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

THE SPANISH PROPERTY MARKET – WHAT NOW?

Recently an influential annual report was published by Acuna & Asociados who are highly regarded Madrid real estate analysts. Their report makes depressive reading given that they do not think the Spanish property market will recover for several years. Indeed, at current rates of demand (around 200,000 properties per year) it may take some six to seven years to clear just the existing housing stock for sale.

Certainly, there is an inordinate amount of property for sale on the Spanish marketplace. According to Acuna & Asociados there are some 1.67 million properties for sale in Spain. These comprise some 500,000 new builds, some 470,000 new builds yet to be completed and around 500,000 re-sales. It is quite likely that the estimated number of resales is very conservative given the amount of properties privately for sale that will not be registered formally anywhere.

Meanwhile the Spanish economy is in meltdown. Unemployment is currently somewhere around 19% with Citibank predicting that it will rise to 22% and Acuna & Asociados to 25%. The collapse of the Spanish construction industry has impacted not just on its associated industries but on the population at large who have been caught in a lethal vortex. As more people lose their jobs so more properties come onto the market - often with distress sale prices.

Unfortunately, there are no apparent ‘quick fixes’ for the Spanish economy which is also being hurt by the world credit crunch. Socialist Prime Minister Zapatero has tried to stimulate the economy with his much publicised Plan E (see my 14th August Blog). However, this is due to cease soon due to lack of further funds and has done little other than reduce the very short term unemployment figures. These will, obviously, rise once Plan E stops and as Spain goes into the winter period when any tourist related employment reduces radically.

So, what does all this mean for Spanish property buyers and sellers?

Well, as a seller of Spanish property, it is obviously bad news – particularly if you bought within two years or so of the boom. In this case, it is unlikely that you will recover your money for some considerable time to come. Worse still, the sheer quantity of other properties for sale (including many genuine distress sales) means that you will be entering a savagely unforgiving market place. Indeed, the only consolation (for British sellers) will be the strength of the Euro over Sterling which may mitigate any drop in their Euro sale price.

As a buyer, of course, matters are very different. Virtually everything is for sale and you can now pick up bargains throughout Spain almost everywhere you look. However, this does not mean that you can be careless. Far from it. Indeed, uppermost in your mind, at all times, should be the adage that ‘not everything that is cheap is a good buy’.

In fact, you should not even think of buying unless you know intimately how to tell whether a property is fully legal or not. Furthermore, you must be able to assess objectively what will make a long term sound investment (see my book How to Move Safely to Spain).

As always, the key to a sound investment is its ease of resaleability. However, establishing resaleability is often less easy than it sounds when you are in a foreign country with a particularly complex marketplace involving not just native buyers but also a very significant proportion of foreigners from an array of different countries.

Without doubt, the Spanish property crash has produced some excellent bargain buys. These exist now and are well worth exploiting. However, the question is whether property prices in Spain have now reached their bottom?

My own feeling is that prices still have around 10% further to drop. This will be an unpopular ‘call’ but the sheer numbers of property currently for sale together with an economy in freefall means that any optimism at the moment is hard to justify objectively. At the end of the day property, like any other commodity, is subject to supply and demand and at the moment, there is far more supply than demand. Until this readjusts, prices will continue to drop and the Spanish property market will remain very weak for the forseeable future.

Of course, if you are thinking of buying a Spanish property then your next question may be ‘when will it be a good time to buy?’

Well, I cannot help feeling that the desire to make untold money on property is somewhat distasteful. Surely, the primary aim of moving (particularly to a foreign country) and buying a property is about obtaining a better quality of life than you have currently - preferably as soon as possible? To place life ‘on hold’ whilst waiting for a market to guarantee a ‘profitable’ investment seems somewhat short sighted given life’s brevity and uncertainty.

This is not say that you should not be very careful. However, now I think the emphasis should be on buying a property that will retain its value long term – as opposed to being purely focussed on the profit that it will, or could, make. Those days, in Spain, are, for the time being, largely over. That does not, in any way, diminish the valid reasons for coming to Spain which should be about delighting in the genuinely superb quality of life still on offer. Little has changed in that regard – it is just that combining this with a guaranteed short term profitable property investment is less valid.

