SPANISH PROPERTY – ANOTHER NAIL IN THE COFFIN?

Probably like everyone else in Spain(!), I have just received, from a UK relative, a cutting from the Daily Telegraph entitled: ‘Expats threaten a villa “siege” as Spanish serve demolition orders’. This headline is enough to send shivers of fear down any Spanish property owner’s back.

In fact, this story concerns some eight properties in Spain sitiuated in Almeria Province (which is at the bottom, south eastern corner of Spain). It seems that the Britons concerned built their respective properties having been granted the appropriate building licenses in 2002 by their local Town Hall, the latter being responsible for planning permissions. However, the regional authority has since decided that the building licenses were illegally granted and a court has now issue a demolition order. At present, there appears to be no compensation available to the property owners.

This, of course, is everyone’s idea of a nightmare! It is also the worst possible publicity for the Spanish property industry and will, justifiably, unnerve potential international buyers.

So, what has happened?

Obviously, I lack any more details than those in The Telegraph article and a couple of other Blogs that I have read. This means that I am in no position to make any definitive pronouncements on this particular matter. However, what does seem to be the case is that corruption within the relevant Town Hall has been discovered by the regional authority. Having found this out, I can only presume that the regional authority or its court are under a legal duty to reverse the ‘invalid’ licences - and then must demolish the properties once they have been formally declared ‘illegal’.

The problem is that this is very far from the first time that this has occurred. Indeed, the Marbella scandal a couple of years ago (see my article ‘Meltdown in Marbella’ on http://www.nicholassnelling.com/) was the most high profile recent scandal involving illegally issued building licenses. In this case, the level of corruption was, literally, breathtaking - with the police eventually seizing some 2,400 million Euros of cash and assets! Corruption had, it seems, pervaded every corner of Marbella Town Hall and had probably stretched a good deal further up the administrative chain...

So, what do we draw from all of this?

Well, as a generality (however defensive this may seem) the vast majority of the problems encountered by people when they buy Spanish property can be avoided. Know the law, always use an experienced, independent conveyancing lawyer and an equally experienced (and fully insured) building surveyor before you buy anything! Furthermore, wherever possible, buy Spanish property that is Urbanizado and fully Urbanizado. Buying property in Spain in Rural areas (as I have stressed many times) almost always carries a risk – and taking any risks when you buy property in Spain is very stupid indeed.

Of course, this does not, in any way, justify the appalling corruption involved in the illegal issuing of building licences to our British compatriots in Almeria. However, I do wonder whether, before they bought their properties (or building plots), our compatriots had any knowledge of the law - or whether they used independent and experienced conveyancing lawyers and surveyors. I wonder...

I mention this because if you want to build a property in areas classified as Rural you must own a minimum m2 of land - for any new property construction to be legal. This varies around Spain but in Valencia Province, for example, you need 10,000 m2 of agricultural land before you can build a property (to a specific maximum m2). If you do not have this then any construction will be illegal - despite any attempt by a local Town Hall to issue building licences to the contrary. A good lawyer will know this and should immediately tell you.

Sadly, corruption in Spain is endemic and has affected just about anything to do with the Spanish property industry. Sometimes this has taken the form of turning a ‘blind eye’ to illegality, sometimes there has been ‘economy with the truth’ and often a straight exchange of cash. None of this is right, none of this is acceptable and every part of it acts to critically damage Spain, its economy and its perception as somewhere safe in which to live.

It would be an epic understatement to suggest that Spanish property is unsafe to buy. The vast majority of people in Spain (native and international) own properties that are problem free and have a sound title. However, it is equally true to say that there are many illegal properties in Spain and many that have potentially serious liabilities. Clearly, it is these illegal properties and those with problems that hit the news – and often with justification.

Undoubtedly, Spain has been careless and, at times, arrogant and stupid in allowing property illegality to occur. Most of it has been blatantly obvious to the authorities and yet rarely has anything been done. This is ridiculous and needs to be rectified as an absolute priority - with those responsible (or those colluding in any illegality) severely punished. Their actions damage (and have already damaged) the very economy of Spain and thereby every person living in Spain.

Unfortunately, whatever the truth with our compatriots in Almeria, they stand as an example to others of what can happen if things go wrong in Spain. Equally, although the Spanish seem blissfully unaware of this, these types of cases provide the worst possible publicity for the Spanish property industry during its most severe crisis in living memory.

The answer?

Well, there are two. Firstly, if you are a buyer: be careful and knowledgable so as to avoid being the purchaser of a ‘problem’ property – this is something I stress constantly in my ‘Move Safely’’ book together with relevant guidance.

Secondly, Spain must ‘grasp the nettle’ and create an amnesty for almost all existing illegal property. It really is way too late to start demolishing property and, although I hate the thought of any rewarding of illegality, this is the only way to clear-up, quickly, a long term, discreditable mess. Obviously, the amnesty should, on no account, extend to corrupt officials...1

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

SPANISH PROPERTY CRASH – THE MARKET IS MORE COMPLICATED THAN IT LOOKS!

