SPANISH PROPERTY MARKET – PROPERTY IN SPAIN FOR THE BRITISH

One of the conundrums facing the Spanish property market is when Spanish property will again become financially appealing to British buyers - given the collapse of Sterling against the Euro which has affected both potential buyers and existing owners of Spanish property.

Obviously, the current strength of the Euro against Sterling has had dramatic consequences for anyone living in Spain and relying upon an income paid in Sterling. The difference between an exchange rate at 1.40 Euros to the £ and (say) 1.10 Euros to the £ is huge. In effect, the purchasing power of a UK pension in Spain has dropped by some 30% over the past couple of years. This has unexpectedly ruined the financial planning of many Britons and made, for some people, life in Spain too expensive to sustain.

Indeed, many ex-patriot Britons have had to place their properties in Spain for sale so that they can return to the UK. The danger of this is that many estates in Spain with a high density of British property owners have, as a direct consequence, a disproportionate number of properties for sale.

Of course, the more properties in Spain there are for sale in a given area the harder it is to sell (the laws of supply and demand) with any seller having to rely upon a severe price reduction to differenciate his property from his competitors. This is never more true than when an estate comprises more or less identical properties - which is often the case on ‘new’ urbanisations. To make matters worse, some estates in Spain are primarily ‘British’ and therefore unlikely to appeal greatly to other nationalities. This means that any likely buyers of Spanish properties on ‘British’ estates will largely remain fellow Britons – themselves hampered by the weakened purchasing power of Sterling.

Of course, many Britons bought their properties when Sterling was at 1.40 (or more) to the Euro. This means, very crudely, that they can drop the sale price of their Spanish property by 30% - and still get their money back (at current exchange rates).

The conundrum is obvious.

Property in Spain has fallen by (at least) 30% since the end of the boom in 2007. So, if you, as a Briton, reduce your Spanish property price by 30% (from its 2007 level) then your property in Spain is still not cheap - to a British buyer! In fact, the 30% drop in an ‘in-coming’ Briton’s purchasing power means that your Spanish property price has, in effect, not fallen at all. So, ironically, any UK buyer is going to be looking for a further price discount before he even begins to think he is getting anything like a real bargain.

In fact, ironically, Britons in Spain are not helping the vortex of falling Spanish property prices. At the moment, many are able to drop their prices by 30% with impunity – and then to drop them by a further 10% - 20% if they are prepared to take a (reasonably acceptable!) loss to extricate themselves from Spain. This is more than most Spanish or Euro sellers are prepared to countenance but acts to further destabalise the Spanish property market.

Certainly, it is no secret that the stabalisation of a property market is utterly dependent upon ‘distress’ sales being rare. Until that is the case, any property market will continue to be volatile with the emphasis being on continued falling prices rather than any marked ‘levelling off’.

In short, are prices stabalising on British owned property in Spain?

Sadly, I rather doubt it – although this could change should Sterling suddenly find sustained strength against the Euro. This would put money back into the pockets of those Britons in Spain drawing their incomes in Sterling and thereby make them less desperate to sell. It would also, as a side effect, force prices up as the Euro weakened and reduced the ability of British sellers to drop their sale prices ‘artifically’ on the basis of having bought when Sterling was strong.

In the meantime, can Spanish property offer value for money to in-coming Britons carrying Sterling worth some 30% less than a couple of years ago? The answer is a cautious yes. The unfortunate number of true distress sales (particularly on ‘British’ estates in Spain) provide some real opportunities to buy Spanish properties at bargain prices unthinkable a few years ago – even given Sterling’s depreciation against the Euro.1

ESTATE AGENT'S SALES COMMISSIONS IN SPAIN

Last week, I noticed an article in a major UK daily paper commenting upon the fact that estate agent’s commissions in Spain are ‘much higher than in Britain’. Indeed, the article pointed out that an ‘agent selling a property in Spain could earn up to five per cent of the sale value’.

I doubt that I was alone amongst expatriots living in Spain who expressed surprise at the moderation of the article writer. 5% sales commissions may seem exhorbitant in UK terms but in Spain they are far from exceptional. In fact, sales commissons of 10% are not unknown and a couple of times I have been offered sales commissions of 18%! The latter were by developers selling new build apartments around golf courses along the south east coast of Spain.

Incidentally, there was nothing underhand or secretive about the offers of 18% sales commissions. On both occasions the offers came formally by e-mail and an e-mail that would have been circulated to many other people in the industry, few of whom would have been unduly surprised by the amount. The offers were genuine and would have been honoured had a buyer been introduced and bought a property.

Of course, few buyers would be comfortable knowing that possibly some 5 % -18% of their Spanish property purchase value comprised (effectively) a sales commission. Indeed, I suspect that many British buyers would refuse, on principle, to buy a property on that basis.

In fact, property sales commisions vary considerably throughout Spain with the least amount normally around 3% of a given sale price (albeit that this is sometimes made up by both the buyer and seller paying 1 ½ % each to an estate agent). Alternatively, sales commissions for cheap properties can be commonly a straight 6,000 Euros (which equates to around 1,000,000 old pesetas) - sometimes irrespective of whether a property’s sale price is 25,000 Euros or 150,000 Euros.

