With further recession and sovereign debt crisis looming, is this still an opportune time to buy property in Mallorca?

Mallorca property market - what next?

Continuing doubts about recovery from recession and the additional threat of a Euro debt crisis are once again putting pressure on property markets across the world. The stronger markets, prime locations in Mallorca among them, have seen some recovery from the low points of 2009 but sales are still thin and buyers remain tentative.

Here is the latest MPP assessment of the property market in Mallorca.

It has to be said the market has cooled off somewhat since our last report. That is not to say there are less sales being made. Rather, the increasing strength we saw early in the year has not carried through noticeably into the summer. The growth has flattened out somewhat and the level of overall sales appears to have settled at a higher level than at this time last year, but still relatively low overall.

The influences behind this are straightforward. Concerns over a continued recession and the precarious position of the UK economy have increased. Fear of sovereign debt crisis in the Eurozone has unsettled many who were thinking of returning to the market. At a practical level, the flight disruption caused by the eruption of Eyjafjallajokull, the Icelandic volcano, has been a significant negative factor too.

Whilst these factors have kept the lid on a stronger recovery, estate agents dealing with an international client base and prime locations have seen the most improvement. The indications are that this is holding firm with more buyers from Germany and Scandinavia in particular looking for good opportunities. The increase in the value of Sterling is beginning to bring UK buyers back into the market to look for the same.

This has had some impact on asking prices. Idealist.com, a leading Spanish property portal, reports that in May, asking prices for resale properties in Spain were static overall but rose in the Balearics by 0.6%. Whilst one isolated statistic does not indicate a trend, it seems likely that this increase came mostly from prime location properties where the demand is higher and owners have more confidence in the value of their assets.

Another way of looking at the changes in relative prices within Mallorca is as "correction" to a market that had become overblown. We stated in our February update that the differential, i.e. the amount by which they had become overblown, was lower for prime properties than for non-prime properties. Therefore, the overall price drops in prime locations would be less and the low point for these properties would be reached more quickly.

The recent evidence from the market is that this is exactly what is happening and it is quite probable that the price correction is reaching its end point for prime properties, but not for non-prime. This is not to say that the opportunity in the prime locations is over, rather that the "average" prices in these areas have leveled out. Within this there will continue to be pressure sales where below-average price deals can be made and these are the properties to target as good investments.

"Prime" does not mean expensive

One could be forgiven for thinking "prime" necessarily means expensive too but this is not the case. Whilst prime locations include the most sought-after and expensive spots such as Deia, front line Portixol and Puerto Andratx, "prime" also incorporates locational attributes such as sea views, mountain views and proximity to good beaches. It is possible to buy apartments with good sea views for less than 300,000 Euros and there is currently an increasing demand for such properties.

In practice, the prime / non-prime classification is too simplistic and there is a mid-ground of properties that fall somewhere between the two. For example, more people are looking for country houses and townhouses as permanent and semi permanent homes. These people are prepared to go outside of the most established international buying areas to get more choice and better value-for-money. The properties they are seeking may not be regarded as "prime", but good opportunities are limited and these sectors should fare well in the future.

Some beach resort towns such as Cala d'Or and Santa Ponsa have been hit hard by the recession and would not generally be regarded as "prime" at present. But these are well established and popular resorts with solid local communities, so they also fall into this mid-ground where there are already interesting buying opportunities.

The non-prime classification should be reserved for some of the more remote package-holiday resorts and newer resort areas that are not yet established. Prices in such locations are likely to fall further and may take a very long time to come back up to pre-recession levels.