Czech University of Life Sciences

Faculty of Economics

Lodging properties in Spain: Mallorca

Real Estate Economics and Transactions

By: Dumitru Trifan

Prague 2012
 Lodging properties in Spain: Mallorca
Content:

1.Introduction........................................................................................................................................2
2.Mallorca..............................................................................................................................................3
2.1 The market...................................................................................................................................3
2.1.1 Market participants...............................................................................................................3
2.1.2 Market trend.........................................................................................................................4
2.2 The real estate types....................................................................................................................5
2.3 Zoning, land use and limitations...................................................................................................5
2.4 Main legal and economic issues related to owning, buying, selling and rating............................6
2.4.1 Taxation in Mallorca..............................................................................................................7
2.4.2 Buying....................................................................................................................................7
2.4.2.1 Construction...................................................................................................................7

2.4.2.2 Buying Finished Real Estate...........................................................................................7

2.4.3 Seling.....................................................................................................................................9
2.4.4 Renting..................................................................................................................................9
3. Economic overview: Spain and Mallorca............................................................................................9
Conclusions..........................................................................................................................................10
References............................................................................................................................................10

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 Lodging properties in Spain: Mallorca
1.Introduction

The field of Real Estate Economics is very important for the correct property
transactions and understanding of the market. The Mediteranian sea propreties increase in the
popularily in last periods, especially lodging propreties. The purpose of this paper is show the
application of Real Estate Economics by providing an analysis of spanish island of Mallorca
and emphasize the main issues linked to the respective market, also by providing the legal and
general economic frame and a comparison.

2.Mallorca

Mallorca is an Balearic island in the Mediterranean sea, an autonomus community in

Spain it has an Area of 3,640.11 km2 (1,405.454 sq m). The capital is Palma. Like the other
Balearic Islands of Ibiza, Formentera and Minorca, the island is a highly popular holiday
destination, particularly for tourists from the different countries. Majorca has two
mountainous regions each about 70 km in length, which occupy the north-western and eastern
thirds of the island. The island has a variety of caves both above and below sea-level. The
climate is Mediterranean. There are two small islands off the coast of Majorca: Cabrera and
Dragonera. Property in Mallorca has seen a constant growth over the last 20 years. Mallorca is
an incredibly attractive region and buyers are particularly attracted by the charms, cultural
offerings and everything they could want commercially and culturally. The respective has
been named as the most stable property market in Spain as the region has an upmarket
reputation and demand is driven by the fact there is a limited number of properties on the
island so it is not suffering from over-supply. The agreeable year-round climate, excellent
travel links, expanding recreational opportunities – particularly golf, yachting and equestrian
activities – and the Island’s exceptional safety and privacy record are being increasingly
noticed amonit luxury lifestyle investors looking for properties to purchase for personal use.

2.1 The market

Spanish real estate market had a different evolution in different time for different
regions. The most significant fundamental influences highlighted when investigating the
Spanish case were the extraordinary rise in the number of households, the sharp decrease in
interest rates on mortgage loans, and the prominent role of speculative investment in the
housing market during the period in question. Among the demographic factors that affected
the Spanish housing market over the past several years, immigration trends and other cultural
and sociological changes could be considered the most important. Higher employment rates
and rising real disposable income boosted demand for housing, which drove prices up in
recent years. The real estate stock-flow was successful in pointing out that the immense
population growth combined low mortgage interest rates, further deepened by speculative
behaviour – based on backward-looking expectations which caused the formation of an asset
price bubble, which burst in short time in 2007. Particularly, Mallorca Real Estate Market also
was affected by these conditions, however, this region is a famous one and a big part of the
demand in the market is represented by the foreigners from different countries, and this fact
diminuate the affect of the overal market trend. In general, the supply is moustly represented
by the operating firms who manage the property and make investments in it. As a

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compromise, the price level is in general high compared to other regions of spain. The total
volume of the market1, estimated aproximatelly is € 3 114 486 064.