Of course, there is no denying that the Spanish property market is in deep trouble. Indeed, the problems caused by the Spanish property crash are, undeniably, central to the ‘crisis’ in Spain. Quite simply (as everyone now knows) far too many properties in Spain were built during the boom years. To compound this fact, promoters were lent absurd amounts of money on projects that, at the best of times, would probably have been unworkable. Meanwhile ‘debt’ for the general public was easy to obtain and often based upon over-valued properties. All of this created a rampant Spanish property market that spiralled out of control and for which Spain is paying heavily now.

However, for a foreign buyer to look upon the Spanish property market as a lethal area to avoid, at all costs, would be a mistake. The truth is that the Spanish property market has many different parts to it. It is far from being a one-dimensional market and still offers value for money to the careful foreign buyer - who is unlikely to be in the least interested in the vast majority of the housing in Spain for sale.

Indeed, many of the Spanish properties for sale are flats, apartments and adosados (terraced houses) that were built not for ‘wealthy’ North Europeans but for the Spanish (or in-coming non-European immigrants) within towns and villages away from the coast. Of those that are on the coast many newly built properties are often too far from normal tourist amenities (bars, cafes, restaurants, clubs, international airport etc.) to be attractive to North European holiday buyers - let alone those wanting to move to Spain permanently.

Of the properties remaining there are large complexes around golf courses and ‘ghetto’ estates specifically built for ‘wealthy’ foreigners. Some of these estates never were going to be sound buys and many would be discounted instantly by any wise buyer upon seeing the rows of almost identical new, or almost new, properties. These are often transparently poorly built and offer little obvious, long term value. This is not say that a Spanish property, for example, on a golf course is not a good value buy – but recognise the difference between a golf course complex built in the middle of no-where and a quality one that is part of an integral and workable infrastructure.

As I have mentioned before, the secret to buying property in Spain is to know what is (and always has been and always will be) of long term value. As a very crude generality, when it comes to the foreign buying market there are two principle types of property that come within this definition (taking absolute legality for granted).

- Front line beach apartments close to amenities. These are always a good buy and tend to hold their value well. They are also surprisingly hard to find (a quality build with a panoramic sea view, pretty beach/bay, reasonably quiet road in front – or no road in front at all! - within walking distance of amenities etc.)

- ‘Character’ villas within 15 minutes of the beach on a quality estate with a full infrastructure close to a lively village. These are also tough to find (given that the ‘ideal’ specification for the build tends to be three bedrooms, two bathrooms, a flat plot, a swimming pool and some degree of privacy).

Try finding a property in 1. and 2,. above and you will discover that it is far from easy – proof, if ever it was needed, of the importance of knowing exactly what to look for if you want to be assured of long term value. Indeed, 1. and 2. are as good a representation of the complexities of a ‘crashing property’ market as anything else. There is always value to be had (and a reasonable amount of it) if you know where to look and what to look for.

Of course, 1. and 2. are a simplification. In Spain, some town houses and flats are, even now, excellent buys as are, occasionally, some new adosados. However, as I stress in my book guidelines exist to buying property as a sound investment even when a market (as in Spain) is badly damaged. Always there are properties of value – it is just vital to know exactly how to gauge that value objectively.

No-one would deny that the Spanish property market is in long term trouble. However, know what you are doing and there is no reason why buying now in Spain should be anything but a positive action.

In short, the Spanish property market is certainly in crisis - but this does not mean that the entire Spanish property market is defective. Far from it. Some sectors will always have long term desirability and be sound investments. Just be sure that what you buy into is the sector that has assured value and that you are not seduced by ‘bargain basement’ priced properties - in the wrong sector!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

NEW SPANISH PROPERTY - ‘OCCUPANCY PERMIT’

First Occupation License

It is absolutely essential that your new build property in Spain is granted a Licencia de Primera Ocupación (sometimes referred to as a ‘Certificado de Habitacion’ or ‘Cedula´) before you pay fully for it. This vital certificate is granted by the local town hall planning department upon completion of a Spanish new build and declares the legality of the property in Spain. Also, it acts (in theory) as confirmation that the Spanish property meets all necessary local and national planning regulations.

If your newly built Spanish property, when completed, does not have a Licencia de Primera Ocupación (sometimes referred to in English as a First Occupation License - FOC) then ‘alarm bells’ should ring! One sign of this is when a Spanish property is not connected to mains utilities (water, electrics and telephone). This is known sometimes as being on ‘builder’s electrics and water’ - which is an accurate phrase!

Indeed, your property in Spain may literally have its services connected to those of your builder rather then the services suppliers. This is usually obvious but can be proven by the fact that you will not receive or be able to obtain any formal services bills.

Certainly, by Spanish law, utility companies cannot connect their services to illegal properties in Spain. If they do they can now be fined heavily. So, services suppliers tend not to connect to illegal properties - when in the past (pre-fines) they turned a ‘blind eye’ to the law.

