Property Investment - Spain

My favourite foreign investment area is the Costa del Sol, Spain. Anyone who has visited the area recently will understand it’s strengths which I will now highlight.  Below I examine the strengths and risks of Spanish Property Investment, and give some practical advice on purchasing a buy to let property in Spain.

Strengths of Spanish Property Investment Market

The biggest single factor is probably the sun – 320 days of sunshine a year, an average winter temperature of 18 degrees centigrade, dry climate, warm all year round and a fantastic holiday and retirement destination. Property prices are reasonable, with 2 bedroomed luxury apartment overlooking golf courses for about 200,000 Euro. The supply is becoming restricted since most land banks have been used up and families find it difficult to release land because of the intricacies of multiple ownership within Spanish families. Environmental and planning legislation has tightened up considerably, and the amount of coastal land for development is drying up.

Meanwhile, millions of North-West Europeans and Spanish are migrating south in the next five years to take advantage of the climate and all weather lifestyle. The local economy is booming. Malaga airport has expanded with direct low cost flights to many European destinations, particularly the UK. New and improving roads and rail links to Madrid have reduced travel times for the Spanish to this development area. The Spanish economy is growing at a steady rate and probably still has some way to go since it joined Europe later than other NW European countries. Low cost airlines have given the area an extra boost – many people come on holiday more frequently, some for short periods.

Golfing is become big business, taking advantage of the excellent climate and beautiful coastal scenery with mountainous back-drop. The Spanish generally speak English, which helps, and are friendly and inviting. The outdoor lifestyle appeals to many - barbecues, beachside restaurants, marinas and habour-front terraces and sea-front promenades. Away from the coast in a few minutes, up into the mountains for beautiful walks and visits to mountain-top Andalucian villages.  The area also has national parks close to the coast. Is it any wonder that this area is attracting high-tech companies and the services sector to relocate to towns like Marbella?

The cost of living is quite reasonable by Western European standards. Currency risk is low since Spain joined the Euro – for UK citizens, as interest rates slowly converge to the lower ECB Euro interest rates, it is likely the pound will decline by say 20+%. So as long as you believe the UK will join the Euro in the not too distant future, it might be wise to expose part of your property portfolio to the Euros. A final comment on strengths is that some people describe the Costa del Sol as the “California of Europe” – I can see many comparisons – for those with some foresight, it could be that the Costa de Sol is in for a period of economic growth and property price increases akin to that experienced in California from 1960 to 2000.

Why should property prices in Spain rise?

Spain has seen quite dramatic property price increases in the last few years which many may view as an indication the market has risen too fast – about 15-20% in the last three years, though about 23% in Malaga province in 2003 and higher in some hot-spots along the coast. This does not show any signed of slowing yet. The price increases are probably caused by a combination of:

• Low supply – only more expensive developments are now being built (180,000 Euro+)
• High demand – from UK and other European citizens buying second and/or retirement homes, some purchasing buy-to-let investment property
• High local demand from Spanish people re-locating south and Madrid citizens retiring or buying holiday homes
• The Spanish economy is growing strongly with robust wage earnings growth
• Spanish and European development money is being pumped into the infra-structure, communications and amenities, as the country catches up with other Eurozone countries
• The Costa del Sol has got something for everyone – sun, sand, sea, mountains, culture, history, sailing, scenery, shopping, golf, warmth, winter skiing (Sierra Nevada)

If one compares the property prices of Holland, the UK and Ireland with those of Spain, it would seem that Spain has quite some way still to go. Equivalent property prices in the UK and Ireland are probably some 40% higher, albeit GDP is higher. As Spain GDP per capita catches up with other European countries, possibly even overtaking some of them, property prices should follow suit. This, and the influx of foreign retiring baby-boomers and relocating business should drive prices higher in the longer term. There does not seem to be any signs of a slowdown yet – the market is now driven more by affluent Spanish and UK citizens, rather than German and Dutch purchasers. As long as Madrid and the UK see higher property prices, it is likely that a ripple effect will support Costa del Sol prices as people re-mortgage and buy second homes, retirement properties or buy-to-let investments (or properties that fulfil all these requirement).