2.1.1 Market participants

Just like Ibiza, Mallorca attracts rich buyers from the Europe, especially England,
Germany, France, Switzerland and Scandinavia, USA, Russia and the Middle East. Investors
seeking a bargain should turn to the Spanish property market as High levels of distressed
properties and unsold stock in Spain make it a buyer's market, it has been suggested.
According to Bloomberg, there are many reasons for people to consider purchasing real estate
in Spain at the present time as the real estate values have now provide an enticing prospect for
investors. They can make a profit as a recovering market give speculation opportunities. We
can say that Mallorca real estate market is more an buyers market, however, the supply is not
only represented by the foreigners, local people and the speculators. Different companies
develop certain regions, investing in them, for example by building houses, also they provide
rent opportunities for clients together with an set of tourist services. 2 Among the market
participant also is state. Within different public projects, the spanish state help to development
of the market, provide regulations, but also receive many financial resources from taxes
applied in this region.

2.1.2 Market trend3

The property market is still unstable, but it should stabilise in this year, with some
prices increasing slowly and only in prominent locations like coastline or countryside areas in
Mallorca. The real estate market is a reflection of luxury sales, which grew by 20% in last
year. According to CBRE, prime buildings will eventually stabilit or increase in 2012
although secondary properties will continue to decline as occupiers continue to take
advantage of the ability to negotiate favourable terms and conditions in an oversupplied
market. The Spanish island of Mallorca appears to be leading the real estate recovery with
developers reporting increased sales and interest due to realistic price corrections. Mallorca
has seen particularly positive figures due to two important factors. It is still considered a
unique place and in many ways superior to some of the mainland destinations. Following a
slow start to the year, the volume of Mallorca property transactions began to raise. Mallorca
property prices began to stabilize across the market, after some jockeying to establish the
current value of properties in the market. Asking prices that had dropped in the second quarter
of 2011 recovered their value by the end of the 4-th quarter, ending the year on an average of
€2,214 per m2. High-end luxury prices steadied in the second half of 2011. Rental property
prices for Palma de Mallorca maintained value at around at around €8 per m2 all year. In this
year is expected the gradual increase in the number of sales. The potential buyers continue to
be interested in the South West of the island but there is growing interest in Palma de
Mallorca city centre, large country estates throughout the island and sea front houses in prime
locations such as Formentor, Costa de Los Pinos and Deiŕ. In Mallorca and the wider
Balearics the supply side has been more constrained due to the relatively more controlled
speculative development boom of the early years of this century. Furthermore being a small

1
Calculated by multiplaying the average prices in, 2011 (data can be found in 2.4.2.2 Buying Finished Real
Estate ) by total surface.

2
The real estate market also, is used to store value by some people.
3
Quantitative data in this sections are from Official Statistics of Spain and related trend references, which can
be found in the end of this paper.

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Island certain segments of the market have and will increasingly have a more restricted supply
side – eg front line villas or large rural fincas / country houses, simply because the availability
of front line plots is limited and planning regulations on development in rural areas, especially
in the Tramontana Mountains, have become increasingly restrictive. In conclusion, the short-
term changes depends on the activity of market participans and the spanish economy as
integral, but in the long-run, the overal trend is positive and there is expected a development
in this area, together with the increase in the demand side and eventually the price level.

Figure 1: Property transfers – Balearic Islands 2011 Figure 2: Average Mallorca property sales prices
2011

Source: National Institute of Statistics Source: Idealista.com, Fotocasa.es

2.2 The real estate types

In Mallorca the main types of real estate are represented by Lodging properties such as
resort hotels, Business/Convection, Extended Stay (Motel Apartments); Community centers
as the city of Palma (for example); Different offices (Classes A and B) and, of course
Residential. There are different types of building such as Fincas, Chalets / Villas, Apartments,
Penthouses; but also are building plots, some of them being used by the construction
companies and investors. More concrete there are Luxury Villas on the coast like Port
Andratx, Puerto Portals, Portixol, Bendinat, Formentor, Pollensa Bay, Bonaire; Apartments in
outstanding places of Andratx, Bendinat, Puerto Pollensa, Palma Old Town , Illetes; Country
luxury Homes in the best island spots and Traditional Townhouses like Mills to renovate,
farmhouses, in villages like Pollenca, Deia, Soller, Old Town Palma and more.