So, if your new Spanish property lacks a mains supply of electricity, water and land line telephone then you should take this as a potential sign of illegality. At best, it may indicate that there are delays with regard to legalisation or final completion of your Spanish building project.

Note that sometimes personal registry on the local ‘Empadroniamiento’ can also be affected by a lack of a First Occupancy License.

Being on ‘builder’s electrics and water’ used to be laughed off and was tolerated by many buyers of new properties in Spain. Frequently these people were told that it was ‘quite normal’ and would be ‘sorted out soon’... However, some found out later, to their great cost, that the underlying reason for this seemingly ‘innocent’ delay was related to the far more serious and worrying issue of illegality. So beware...

Note that failure to supply a Licencia de Primera Ocupación constitutes a breach of contract on the part of the seller. Indeed:
· You are not obliged to sign the Escritura (UK ‘Completion’) until the Licencia de Primera Ocupación is presented.
· Your seller cannot cancel the contract on the grounds that you refuse to sign the Escritura without the Licencia de Primera Ocupación.1

COAST TO COAST

Over the past few weeks a further controversy over the safety of buying property in Spain has erupted into the press. This time it revolves around the illegality of properties situated too close to the seashore. Earlier this year Hollywood actor Antonio Banderas was reportedly advised that part of his luxury villa in Marbella would be demolished. This has been followed by recent warnings that around a thousand homes on the northern Costa Blanca may be equally at risk.

So, what is this all about? Will it affect you if you are thinking of buying in Spain – or if you are already a property owner with a home on the coast?

In reality, everything revolves around a law passed in 1988 called the Ley de Costas (Coastal Law). This law sought to protect the integrity of the Spanish coastline whilst also providing an absolute right of access to the public to the beach and shoreline itself. It is therefore, in essence, not a ‘bad’ law. The coastline of Spain has a fragile ecology and its conservation is important. Most particularly there has always been a danger (due to the heavy demand for ‘front line’ beach properties) that the coastline would be damaged by invasive construction projects.

The law ‘divides’ the coastline into two areas of protection. The first is the public domain which is crudely the area between the sea and the furthest point which the sea has touched in the worst known storm. This includes all areas of sand, shale and pebbles

The second area of protection is divided into:
- The Protection Zone. This is the first hundred metres inland from the public domain (although this area can be extended a further hundred metres by the Spanish state, autonomous region or local town hall). No building of any nature whatsover is allowed within this area.
- The Zone of Influence. This area extends for 400 metres inland from the Protection Zone. Building is allowed - however restrictions are applied on a reducing scale of severity as you move inland from the sea.

Obviously, some properties in Spain were built within 100 metres of the sea prior to the Ley de Costas being passed. These can be subject to a ‘concession’ meaning that they can avoid demolision. However, any ‘concession’ must be treated with the very greatest possible care and should be subject to expert, independent advice from a Spanish land law specialist.

Of course, in typically Spanish fashion, the Ley de Costas has been erratically enforced since it was passed. As a consequence, properties have been built along the Spanish coasts that clearly breach the Coastal Law. In some cases, despite the transgression being blatantly obvious, no action by the relevant authorities has been taken. It is these dangerous properties that lie waiting for the unwary buyer.

Certainly, it would be an error to think that just because no action has been taken so far on a given property subject to the Coastal Law that no action will be ever taken. If this argument is put forward by a seller or agent (or lawyer!) then it should be treated with dismissive contempt before you move onto a property that is undeniably legal in every respect.

The answer, of course, is to be extremely wary of any property located very close to the sea shore. If you want to buy a front line property make sure that your conveyancing lawyer specifically checks its legality with regard to the Coastal Law. Importantly, get any advice provided placed in writing and, if you have any lingering doubts - obtain a second opinion.1

BUYING A SPANISH PROPERTY IN THE WRONG LOCATION – THE COST!

Stressing the importance of ‘location’ has become an unwelcome cliché. However, it cannot be stressed often enough - as it will define your future life absolutely. If you make a mistake with your choice of location within Spain then it may terminally harm your dreams of a new life and lead to a rapid and embarrassing retreat to the UK. Alternatively, if you decide to move again within Spain then it is bound to be an experience that is disruptive, unwelcome and expensive.

You should realise that any sale of a property in Spain, depending upon your personal classification, is likely to attract Capital Gains Tax at 18% even if you are selling your primary and main residence. Equally daunting is Spain’s 7% purchase tax payable when you buy a Spanish property. Move twice in succession (2 x 7% purchase taxes and a CGT of 18%) and you may lose a lot of money simply to the tax man! So, it is important to make sure that any purchase of property in Spain or relocation is precise and does not result in further unnecessary moves.

In fact, there are some very good general guidelines about what tends to suit the majority of people when they relocate. These are really important to understand and deserve close attention. So, always concentrate greatly more upon the suitability of your proposed location - than upon searching for particular properties in Spain. Finally, know what the guidelines are for a successful purchase of Spanish property. This is something that I will tackle in another blog and detail extensively in my book...1