purchase price. If you can establish the cost of building your dream property from scratch, you can use that price as a baseline, against which to compare all other properties.
Architects and builders quote an average, including professional fees, of €1,000 per square metre for a fully finished build cost – with terraces, garages and basements costing between 30-50% of that price.
It’s possible to go as low as €600 per square metre (for a self-managed project and basic finishings) and as high as €1,500 for better quality finishings. However, €1,000 is a good average for our purposes.
If you’re looking at a 200m2 property, the build cost should be €200,000.
As David points out, a brick is a brick and pretty much costs the same anywhere, unless you have abnormal haulage costs. Similarly for labour with only slight regional variations. Therefore the big variable is in land costs. Clearly, there are huge differences between areas in terms of desirability, and therefore in values.
How to value the land? Looking at urban plots, the Ministry of Housing says that in Q3 2008, the national average was €257 / m2. The range is large – from 525 /m2 in Madrid to 100 /m2 in Teruel.
Unfortunately, these prices suffer from two of the Ministry’s common inaccuracies – vague area measurements and hidden cash transactions.
The net effect is that plot areas are likely to be under-declared, and so are the prices paid for them. It’s impossible to quantify the compounded effect of these two inaccuracies, but it may be balanced by the fact that land prices are currently falling.
For now, let’s take a urban plot size of 400m2 and an average cost of €250 /m2 to produce a plot cost of €100,000.
Finally, some extra costs may also need to be factored in:
- Building permits: 7-9% of building cost (€14,000- €18,000, average €16,000)
- Mains connections for water, sewage & electricity: €5,000 to €15,000, average €10,000 best guess
Based on these costs of building a property and making it habitable, we arrive at the following:
- Plot: €100,000
- Building: €200,000
- Licences etc: €26,000
- Total €326,000
This becomes the benchmark price for a dream 200m2 home on a 400m2 plot against which all other properties can be evaluated.
(Interestingly, this method tallies quite well with the examples used in the original article). The advantage of David’s method, however, is that it removes the potential for the price to be skewed by a previous owner having over-payed for the property.
Now, armed with a profile of the ‘ideal property’, a buyer can evaluate the value of both newly built and resale property on the market. Does a property need a new kitchen? If so, subtract the cost of it from €326,000.
Similarly, if property needs decorating or some refurbishment, the associated costs should also be subtracted from the ‘ideal price’. If the property is larger or smaller, has more or less terrace space, or has a pool, the associated new build costs can be added or subtracted to the ‘ideal price’.
While this method works well for a detached property on its own discrete plot of land, it is less useful when valuing apartments or property as part of an urbanisation.
In these cases, some of the value attributed to the plot and the connection fees must be attributed to the communal areas and features of the apartment block or the urbanisation – which can be tricky to put a value on.
Another hidden cost in this valuation method is the subjective cost of waiting for the property to be built.
Building a property from scratch is not a process for the faint-hearted, nor the impatient – especially in Spain. For this reason, fully-finished newly built homes sell at a premium above their built costs – because the vendor doesn’t have to live with the turmoil of managing the project.
However, as a way of establishing a baseline price, I believe that David’s method is a useful addition and a useful sanity check in today’s Spanish property market.
One thing these various valuation models have in common is the need to know accurate measurements for the property in question. Given that the title deeds are unlikely to contain accurate measurements – how exactly should a property be measured – and therefore valued?
I asked Campbell Ferguson, a chartered surveyor from Survey Spain, how it should be done. You can read his detailed response in How to Measure Property.
I’m very grateful to both David and Campbell for their contributions and, as David comments, “Without a foundation, clearly understandable and widely accepted as being logical, the market will continue based on dreams and utter nonsense.”
Martin Dell, Kyero.com