Rental Potential of Spanish Properties

One big attraction for property investors compared to many retirement or holiday destinations is the good rental yields and returns available on buy-to-let property. Because the area is an all year round holiday destination, and many elderly Spanish and NW Europeans choose to re-locate for the winter months to the Costa del Sol for health reasons, it is possible to keep void periods to a minimum and take advantage of high peak summer period rentals as long as the property is in a good location and is attractive. Yields over 10% can be achieved with apartments and studios close to the coast or on golf courses.

What are the risks of Spanish Property Investment?

Politics: The new socialist government could be viewed as a risk by some – however, the new Prime Minister used to govern in Andalucian, is Andalucian and it is thought would not want to suppress development and opportunities in such a critical Spanish economic zone.

Terrorism: It is not thought by the locals that the Madrid March 2004 bombings will have a material impact on the investment potential of the Costa del Sol. In addition, the threat of terrorism by Basques on the Costa del Sol is not thought higher now than at any other time.

Demographics: Another slight concern is the longer-term demographics of Spain – the Spanish fertility rate is now about 1.2 (births per family). However, because fertility rates were so high in the late 1940s to early 1960s, this age group of Spanish baby boomers will be retiring – and many of the them will head out of Madrid (which is cold in the Winter) to the Costa del Sol. Remember the Spanish like to congregate in crowded areas – so expect to see them on the coast in busy sea-side resorts (rather than in the country, rural or mountain areas). This is also where retiring NW European baby-boomers will generally be heading – to take advantage of the sun, sea, sand, golf, swimming and tennis etc plus all the other amenities and nightlife.

Taxation: Greater transparency of taxation between Spain and other EU countries means that less “black money” will be invested on the Costa del Sol. Anecdotal stories of German and Dutch selling up because they now have to declare they own property in Spain after Spain’s collaboration with other countries tax authorities will likely not have a significant material effect on the market. Another risk is higher Spanish property taxes or changes in tax legislation – this cannot be ruled out, though it is not thought likely the Spanish government will want to destabilise the property market for want of losing votes from the average voter. One cannot rule out some form of stealth taxes from a socialist government that may wish to extract some value from property to put into infra-structure and social services, though it would be unlikely this would knock a strong property market off course, particularly in an area where demand currently far out-strips supply.

I struggle to find many significant risks to investing on the Costa de Sol – rewards seem to far outstrip the risks in all time horizons.

How can I go about purchasing on the Costa del Sol in Spain?

There are many reputable and many less than reputable property development companies and agents in Spain. My recommendation is to contact:

• AndalucanDreamHomes.com – this real estate agent is owned by two reputable Spanish and Dutchmen and has a long history of providing overseas investors and property purchasers advice and introductions. They only deal with reputable developers – the ones least likely to have difficulties. They also focus on property which has good investment potential and can guide a purchaser to the areas of their interest anywhere along the Costa del Sol. They are reputed to be the largest agent in the coast and have professional staff that can also advise on legal, tax and financial matters affecting a purchase. I suggest contacting Len Bage on +34 952 667 160 Office. These agents can show you around the properties. For off plan developments, their commission is taken from the developer (not yourself), so there does not seem to be any benefit in approaching the developer direct.

What type of Spanish property do I choose?

A good market for buy-to-let seems to be two bedroomed, two bathroom apartments in golf complexes, or similar apartments or studios close to the beach or on the sea-front of resort, for all year round letting. Do not let you emotions run way with you – you might find a lovely villa 20km into the mountains and find it impossible to rent for all but the10 week peak summer season – best stick close to amenities and infrastructure. Also, your villa can get broken into and is higher on maintenance costs.

The property should also be within 50 minutes drive of Malaga airport (preferable within 30 minutes). Remember, if it only takes 10 minutes to drive to the airport, you might attract weekenders from Madrid or short stay lets from the UK. Good all year round rentals would be on the sea-front or first line golf apartments or townhouses. Make sure you check the local market by speaking directly to a letting agent before purchasing buy-to-let properties. I favour the area between Marbella and Torremolinos – a lovely coastal strip within 30 minutes of the airport.

Note prices and cache increase towards Marbella, whilst rental yields tend to drop a bit. You might find one of these purchases can be bought as a future retirement apartment or second home, meanwhile renting it out to capture the capital value increase most likely to occur.