2.3 Zoning, land use and limitations4

Land Use and Zoning Laws are made up of a set of a regulations and policies that
implement community goals and protect community resources while guiding new
4
Data are extracted from ministry of Environment of Spain and the study made by Pau Balaguer Huguet.

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development. Zoning regulations affect all new construction, most alterations, commercial
occupancy changes, property line changes and most site development activity including some
tree cutting and landscaping. Spain coasts are subjected to a manatory Law 22/1988 (BOE,
1989), is compulsory with the objective to guarantee the public use of the coastal area and, to
take the approate measures for protection and restoration, respect for landscapes, environment
and historical patrimony and, to have a satisfactory quality of waters. The law differentiates
some zones in the coasts and proposes some limitations about their property in order to
guarantee the protection of terrestrial and marine public domine. These zones are: 1)
Servitude of protection, this area covers the first 100 m from the coastline, which can be
extended in 100 meters when it is considered advisable to take care of the characteristics of a
coastal section, prohibiting the construction, resources exploitation and spill of pollutants,
among others; 2) Servitude of transition affects a strip of 6 meters from the coastline being
possible to extend to 20 meters. The function of this zone is to ensure the public use of the
coastline; 3) Servitude for sea access in which it is tried to ensure the public and free access
to the sea, with rolled access separated at least in 500 metres and pedestrian crossings
separated at the most in 200 meters; 4) Influence zone, with a minimum width of 500 meters
respect to the coastline. At beach coasts, parkings will be reserved. In this zone the density of
the construction cannot be higher than, the existing density in the respective municipality. In
Spain, the jurisdiction of the land use and planning at the coast has three hierarchic levels,
Ministry of Agriculture, Food and Environment (State Level -Law of coast-), the Regional
Government (Regional Level -Autonomous Region-) and municipality (local level). In the
Balearic Islands, there is an intermediate level between regional level and autonomic level,
which is represented by the Insular Council, also in Mallorca. Regarding the land use, urban
planning and coastal development, the councils are responsible for the elaboration and
modifications of the Insular Territorial Plan, which establishes the criteria that guides the
land use for each island. Presently, the most concrete directives for the definition of
management units of the coast are contemplated in the Director Plan for the Sustainable
Management produced by the Ministry of Agriculture, Food and Environment5. Actually the
criteria zoning is contemplated for 5 types of management units. This units are: 1) beaches
and dunes, 2) cliffed coasts, 3) lagoons and salt marshes, 4) coastal masses of water and 5)
special units, defined as zones where the management is established by its natural features or
their specific use. These protected natural zones, military zones or ports. Management of the
coastal water masses defines the criteria zoning according to the Mediterranean or Atlantic
slope of the Spanish coast and gives a notion of the agents, laws and institutions acting over
the coastline. This Director Plan adjusts to the established Law 22/1988 of Coasts (BOE,
1989) and does not contemplate the socioeconomic dimension of the coastal area because it is
attributed to the autonomic legislation of each autonomous region, and to the premises, about
land use planning of each municipality.

