The past year has seen increasing numbers of Britons snapping up property in Spain. House prices are low; the pound is strong and the sunny escape is tempting. There is a lot of information out there, and it’s easy to find a bargain, but not so easy to be sure you are making the right decision.
The key to avoiding costly mistakes is to get good information from reliable sources. There are plenty of people who will advise you to buy now, but some of these have vested interests. Be a savvy buyer and you are more likely to make your Spanish dream a reality.
Gloomy Spanish economy leads to low prices
The situation in Spain is very unstable. The 25% unemployment rates are the highest in Europe, debt-ridden banks are desperate to sell off their assets and a there is a massive oversupply of housing. It is unsurprising that many homes are selling for up to 70% less than they were at their peak in 2008. The IMF last week published a report showing that, including other struggling nations such as Portugal and Italy, Spain has seen the greatest decline in property prices. Spanish property prices have now plummeted to their lowest point in years.
The situation is a harsh contrast to the property boom years of 1997 – 2006. Spain built on average 675,000 homes a year, which according to a report by a unit of Spanish savings bank Cajama, was more than the UK, France and Germany combined.
Now, instead of the anticipated city paradises, there are so called ‘ghost-towns’ haunting the beautiful landscape of Spain. Building work in many areas has been abandoned before completion due to lack of demand. According to a Madrid-based property advisor, there are now 2 million unsold homes. One notable example is in Sesana, 80km south of Madrid, an intended commuter town where 30,000 people were due to live in immense apartments, which are now left abandoned. Spain also has enough land approved for development to build another 4 million homes. But many of the once landscaped areas which were due to be developed on now lie deserted and bleak.
Brits are flocking to buy property in Spain
This leaves the door open for thousands of interested UK buyers who can smell opportunity quicker than you can say ‘paella’, albeit perhaps at the expense of taking advantage of the misfortune of our Iberian friends.
British buyers are not slow up the uptake. UK search portals have rocketing numbers of searches for European property, with Spain getting the most hits. According to the latest search report from Rightmove Overseas, 21% of all searches in September were for Spanish properties.
The bargains are impressive and plentiful. From a four bedroomed apartment in Valencia for just E180,000, to a country house with 5 500 square metres of land and a swimming pool, which was on the market for €220,000 in 2007, now just €99,000.
Should you buy now?
The low prices of 2012 may be a great opportunity for buyers. Many experts feel that British investors should make the most of the current market situation in Spain.
Numerous websites selling Spanish property will advise you that now is a good time to buy. For example, several claim that if you want to make significant savings, consider buying as quickly as possible. They recommend the last quarter of 2012 as an optimum time to buy, pointing to January tax reforms, which will add 6% to any new build property acquisitions. Also mentioned are the current discounts offered by Spanish banks on their stocks of repossessed properties.
However, be aware that many people who advise purchasing now may not have your best interests at heart. Estate agents want to make money, and Spanish banks are desperate to rid themselves of the vast pile of unsold properties they have. With thousands of new and repossessed homes to divest, many banks like Bankiahabitat also have their own websites promising discounts of up to 60% off the original asking price.
Pound is strong against the euro
The strong performance of sterling against the euro, along with 4 per cent VAT until the end of the year, is a definite bonus and has already convinced many Brits to invest. According to X-Rates, the euro is currently 20% weaker against a basket of other major currencies, which in the opinion of buying agents Ultissimo makes now a better time to purchase than ever before.
Due to the drop in the Euro, some banks are also offering high loan to value mortgages. Britons can now apply for 75% or sometimes even 100% loans from Spanish banks for some repossessed flats. A tempting offer indeed.
An upwards trend?
While many believe this is only the start of the bust, there are signs that the Spanish housing market is actually on the up, making now the best time to purchase.
Foreigners invested over €4.5 million into the property market this year, and over the last month sales prices in most major Spanish cities have increased. For example, according to Idealista.com, prices have risen by 1.7% in Alicante. Marc Pritchard at Spanish estate agents Taylor Wimpey Espana feels confident this rise will continue. He reports an 11% increase in transactions in September 2012, compared to last year, and points out that several major airlines have increased the number of flights to Mallorca.
Merits of waiting
However, although prices are low, some experts believe that the bottom has not yet been reached. Will you get a better deal if you wait?
There is a huge surplus of housing in Spain, currently 2 million unsold homes. In a typical year, there is demand for 200,000 to 250,000 properties. According to the credit rating agency Fitch this oversupply means that prices will be unlikely to recover for many years.
Many also feel that prices are not accurate. An April study from The Economist concluded that house prices in Spain were 27 per cent overvalued. The investor after a quick buck should consider that most regions’ prices are still not realistic.