What about off-plan – how does it work?

Purchasing off plan in Spain is relatively straight-forward. First you review all your options with a reputable agent – they will drive you to these developments and introduce you to the developers sight office / showroom. Then you choose the type of flat using models, diagrams and the show apartment if one has already been build. Then you choose the actual location of your “to be build” apartment, townhouse or villa. To commit, you normally need to place a 6000 Euro non-refundable deposit.

Normally after about 30 days you need to place a further deposit of 30% of the purchase price (minus the 6000 Euro), plus tax of 7% of the 30%. Legal and other costs are a further 2-3% of purchase price, some portion payable on deposit of the 30%, others payable on completion. At this point you do not need to have got a mortgage, but will be asked whether you require a mortgage from the developer. It’s generally best to say “no” since if you change your mind later, you can be charged say 1% of the purchase price for breaking the mortgage agreement – you can always go back and say “yes”. If you are sure and want to take no risk that the bank will refuse you the mortgage later, then you may wish to say “yes” to the offer.

Most developers will allow you to sell your contract before completion. Many people minimise capital gains tax by selling the property just prior to completion. Note that estate agent costs for marketing and selling the property are in the region of 6-7% of purchase price, so you need to make this amount and the 7% tax and 3% costs before you break even. In most developments, as long as you buy the property for a reasonable price, the capital value should increase by about 10% purely because you buy off-plan and take some sort of risk – e.g. you can imagine a nice resort while the bulldozers are levelling the place, when others may struggle with this concept (note: most people like to see, feel and touch what they buy).

In an established development in a later phase, this might only be 5% but on a virgin development on phases 1 or 2, you might achieve 15% to cover your agent’s fees and tax. From thereon in, it’s all about speculating on how the prices will rise between you placing the first deposit of 6000 Euro and just before completion. About the best time to try and sell is about 5 months before completion after the show apartment has been built. If this period is 18 months and prices are rising 15% per year, you should make about 22% profit on the full price, minus tax at 7% and agents fees at 7%, other costs at 3%, plus say 15% uplift due to early stage buy-to-let uplift.

If you sell after completion, you will be liable for a 35% tax as a non-resident unless you roll the property into a Spanish company, where the capital gain can be offset against operating costs. So if prices rise by 20% a year, you are likely to make a 50% return on investment assuming a 30% deposit. If prices do not rise at all in the area, you will experience a loss of say 10% of the sale price. You have to weigh up whether your 30% capital is best invested and tied up in something that “could” see a healthy uplift in about 18 months, or you would prefer to seek high rental income from buy-to-let or an opportunity to buy used property to renovate and sell or let out. For investors who do not live in Spain, a good off-plan purchase can be attractive if price continue to rise – something that looks most likely in the next few years.

What about buy-to-let in Spain?

Another option is to purchase buy-to-let property in holiday complexes that guarantee a certain rental yield for a full year over a fixed term at an escalating rate related to the Spanish cost of living index. These are attractive for investors that require a low risk investment that more than covers the cost of borrowing and allows exposure to the Spanish property market. Investors wanting to tie in their capital at low risk for extended periods see this as an attractive option – such opportunities can be introduced by AndalucianDreamHomes.com.

Other buy-to-let opportunities are higher risk but potentially higher reward. Studios overlooking the beach can be bought for about 110,000 Euro in places like central Fuengirola that have very low void periods and relatively high rental yields of about 10+%. These require a professional managing agents who do the marketing to reduce the risk of large void periods – best to convince yourself of the economic merits of this option by talking directly to independent letting agents.

What geographical areas should I focus on?

For the investor in the medium term, my advice would be to stick to the coastal strip between Malaga and say 15 km west of Marbella, within 50 minutes of the airport. Areas inland have less rental potential since the average holiday-maker wants to be close to the beach, golf courses, attractions and amenities. Further west from San Pedro the area (55 minutes drive to Malaga with no heavy traffic) is less developed albeit it is also beautiful. If access to Gibraltar airport improves this will further boost areas such as Estopona and Sotogrande but prices have already risen a lot here and it is not as accessible as the eastern part of Marbella for the rental market. Furthermore, businesses are relocating to the Marbella-Malaga area - this also helps to boost rental demand.

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