2.4 Main legal and economic issues related to owning, buying, selling and rating

Foreigners who want to buy property in Mallorca rarely know Spanish law. Thus they
can easily commit formal mistakes when they operate on their own. Very few foreigners will
have an assumption to consider risks and potential problems in connection with property
purchase in Spain. There is a need for a lawyer and financial advisor advice. The lawyer
should check the following: that the vendor really has the title to the property in Mallorca;
that the property doesn’t have encumbrances; that all the taxes and fees are paid; that all
licenses are in accordance with regulations. That method is in accordance with normal
practice. A lawyer will be sceptical towards everything that has not been documented and not
5
Directorate for Coasts

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least know how information on the property can be controlled. From financial point of view,
we recommend not to enter into contract unless you are certain that you can pay the whole
amount in accordance with the contract. Apart from individual ownership, a property can be
owned by one or more companies. Owning companies can be Spanish, from countries with
double taxation agreements with Spain or offshore or a combination of these. Also there are
notary’s fees are paid by the buyer. After you buy the property there is a need for registration.
This is done by entering the deed of conveyance escritura publica6 at the land register office.

2.4.1 Taxation in Mallorca7

On new residential buildings there is VAT (IVA) charged at 7% of the value, plus 1%
stamp duty, paid by the purchaser. However, on urban plots, commercial premises and some
garages8 purchased from developing or trading companies, VAT is 16%. On re-sales there is a
property transfer tax set at 7%. In all cases there is a surplus value tax plusvalia 9. In theory,
plusvalia is paid by the seller, and is a municipal tax on the increase in value on the land only.
However, it may be subject of negotiation between buyer and seller. Also there are Annual
Property Taxes: I.B.I.10, which is a real estate tax levied by the local townhall and is usually
0.85% of the cadastral value (valor catastral).

2.4.2 Buying

When buying a property in Mallorca it is essential to have a good knowledge of the

market. The best way is by having an advisory support. The first step in purchasing a
Mallorca off plan property would be to hire an estate agent and to consult with a lawyer.

2.4.2.1 Construction

In the case of buildind a new property, once the potential buyer have found a site where
he would like to purchase, he will need to submit a down payment fee to the properties
developer. All fees given to the developer must be secured by a bank. This protects the buyer
of in case the project is not completed or takes an excessive amount of time to complete.
Mallorca property is always priced below the real market value. This is due to the fact that the
project has an average two-year completion period. The developers are permitted to reassess
the value of off plan mallorca properties for sale not sold during the construction period. This
allows them to increase the asking price along in the construction stage. It is to the buyer’s
advantage to purchase a Mallorca property as early as possible.

2.4.2.2 Buying Finished Real Estate

The most exclusive and expensive areas of Mallorca are the North, Southwest,
Southeast and East Coast properties. To find a real estate bargain in the depressed housing
market is only possible away from the best areas. While official statistics are notoriously

6
Property Title Deed
7
Quantitative data from Ministry of Economy and Finance (Spain).
8
Not annexed to a home.
9
Not to be confused with capital gains tax payable by the seller on the profit made when selling the property
10
Impuesto Bienes Inmuebles

7
unreliable11, data from the Ministry of Housing still make interesting reading, and give us a
crude benchmark against which to look at asking prices and property values.

Table 1. Average Price in The Balearic Islands

Average Price of Housing in the Average Price of Land in the

Balearic Islands Balearic Islands

Year New Build Second Hand Palma Balearic Islands

2005 2,020€m2 1,942€m2 605€m2 295€m2

2006 2,301€m2 2,200€m2 640€m2 337€m2

2007 2,468€m2 2,340€m2 655€m2 352€m2

2008 2,692€m2 2,339€m2 716€m2 331€m2

2009 2,329€m2 2,025€m2 453€m2 316€m2

Source – Ministry of Housing 2009

Table 2. Average Price per square meter on property in Mallorca.