If you are purchasing land to build on in the future then it may be prudent to hang on. According to Suntrap Property, in late 2013 or early 2014 financial institutions will be looking to sell off land they accumulated in the boom years and prices will be tempting.
Location, location, location.
The location of a property can be considered the main driving factor determining if it is a bargain. Mark Pritchard of Taylor Wimpey Espana stated:
“At present, it is a good time to buy as long as the location of the property is good”.
Broadly speaking, there are two main types of location: the authentic rural Spanish property which perhaps has been passed down generations for example in Catalonia; and the purpose-built modern apartments on the Spanish Costas for example in Alicante. Buyers can also be loosely divided into two areas: those lifestyle buyers seeking a permanent retirement paradise in a rural idyll; and those seeking a second-home which they can use for holidays.
Whether a property can be considered a ‘good’ location essentially means whether it will hold its value. Many areas where the great bargains can be found, such as parts of mainland Spain, are likely to take a while for the market to recover. Overall though, it seems to be the second home properties on the Costas that are the biggest draw.
Second home properties – the biggest bargains?
A study by Immoaction, a real estate agency in Spain, showed that 27% of Brits enquiring about Spanish property were interested in purchasing a second property. British people want a second home in traditional locations where they like to holiday, such as Benidorm and Torrevieja, according to Rightmove Overseas.
Banks are dramatically lowering their prices on these types of properties. There are big discounts available in some areas and buyers can get real bargains with price falls of 40%-50% off their peak.
Many of the cheap prices are in areas when the developer has got into financial trouble leaving the banks with hundreds of thousands of empty flats. The biggest falls are in the Costa del Sol, with Lleida in particular offering the lowest prices. There are a large number of these new builds with prices as low as €86,000 for 2 and 3-bedroom flats. Despite the properties being in a complex with swimming pools and just minutes walk from the beach, all the flats remain unsold, and the low prices reflect the desperation of the sellers.
However, these coastal areas can also be considered the riskiest ventures. Claire Nessling, director at Conti, an overseas mortgage specialist states:
“Many so called bargains are being offered at bargain basement prices because they are of poor quality and in undesirable locations”
Countless numbers of these cheap developments were also built to sub-standard levels. It is possible that many did not comply with planning rules and licences. Buyers need to check the build quality and check the history of the site. Some properties have been built on dried-up river beds!
Post-purchase building maintenance can also cause problems. Check the service agreements and find out who is in charge of maintenance e.g. if the lift stops working. Also enquire about the laws relating to service charges which can escalate if other flat owners default.
There are numerous horror stories of Brits buying properties and then discovering they do not have full ownership, the purchase is illegal, or the property has fraudulent planning permission. Unfortunately, there are many cowboy builders who have skipped corners and will happily leave the inexperienced buyer to pick up the very expensive pieces.
The stern warnings may imply you would be crazy to purchase any property in Spain at the moment, or ever! But any negativity is unlikely to put off hardcore lovers of Spain. According to a recent study by annuity provider MGM Advantage, Spain is the top retirement destination for Brits.
‘Local’ real estate properties – the sensible buys?
Even though prices may not have fallen as sharply as beach areas like the Costa del Sol, the best buys appear to be in the countryside. A village property in a nice town will hold its value much better than an urban ‘box house’ which is very likely to lose value.
Prices have still dropped considerably in rural Spain. Many of these properties are also located in stunning countryside, just a short inland drive from the beach. For example, the Costa Verde in Northern Spain is completely unspoilt and you can find a rustic stone property, with land, for under £50,000. In the summer the asking price for one 2-hectare country estate was €57,000, a big drop from its 2009 price of €149,000. It may take a bit more driving around to find estate agents who speak English but your savings will recoup any efforts.
Bear in mind however, that many of these properties are in need of restoration. Do not underestimate the costs of this, often around £150,000, or overestimate the building permissions you may struggle to obtain in Spain’s strict rural areas.
Be a savvy buyer
The best advice is to be cautious when buying any property in Spain, and take your time. Spanish property law is quite different to the UK. Make sure you are up-to-date on laws, use legal advice and find a reputable bilingual lawyer. Also find out who owns the land. Is it the bank or a private individual? Check the paperwork. This needs to be perfect or you may risk making an illegal purchase, and can be invaluable in cases of boundary disputes, subsidence etc. Visit the property first and remember you can always rent in an area first to ensure you like it.
In essence, the investor should look for a property which will hold its value well, rather than just hunting for a bargain. Consider the location, and the type of property you want. Remember also that all properties have their individual merits, regardless of the location. There are always bargains right next door to more dubious buys and careful buyers can hunt these out with a little know-how.
No-one can say with 100% certainty whether now is the right time to buy. Pick carefully, do your research and take your time. Making an informed decision is the best way to avoid ending up with a toxic asset.