Feb 16, 2021 Newsletter

Investors, fasten your seatbelts: late Q1 – early Q2 –  is the best time to buy

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Gonzalo Bernardos is a lecturer and director of the Master’s in Real Estate at the University of Barcelona. I studied with him some years ago. He is a man with a distinct opinion about the economy and real estate. The longer I know him, the more I appreciate his vision. But above all, he is extremely good at predicting the market. I recently read an article from him and I believe his foresight of what will happen in the real estate market in 2021 is spot on.

For asset investors, a crisis offers an opportunity to increase their profitability. There is not per definition something ethically wrong about it. Quite the contrary, in times of crisis, selling a property is often the only income safety net available for the seller.

Real estate investors can be divided into two main categories: speculators and asset investors.

The first category seeks to sell their acquired properties quickly and their profit is generally equivalent to the capital gain achieved.
The latter keep them for a long time, so much so that most of them end up being inherited by the family. The profit made comes from the rents received.

The current crisis has all the characteristics desired by speculators. It will have a short duration, the price will fall a lot in a short time, bank financing will remain high and it will generate the exit to the market of many well located and poorly preserved apartments, this being their preferred asset.

According to professor Bernardos, if a large part of the population is immunized in June, the real estate crisis will not last six years, as the one warned between 2008 and 2013, but will not reach two years. 

In the current fiscal year 2021, sales will increase by 15% and the price will stop falling in its final part. However, between March 2020 and December 2021, the sales amount will decrease by 16%.

Unlike in the previous crisis, in the current year, it will continue to be easy to get a loan to buy a home. Mergers will not prevent intense competition in the mortgage segment, which will enable many investors to borrow at the lowest interest rates in history. In fixed mortgages, it will not be difficult to obtain 1.5% and in variable mortgages Euribor at 1 year +1%.

The apartments for sale coming from inheritances will be the great protagonists of the market due to the death of many elderly people caused by the Covid-19. 

Most of the bequeathed homes will have to be completely refurbished, as their previous owners did not have enough money to update them, did not want to spend it on making changes to them, or wanted to avoid the inconvenience of any improvements.

The ideal time to acquire one of the above will be between the end of the first quarter and the beginning of the second quarter of 2021. 

At those dates, unlike in 2020, there will already be many units for sale, as the strict confinement during the first wave considerably delayed the necessary steps to receive the inheritance.

In addition, some will already have been on the market for almost six months. This is enough time for many descendants, after receiving no satisfactory offers and almost no interested parties, to realize that the price initially established was an impossible wish to become a reality.

The need to obtain urgent liquidity, either to improve the complicated economic situation of one or more of the beneficiaries (the neediest is the one who usually sets the sale amount) or to cover the inheritance tax, will make the new price set be equivalent to the market price and in some cases even below it.

However, only a few habitual speculators will be able to take advantage of the opportunities. The rest will be prevented from doing so by the heavy backpack they are carrying, consisting of several homes for sale and a high level of debt. An explosive cocktail that will prevent banks from granting them new loans.

The number of trapped speculators, especially in Barcelona and Madrid, is very high and easily visible in the main real estate portals. They are the owners of completely refurbished apartments that imitate the new ones in the distribution of spaces, in the colors of the walls and doors, and in the bathroom and kitchen furniture.

The crisis surprised them and destroyed their plans. A situation that everyone suffered. However, they distinguished themselves by reacting in the wrong way. They thought it would be short-lived (a few months) and missed the opportunity it offered them.

For those who had several homes for sale, the opportunity was to sell as many as they could to nervous buyers in May and June 2020, even if with some they would gain nothing and with others, they would lose a little of the capital invested. An easy task, if the location was right and the discount offered was around 5%. In most of the country’s cities, an option that in September had become difficult and in January 2021 almost impossible.

The strategy is to sell fast and buy slowly. Visit many apartments, make low offers for all those that have some special feature, either location, height, give most of the rooms to the street or be part of a unique building, and acquire them in stages. 

Purchases should start in February and be completed when all those who have been injected with the necessary confidence by the vaccines to return to investing in housing enter the market.

For equity investors, the crisis offers them the opportunity to increase the profitability of their portfolio in the coming years. However, most of them need to change their acquisition policy. The main change would be to increase geographical diversification. An alternative could be to buy homes in different neighborhoods of the same city or in different locations.

In Barcelona, it would consist of buying in Nou Barris and Sant Andreu and also in peripheral locations such as Viladecans, Montcada and Molins del Rei.

The reason is that in the best areas of both metropolises the amount of rent since the beginning of the pandemic has fallen more than the sale price. Exactly the opposite has happened in districts with lower per capita income and in nearby cities where many poor families live.

Therefore, purchases in the former locations would reduce the profitability of the portfolio and those in the latter would increase it.

In short, 2021 is a great year to invest in housing. It is an exercise in sowing, with the harvest arriving in one of the following years. For speculators, the bargains are homes from inheritances. For patrimonialists, in addition to the above, numerous apartments located in neighborhoods and cities with little glamour, but with a notoriously higher rental profitability than that provided by those who own them.

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