These last eight months have seen an interesting change in the real estate market in Gibraltar. Some market reports have indicated that Gibraltar has not “burst” quite as hard as other European countries in this global recession.

Whilst we would agree with this in part, it is certainly apparent that activity has slowed down. Gibraltar is not capable of continuing a real estate boom when there is a global crisis at hand. However, it is also clear that it does seem to be faring more favorably than other countries which have experienced significant reductions in real estate values, which have fallen up to 50%.

The reality is that prices have, and will continue to fall until the financial markets recover and banks start lending at competitive rates. Many vendors have reduced asking prices between 10% – 15% so far this year, and sales are also completing below asking price. Furthermore, the increase in the number of new developments, combined with the increase in owners now looking to rent, rather than sell, has also had a negative impact on rental values. The correlation between rental income and sale prices is therefore showing a disparity with investment yields on the majority of new developments achieving under 5% gross yield. Typically, rental yields are below the cost of finance and this signals a clear sign that prices are too high!

What about the UK market? The Royal Institution of Chartered Surveyors reported last week “that the balance of surveyors reporting a rise in prices against those reporting a fall rose to -8.1 last month from -17.6 in June. The latest survey provides more evidence that activity in the housing market is picking up, albeit from historic lows. New buyer inquiries have now increased for nine consecutive months.” This has been reported in a leading national newspaper as the highest since August 2007, when the credit crunch first took hold of world markets, and marks a run of improving figures since the start of this year.

The Gibraltar property market has seen an estimated 800 new residential units delivered to the market since 2007. This includes developments which are still under construction, including Kings Wharf and Ocean Village. Our market study shows that on average, a range of 20% to 50% of new developments are now being resold by private investors. This indicates that many off-plan sales were speculatively driven with investors now needing to exit to release equity. Between 300 to 400 new units are therefore currently on the market.

Despite these figures, market sentiment remains strong. The local property market is fuelled by the growing economy and those corporations relocating to Gibraltar who bring with them many employees who need accommodation. This activity also stimulates the commercial sector as demand for office space continues.

We should also remember that our European counterparts have a significant role to play with our growing economy, many of whom buy property in Gibraltar to reduce their global tax status. However, it is also important to remind ourselves that buyers simply want, and expect to find a bargain in this market, and this will continue to stabilise prices.

So what of the end to the recession and the fall in property prices?

Nationwide’s price performance data shows that UK prices have risen 1.3% since the start of 2009 and they believe that there is a reasonable chance that prices will end the year higher than where they started. During the 1990’s property crash, house prices fell from a peak in the third quarter of 1989 and didn’t bottom out until the first quarter of 1993, three and a half years later. They fell 20.2% during that time, and it then took until the first quarter of 1998, five years later, for prices to reach their previous peak.

What of Gibraltar? The local housing market is picking up with new buyer inquiries increasing for four consecutive months. Will we follow the UK trend? There are two main reasons why we believe our market will move out of recession differently. One is that we do not suffer from high unemployment which maintains buyer confidence and the other is that the market should continue to experience strong lending growth. Hopefully we will see a bottoming out within the next three to six months, with prices turning the corner in the second or third quarter of 2010.