Iceland review - 2019, Page 62

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Iceland Review
A glut of luxury condos
A real estate investor who wished to remain anony-
mous due to ongoing business relations agrees that
investors and city planners made a serious miscal-
culation when plans were drawn up for hundreds
of expensive luxury apartments for the city center.
“Most of the downtown luxury condos which have
been coming onto the market or are being com-
pleted have yet to find a buyer, and out of the few
that have been sold many were actually sold in some
larger property swaps. I’ve heard of owners who are
shopping around for summer homes in exchange
for these luxury flats. Investors vastly overesti-
mated the market for these high-end apartments,
no question.” Asking prices have also gone down
by 25%, from up to ISK 1 million ($8,000/€7,150)
per square metre to ISK 750,000 ($6,000/€5,350).
Prices of condos in one of these projects have been
slashed down to its construction costs.
Spurred on by the banks, who had taken over
large property portfolios following the financial
crash, investors rushed to build luxury condos.
“They probably thought that the safest bet was to
build for people with money.” It should not come as
a surprise that some of this speculative investment
was financed with money which had weathered the
2008 storm in tax havens. “It’s one of the things
people have been talking about. Some of these
luxury apartment projects were funded with money
that flowed from off shore, fortunes which former
bankers and Corporate Vikings had managed to
deposit in tax havens before the crash.”
Despite the attention, this issue has received
both in local and international media, the glut of
luxury condos is not a serious problem, he tells me.
“It might take years, but all of these apartments
will be sold. There is no danger of any real estate
standing empty in 101 Reykjavík for very long.”
A bullet dodged
Investors and others who are intimately familiar
with the market argue that Reykjavík might have
dodged a bullet on this issue. High-end real estate
has become a magnet for foreign property specula-
tors who have bid up housing prices in many cities
around the world, creating serious property bub-
bles. So far, very little if any such money has flowed
into the Reykjavík market.
One reason is the rapid strengthening of the
Icelandic króna between 2012 and 2016, thanks to
the boom in tourism, made investments in Icelandic
real estate less attractive. An 8% appreciation of
the króna in 2015 and a further 18.4% appreciation
in 2016, the largest in Icelandic monetary history,
made Reykjavík real estate less attractive to
international investors. Calculated in US dollars,
real estate prices in Reykjavík more than doubled
between 2014 and 2017. No housing market world-
wide has seen similar increases.
The króna has again depreciated by more
than 20% since 2017, perhaps making Reykjavík
real-estate more appealing to foreign buyers, but
a housing economist who spoke off the record due
to contractual constraints explained that foreign
real estate investors, who are primarily looking for
safe investments, are wary of the kind of “instabil-
ity which has characterised the Icelandic market.”
Instability is perhaps too gentle a term.
A few large foreign investors have entered the
market, but these have by and large invested in
hotels.
Too many hotels?
One of the most important forces driving the
Icelandic property market has been tourism. In
addition to luxury condos, hotels became a favou-
rite of real estate investors following the crash.
Many housing activists have therefore pointed to
hotels as another example of warped priorities.
However, the most important difference between
hotels and luxury condos is that the demand for
hotel rooms is very real. The growth in visitor num-
bers from fewer than 500,000 in 2010 to 1.8 million
in 2016 left existing hotels booked to capacity. With
double-digit growth rates in the tourism industry,
hotel construction was not booking on speculative
future growth, but very real current demand.
Some of the largest hotel projects announced
in 2015-2016 have also been put on ice as banks
reassess the prospects of the tourism indus-
try. This includes two hotels on the outskirts of
downtown Reykjavík which were set to become
the largest hotels in Iceland, with some 710 rooms,
nearly a third of the 2,400 new hotel rooms which
“Most of the downtown luxury condos which have been
coming onto the market or are being completed have yet
to find a buyer. Investors vastly overestimated the market
for these high-end apartments, no question.”