Ibiza Market Analysis:
Well, the reality is that Ibiza is a fantastic opportunity for investment for two main reasons:
1. Land on this island is a scarce (limited) resource
2. Property on this island is a highly demanded product.
The laws of economics dictate that if the supply (the amount of land available) is limited, and the demand for this land/property increases, the price will keep going up. This is depicted in Figure 1 : as the supply curve (quantity available) stays the same and demand curve (how much property is needed) goes up, the price will go from P1 to P2 and will continue the trend.
This is exactly what’s happening in Ibiza. It is an island which is famous all over the world and thus has extremely high demand for property. And in the next five years it will only increase, attracting people from America, Asia and the Middle East. This is evident within the economic movement we see in Ibiza right now. The new super port will be completed, new luxury designer shops are entering Ibiza, and the iconic Hotel Montesol is becoming an exclusive Hilton Hotel next year, among other new five-star hotels (1).
Due to this trend within the luxury market in Ibiza, we are seeing the property rental prices rise rapidly, which in turn has a domino effect on the prices of villas and apartments in the upper-end of the market throughout the island.
There is also a trend of growth that is also evident when looking at Spanish economy in general. The European Central Bank put in place low interest rates to boost economic growth, which skyrocketed the housing market here in Spain. It is estimated that there was an average growth rate of 4.2% for residential investment in 2015 and of 6.6% in 2016 by The Bank of Spain (2) Moreover, according to El Boletín del Colegio the resale prices grew by 2.65% year-on-year “consolidating the trend seen in 2014” (3)
What does this mean for you? Well it is simple. If you invest in a property this year in 2016 of let’s say € 500.000 this will be your returns:
1. Rental Income: You can rent out a property (3 bed, 2 bath, and pool) per season, discounting the VAT (21%) and agency fees, in an 10 week season you will yield (we’ll stay on the very conservative side at €1.200 per week): 12.000€
2. Capital Gains: Considering the following growth rates, 2.65% price growth until 2014 and an increase in growth of residential investment of 4.2% in 2015 and 6.6% in 2016, this is what you can expect:
Let’s assume that the increase in the growth rate of prices annually will be equivalent to the growth rate increase in residential investment. The growth rate is calculated as follows: (present/past)^(1/n) − 1. Therefore, as seen in Table 1 the estimated increase in growth rate annually will be 25%, which considering the trend in the Luxury market discussed previously is a reasonable assumption. Therefore, the estimated growth in prices will increase annually by 25% and result in the growth rates depicted in Table 2 on the right.
This means that the price of the property you bought in 2016 for € 500.000 should be € 650.652 by year 2021 (see Table 2). This means that your Nominal Return for owning this property for 5 years will be 150.652, which of course means that Returns on your Investment (ROI) will be 30% if you choose to sell in 2021 (see Table 3).
A very nice return of 30% is a very attractive return on any investment, but what’s even better about real estate investments is that you have a physical asset to show for it, where you can vacation with your friends and family. Moreover, if you notice our ROI calculations do not include any Rental Income, which means renting out your property
will be a nice yearly bonus in your pocket.
What’s even nicer is that the Bank of Spain estimates that at this rate by 2021 the demand for property in Ibiza will have increased by 20% (Table 4). This means that you can be certain that you will be able to sell your property after the 5- year investment period if you choose.
It’s a no-brainer, by investing in Ibiza property it is reasonable to assume that your return on investment (ROI) will be almost triple that of those in conventional Northern European markets.
You will be investing into one of the highest growing real estate markets where you can get triple the money you would get Northern Europe but could also get a nice annual bonus from renting the property out during vacation season, or instead vacation in one of the world’s hot-spots with your family while saving on renting out and growing your money at the same time.
1) Majorca Daily Bulletin, http://majorcadailybulletin.com/news/local/2016/01/25/42648/ibiza-real-estate- demand-explode-worldwide-2016.html
2) Forbes http://www.forbes.com/sites/carlapassino/2015/05/31/the-tide-is-turning-for-spains-real-estate- market/#606ab62b4e01
3) El Boletín del Colegio http://www.registradores.org/publicaciones-periodicas/