In short, I suspect, that the prices of Spanish property will hit their low point probably in the spring of 2010. However, that is not to say that you cannot now pick up a heavily discounted property - and one that will prove to be a good purchase for the future. If you are planning to move to Spain then, give or take, this is about as good a time as any. However, be prepared to drive a hard bargain - as I believe that the market has some time to go before it stabalises...1

THE SPANISH PROPERTY MARKET - BUY NOW OR WAIT?

Few things are more apt to cause stress than an attempt to ‘call’ a market. It is something that my friends at Currency Direct have to do daily and it is something for which I have nothing but admiration. They know that, one way or another, they have to make a prediction about what will happen in the future – and then act upon it - despite the real risks and difficulties of so doing.

When it comes to Spain, the vital ‘call’ for anyone interested in the country revolves around whether or not now is the right time to buy a Spanish property.

Certainly, as we all know, timing is everything. Buy at the wrong time and you can find that your new property in Spain instantly loses you money. On the other hand, if the market rises you may ‘kick’ yourself for not having taken advantage of a distressed Spanish property market offering possibly ‘once in a lifetime’ bargains. In short, do you buy now or remain watchful and wait for another year – or possibly much longer?

As always, it is hard to find meaningful guidance that will help you make an informed ‘call’.

Just as with the UK, reliable predictions in Spain about anything to do with the national economy and its related property market are hard to come by. Those that do exist are often coloured by political or vested interests so biased as to leave most observers baffled.

So, what is the reality?

Without doubt, Spain is suffering a property crash of epic proportions. The world economic crisis has hit the country very hard indeed but has been greatly exacerbated by the lunatic building programme of the past ten years. The latter resulted (between 20002 – 2007) in Spain building something like a third of all new properties constructed within the Eurozone. This was far in excess of any possible demand and has led to a massive oversupply. Indeed, it is thought (no-one knows exactly) that there are some 1 million new builds for sale and possibly much the same number of resales.

To make matters worse, new construction is somewhat like an oil tanker with building completions continuing to occur despite the brakes on the market having been applied some time ago. So, unfortunately, this year some 450,000 newly completed homes will evidently hit the marketplace - further damaging it when least needed.

The combined effect of the world recession, the collapse of the construction industry and reduced tourism means that Spain is already experiencing significant economic problems. Unemployment will almost certainly hit 20% this year (currently it is around 17%) and government debt may rise to 60%. The OECD is predicting an economic contraction of 4.2% and Standard and Poor (S&P) expect the Spanish property market not to recover until 2012.

But what does this all mean if you are a potential buyer? If there is to be no recovery until 2012 - do you have almost infinite time on your hands?

In a way. But what tends to happen in a property crash is that the weak tend to have to sell at whatever price within the first year or so of a crisis. Meanwhile, repossessions take around six months to a year to administer before they appear on the market as forced sales.

So, the first couple of years of a crisis are when you are likely to obtain the best priced quality properties for sale. After that time those property owners who have survived the worst effects of the storm tend to be able to hold onto their homes. The longer time passes the less likely they are to accept really low prices and the more determined they become not to sell at a loss. In reality, it is only at this time that a market naturally begins to stabalise.

My suspicion is that the Spanish property market may still dip down further between now and the early/mid spring of next year. However, during the same period, I think that a remarkable opportunity exists to buy some fantastic properties at genuine distress prices. The latter, for exceptional properties, may start to dry up towards the spring of next year thus making truly excellent buys increasingly hard to find. There may be a lot of ‘rubbish’ still remaining at low prices but they should be of no interest to the wise buyer (because something is cheap it does not automatically follow that it is a good buy).

Would I buy now? I think so - knowing that there will be a diminishing opportunity to buy exceptionally well.

However, I would be a tough and extremely cautious buyer looking for an absurdly good price on an objectively fine (fully legal) property that was easily resaleable and that I could pay for in cash (at whatever the relevant price range). I would also be someone who would be buying on the expectation that I would be unlikely to see any appreciable growth for another three to four years.1