Average Price per M2 of New Build Average Price per M2 of Used Property
Property

Year Properties Properties Properties Properties < Properties Properties

< 300,000€ 3-450,000€ > 750,000€ 300,000€ 3-450,000€ > 750,000€

2008 2,220€m2 3,294€m2 3,349€m2 2,107€m2 2,497€m2 3,210€m2

2009 2,062€m2 2,922€m2 3,103€m2 1,936€m2 2,255€m2 2,707€m2

Source – Ministry of Housing 2009

Figure 1 – Evolution of average housing prices Figure 2: Mallorca rental prices, selected areas
in Spain (quarterly, left axis - Euros/m2,,
right axis – 1996 Q1 = 100%)

11
Due to the historic tendency to “under declare” the real value of a purchase on the deeds and thus the official
value registered at the Land Registry – Registro de la Propiedad

8
Source: National Statistics Institute (Spain) Source: Lucas fox international Properties. Mallorca RE
Report Q3, Q4 2011.

According to Spanish real estate internet portal, Kyero, after a dip at the end of 2010, asking
prices in Mallorca rise from an average of €420,000 per property in Q3 to €427,000 by the
end of Q4 2011. Final year average asking prices approached the levels first observed at the
start of 2011, reaching €433,000. Kyero has reported a more stable pricing picture, with 4 and
5 bedroom properties growing in average asking price or maintaining. At Q1 2011, 4 bedroom
properties had an average asking price of €850,000 but finished the year up on €871,000
(114% above the Spanish average for properties of this size). 5 bedroom properties started the
year with asking prices of €1,359,000 and despite lower levels during Q2 and Q3, had
returned to €1,349,000 by the end of Q4 2011. At present there are few reliable sources for
asking price date on Spanish real estate. It is clear that on Mallorca vendors are keen to
maintain or increase the asking price of their property. According to Idealista, average real
estate prices for areas of Mallorca had a slight downward trend between Q3 and Q4 2011.
Average transaction values were down from the year’s highest prices recorded at the end of
Q1 2011 in West and South Mallorca, while remaining fairly stable all year in the capital and
in eastern regions of the Balearic Island. Average prices in Palma de Mallorca ended the year
at €2,216 per m2. Properties in Calvia, West Mallorca finished the year with the highest
average property prices (€2,955 per m2). Now, for example, a sea view apartment in Mallorca
ranges from 350.0000 to 1.200.0000 Euros, and can be found detached villas with private
pool starting from 380.000 Euros, the difference obviously being about quality and location.
Sea and center remains as the most expensive property. The average payback period
estimated, with data from 2011 is 277 months or 23,08 years per 1 sq. m12.

2.4.3 Seling

If you own a property for sale in Mallorca despite the effects of the credit crunch
properties in Mallorca are selling like very good. To meet the needs of our Spanish Property
Buyers we constantly need a fresh supply of sensibly priced quality properties in and around
Pollença, Puerto Pollensa, Andratx, Palma de Mallorca, Soller or Deia, these are the most
desired areas for property buyers at the moment. To set an attractive price it seem always to
be lagging the market – adjusting their prices on a regular basis but not quite ever enough to
12
Calculated by dividing the average buying price with respect to average rental price per month.

9
attract serious buyers at any moment of time. There are many different asking prices on the
market, from the well priced to the ridiculous and, of course, a whole host in between. In
other words some asking prices you would have to chop in half to have even a chance of
selling while others with a 10% -20% reduction would sell in a “reasonable” period of time.
What is a “reasonable marketing period” depends on the market and the general economic
climate. In Spain anything from 12 months up to 2 years in official valuations. In conclusions,
asking price is critical but so is applying a reasonable marketing period. The sellers cannot
take a rule of thumb figure for discounting off asking prices to get to what a property is really
worth. For some it might be as much as 60% or more, while for others only 10%. There are
some good quality well priced properties out there that with a small negotiating adjustment of
10% or so will offer purchasers really good value. Other properties even at 40% reduction
will be expensive.

