With Madrid Poised for Continued Price Growth, These Neighborhoods Are Smart Buys for Investors

With its comparatively low home prices, popular “golden visa” program and enviable quality of life, Madrid’s property market has become an especially in-demand hub for global investors in recent years, particularly those from Latin America.

After a slump during the depths of the pandemic, “This year around May and June, sales started increasing a lot as people came back,” said Javier Velduque, prime residential coordinator for Knight Frank España in Madrid. “Latin Americans are now [most of] the prime buyers in Madrid.”

And rather than buying at the top of a frothy market, buyers who get into Madrid now are entering a market that’s poised for continued price growth. The city is on track for 3% annual home price growth this year and 6% growth in 2022, according to a June market forecast from Knight Frank, and in a separate July report, Engel & Volkers forecast 20% increase in sales transactions in the city over the course of 2021, driven, in part, by high demand from foreign investors. 

“Madrid offers some of the best returns in Europe,” said Mercedes Pulido, sales manager for Lucas Fox Madrid, an affiliate of Savills associates in Spain. “The entry price is extremely low [compared to other European capitals], and although Madrid property prices rose in some areas in 2020, there is still a lot of room for appreciation.”

Luxury buyers appear to be making their near-term buying plans accordingly; per data from Knight Frank, while 26% of ultra-high-net-worth Individuals are planning to buy a new home this year, for wealthy Spanish investors, that number rises to 35%, with many setting their sights on a new property within the country’s borders.

In other words, in addition to the strong activity from foreign investors in Madrid, “There is a strong likelihood that domestic and European investors will play a much greater role in 2021,” Ms. Pulido said.

For buyers interested in gaining a foothold in the city as it takes off, here’s what to know about Madrid’s appeal, and which neighborhoods in the city are likely to see particularly strong price growth over the next few years:

Lower Price Points and Investor-Friendly Rental Returns

While Madrid still offers plenty of luxury property options for high-end buyers, these homes come at a fraction of the cost of comparable options in other European capitals.

“In Madrid, we have a lot of room for princes to increase,” Mr. Velduque said. “Especially compared to cities like London or Paris, [where homes cost] two to three times more.”

Spain’s version of a so-called “golden visa” program—in which buyers of properties priced at €500,000 (US$592,042) and up become eligible for a Spanish visa, which in turn gives them flexibility to move throughout the European Union—has created added momentum in Madrid’s market, and increased competition for comparatively low-priced “prime” properties.

“About 35% of prime property buyers [in Madrid] are international, and almost all Latin American,” Mr. Velduque said. “Now that you can get the golden visa for €500,000, there are a lot of people buying these kind of average houses in order to get the visa.”

For investors buying with an eye to renting out their properties at least part of the time, Madrid is a promising investment, as well. 

While rental returns in cities across the globe took a hit in 2020, according to a July market report from Savills, Madrid is on track to see an average prime residential rental yield of 2.9% in 2021, on par with the global average for major cities. Additionally, supply shortages may push overall rental prices up across the city over the next year, according to Savills.

“We have low taxes in comparison to other cities in Spain, and our government in Madrid is trying to attract investors,” Ms. Pulido said. “People visit, fall in love with it, then look for a pied-a-terre. They’ll spend €1 million for a residence they’ll use two or three months per year. You can also rent it out or Airbnb it short term, and obtain some financial benefits from your house even when you’re not living in Madrid.”

Neighborhoods on the Rise

Prices in Madrid are reasonable enough that investors can still afford options in the city’s traditionally high-demand areas—including Almagro, neighborhoods within the more broadly popular Salamanca district, and Justicia, all prime neighborhoods with grand properties and international name recognition.

“These neighborhoods are the most in-demand, and are really well known in Latin America, for example,” Ms. Pulido said. “They know the neighborhood and want to buy in this neighborhood. And there are a lot of people now teleworking [from these properties]. Madrid has a very advanced, cheap cable network.”

Mr. Velduque added, “Salamanca and Almagro, these kinds of areas are always profitable. Prices are always rising, there are wealthy people around, good restaurants, designer stores.”

As in so many other cities, buyers have also spent the past year and a half gravitating toward traditionally more suburban neighborhoods that offer more outdoor and green space.

“The north and northwestern zones, like Aravaca, Pozuelo de Alarcón, Majadahonda and Las Rozas have had an increased demand due to the pandemic and we expect that this trend will remain,” said Sonia Catalán of Engel & Völkers Madrid. “Living in bigger houses with gardens, surrounded by nature and relatively distant from city centers is becoming more attractive.”

The new Four Seasons Hotel, which opened in September 2020 in the city center, is also now drawing investors to neighborhoods in the surrounding area including Cortes (located in the broader Centro district), and the traditionally more tourist-heavy Sol-Gran Via.

“After the [opening] of the Four Seasons, that area is getting more expensive, and more and more interesting,” Mr. Velduque said. “There’s a lot of room [for prices] to grow, so it’s a very good area to invest. You don’t have the pricing of Almagro or Salamanca, where we’re now seeing houses sell for as much as €15,000 per square meter. Near the City Center, you’re looking at around €5,000 per square meter.”

Mr. Velduque added, “The whole central area around Cortes, and La Latina [to the west of the Centro district], these areas are getting better and better, and seeing prices increase by a lot.”

While some parts of the city unquestionably have more room for price growth than others, the trend line across the board is clear: Buyers who get into Madrid’s market in 2021 are more than likely to be rewarded with returns on their investments.

“We’re convinced that [price growth will continue], because we now have 20 leads per day of people wanting to buy houses in Madrid,” Ms. Pulido said. “It’s become a trending capital in Europe.”