Finally, some sales commissions are dependent entirely upon what an agent can obtain over a given minimum sale price. So, for example, a seller may say he wants 250,000 Euros from the sale for his property and allow the agent to sell the property for anything above that figure that he can make. If the property sells for 280,000 Euros - then the commission for the agent will be 30,000 Euros.

To some extent, estate agent’s commissions on Spanish properties can be likened to any business transaction where the businessman (the estate agent, in this case) tries to get the maximum possible out of the deal before him. There is nothing intrinsically wrong with this - although neither buyers nor sellers tend to ‘like’ the thought of (in UK terms) sometimes outrageously high sales commissions.

Certainly, if you are a buyer you should be alert to the way that estate agents work within Spain and the possibility that (on occasions) their sales commissions may distort the true value of a property. Equally, it is only commonsense to be wary of Spanish properties where high sales commissions exist. This can be an indication that something may be ‘wrong’ with the property concerned. If something is easy to sell - then it follows that there is little logic or need for a seller to offer a broker or estate agent a very high commission!

Of course, it is is not always easy to find out the sales commission being offered on Spanish properties. However, it is not impossible and a little probing can often reveal something close to the truth – even if it means, for example, contacting a development company (possessing a property in which, perhaps, you are interested) and pretending to be a potential agent. With private sellers, the answer can be to ask the seller directly. They may tell you and - in fairness - many estate agents will do the same, if requested. By no means, is an estate agent’s sales commission always a darkly held secret.

In fact, in my book ‘How to Sell your Spanish Property in a Crisis’ I urge desperate sellers to offer high commissions, well beyond the norm, to their Spanish estate agents. It is the best possible way of incentivising the sale of a particular property and is neither underhand - nor meant as a way of cheating a buyer. In this case, no moral criticism can be cast at a seller - who is just, understandably, exploiting one of the most effective tools in his sales armoury.

At the end of the day, as a buyer, you need to assess the value of a property on its intrinsic worth compared to other similar properties - irrespective of the sales commission element. Finding out later that a large sales commission made up a significant proportion of the overall price of your Spanish property should not matter if your purchase (all things being equal) was bought at the correct overall market price.

The only caveat to all of this is that the stakes for estate agents in Spain can be very high indeed compared to similar priced properties in the UK. To state the obvious, the sales commission on a 300,000 Euro property @ 5% is 15,000 Euros and @ 10% is 30,000 Euros. With 30,000 Euros p.a. being a good middle management salary in Spain, it is easy to see how a Spanish estate agent’s objectivity can be quickly lost in the temptation to make terrific money quickly...1

OLDER SPANISH PROPERTY - 6 REASONS TO USE A BUILDING SURVEYOR

Despite what is often said to buyers by unscrupulous agents, you should always employ a properly qualified building surveyor to survey your intended property in Spain (whether it is new or old).

Below are some of problems that can relate to older Spanish properties...

Subsidence
Just as for new Spanish properties, older Spanish housing can be affected by subsidence. Whilst a Spanish property may show few signs of movement in its early years, long term ground erosion, seasonal shrinkage or heave (often amplified in a rare very wet or very dry year) can reveal problems suddenly. The attempted cover up of such issues is quite common. However, often it will take an experienced building surveyor in Spain to identify any tell tale signs of past or ongoing structural movement.

Retaining wall movement and failure.
Many older Spanish properties are as reliant on the stability of sound retaining walls as new builds, particularly if the slope into which the property is situated was ‘cut’ out of a hillside. Certainly, the very attractive cut stone walls seen in many coastal areas are not normally proper retaining walls but simply a method of ‘decorative’ facing. This may be despite the fact that a hillside is highly prone to movement.

Rot and insect attack
Advanced attack is common in older Spanish properties. The most common oversight made by buyers investing in older Spanish town houses and Spanish country properties is the fact that the timbers are of softwood (and not the oak we commonly expect in very old UK properties). These are often infested with woodworm, termite and other wood boring insects.

Reinforced concrete steel decay risk
The process of steel reinforcement decay can be slow and is therefore always more prevalent and advanced in older Spanish properties. Steel decay can result eventually in structural failure in elements such as floors and even whole Spanish apartment blocks have been known to fail. Normally, professional inspection will identify initial signs of an issue such that repairs can be made. However, these repairs are invariably expensive and complicated and advanced decay can mean that substantial rebuilding is required. In some cases the concrete itself may be sub standard or even mixed up with salt water and beach sand in coastal locations (observed in very rare cases).

Swimming pool defects
Older pools can, on occasion, be very well built and are sometimes based on converted water deposits. Nonetheless, many suffer structural issues in the long term, which can be expensive to resolve. A typical problem is often time expired, galvanized iron pipe work. This eventually decays and leaks which can, in turn, cause erosion of the supporting substrates.

Defective services
Old drains can be broken and septic tanks insufficient for all-year round use. Equally, iron pipe work can be corroded and even some apparently re-plumbed properties are connected sometimes to hidden iron elements. Re-wiring is sometimes needed and some gas installations can be very dangerous.

Note that legally if you find any significant defects that have been deliberately hidden by your seller within 6 months of purchase then you may have a case for compensation against your seller. However, this can be very difficult to prove and it is always better to try and identify any issues by consulting a building surveyor in Spain prior to purchase.1