2.4.4 Renting

Its a great alternative to buy a property in Mallorca and pay its maintenance, taxes and
even mortgage by renting it. The Mallorca rental market is one of the most solid markets for
renting Apartments, Townhouses, Villas or Country homes. This is an extra incoming that
will make all the Mallorca Property related costs easier to afford. And even if the owner
cannot come as often as he would to his property at the Mallorca Island, it can be be well
maintaned by property rental services offered by different companies. Data from property
portals Idealista and Fotocasa show a consistent picture for average rental prices in Palma de
Mallorca, where values were maintained at around €8 per m2. The rental potential of a villa is
normally higher than an apartments and the after value will increase more.

3. Economic overview: Spain and Mallorca

Spainish economic indicators emphasize a medium position of the country with respect
to other countries in EU. Accordingly to IMF, data from November 2011, GDP is US$ 1.485
trillion, in the same time Real GDP growth with 0.8% respect to 2010. GDP per capita -
current prices US$ 32,176 (2011) - share of world total 1.84% (agriculture: 3.3%, industry:
25.8%, services: 70.9%). Inflation is 2.6% and Unemployment rate 19.4%. The Public debt is
about 63.9%. Annual average wage is US$ 11,426.
Mallorca: Median Monthly Disposable Salary is about € 1,200.00. Population working in the
tourist sector, approximately 80%, is contributed to Majorca's GDP. The island relies heavily
on tourism. Its businesses are construction and the real estate transactions, properties,
established businesses like restaurants, bars, hotels and shops; and farming. Mallorca
(Majorca) is a relatively wealthy part of the Spain and accordingly to estimations its GDP per
head is more than 50% above the Spanish average. Annual inflation rate is 2.8 %.

Conclusions

Mallorca is one of the luxury property markets in Spain. There is an growing demand
and slowly growing prices on the respective “products“ as the overal market trend. The
participans face a set of issues liked to the selling, buying, rating, constructiong and so on.
The latters come from economic, social and legal environment. In comparison to the general
spanish economic situation, Mallorca has a better situation, however with a higher inflation.
In general, this region represents an atractive investment, and this guarantee the economic
grow of it, in an long term perspective.

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References

Mallorca Domizil (March 2012)

http://www.mallorca-domizil.com/

Property Wire. News Portal (March 2012)

http://www.propertywire.com/

Spain Real Estate Market (March 2012)

http://www.estatesspain.info/

Spanish Property Insight (March 2012)

http://www.spanishpropertyinsight.com/

Balearic Properties (Company), (March 2012)

http://www.balearic-properties.com/

Mallorca Home Portal

http://www.mallorca-home-portal.com/

Lucas Fox International Properties, Mallorca Real Estate Report Q3, Q4 2011

Mallorca Property Market Blog (March 2012)

http://mallorcapropertymarket.wordpress.com/

The Telegraph (March 2012)

http://www.telegraph.co.uk/

Mihály Borsi. A Study on the Spanish Housing Market. Hungary 2009.

Google Trends
http://www.google.com/trends

Ministry of Housing (Ministerio de Vivienda) Spain. 2009

Bloomberg (March 2012)

http://www.bloomberg.com

National Statistics Institute (Spain), (March 2012)

http://www.ine.es/

CBRE Group, Inc. (March 2012)

http://www.cbre.com

Proposal Criteria Zoning for Integrated Coastal Zone Management. An example from Mallorca,
Western Mediterranean (Balearic Islands, Spain). Pau Balaguer Huguet

Academia.Edu
http://socib.academia.edu/

Ministry of Agriculture, Food and Environment (Spain), (March 2012)

http://www.magrama.es/

Ministry of Economy and Finance (Spain), (March 2012)

http://www.minhap.gob.es/

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Kyero. Real Estate Market Portal (Spain), (March 2012)
http://www.kyero.com/

Idealista. Real Estate Market Portal (Spain), (March 2012)

http://www.idealista.com

Fotocasa. Real Estate Market Portal (Spain), (March 2012)

http://www.fotocasa.es/

Global Property Guide (Spain), (March 2012)

http://www.globalpropertyguide.com

Global Finance
http://www.gfmag.com

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