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

LIFE IN SPAIN – CHRISTMAS IS A RATHER ODD EXPERIENCE!

This Christmas has been the seventh that we have experienced since moving to Spain permanently and it has been as oddly unsatisfactory as the others. We cannot quite ‘place our finger’ on why? It may be because our children are older and that therefore Christmas has lost its ‘magic’ - or it could have a lot to do with Spain and the life in Spain of ex-pats.

Certainly, Christmas in Spain ‘feels’ different and with some justification. The day itself is unquestionably important to the Spanish although they tend to open their presents on Christmas Eve. However, no Boxing Day is celebrated - thus leaving Christmas feeling brutally short as many people return to work immediately afterwards.

It is also true to say that Spain is avowedly a secular state with the vast majority of the population (contrary to popular myth) irreligious. This means that the ‘objective’ of Christmas is as lost to commercialisation as it is in the UK. Indeed, I suspect that church attendance in Spain is now probably close to its nadir at the beginning of the twentieth century when there were fewer church-goers in Spain than any other European country.

The odd thing is that it is not as if the overall Chrismas period in Spain is, in itself, short. It lasts until the 6th January with the all-important celebration of ‘Three Kings’. This appears to us to be as critical as Christmas day itself with the day a national holiday, widespread formal street processions and, to the delight of Spanish children, another round of presents! Meanwhile, New Year’s Eve is as important in Spain as elsewhere in the world and just as replete with riotous parties welcoming the start of the new year.

The trouble, I think, is that Christmas as an ex-pat is hard to get right because of the absence of an extended family during the holiday period. The very nature of being an ex-pat means that close family and life long friends are (obviously) not close and, as a consequence, the ‘nuclear’ family 'bit' of Christmas is inevitably missing. This may be why our Christmas’ have been so unsatisfactory despite our best efforts. Indeed, whilst I have no regrets about leaving the UK, I do wonder whether our children will have missed out on an important part of their cultural and family heritage.

Of course, the weather (in a curious way) also militates against a British ideal of Christmas. This year (in Valencia) the sun was out on a glorious day that made us all feel somewhat preposterous whilst we remained in front of a rather pointless (but attractive!) blazing fire. In our minds, of course, we imagined ourselves looking out onto snow – or, at least, a chill day of freezing drizzle and lashing wind.

I guess, at the end of the day, Christmas is always going to be different when you live in a foreign country. But then I may be looking back at Christmas in the UK, during times past, with ludicrously pink glasses! If I am not - then it is one of the very few negatives to moving to Spain.

I should also say that any maudlin thoughts as to the benefits of a British Chrismas are usually rapidly dispelled. Yesterday, I was rock climbing in shorts and a tee shirt with some British climbing friends who had just arrived from the UK. Needless to say, when not climbing, we revelled in a picnic of turkey sandwiches whilst regaling each other with stories about how wonderful it was to be warm and able to climb (a dry weather sport – if ever there was one!) despite it being the end of December.

Of course, it is impossible to get everything right when you move to another country. However, mulling all of this over with my wife, we both came to the conclusion that our life in Spain is, in almost every way, preferable to what we had in the UK. It is sad that Christmas is a bit unsettling and disappointing - but the other advantages to living in Spain more than compensate us for a it!1

SPANISH PROPERTY AND THE SPANISH BANKS

It is always reassuring for a writer when first hand experience meets gut instinct and ‘rumour’. This was recently the case when I became involved in the sale negotiations for a hotel in Spain together with an adjoining Spanish villa. Both these properties ‘belonged’ to the same owner who has sadly gone bankrupt - so the properties were the subject of formal repossession proceedings by a major Spanish bank.

I happen to know a lot about the two properties as the owner was a friend of mine and the properties are in my local area. Both properties were bought more or less at the height of the Spanish property boom and both were very heavily mortgaged. Indeed, the hotel had a 100% mortgage (as of December 2007) with the total debt to the Spanish bank – for both properties – some 1,265,000 Euros.

When (in September 2009) I was approached by someone who was interested in buying both properties I had to get in touch with the Spanish bank concerned to negotiate the possibility of a sale. Initially, I was told that the discount for a buyer would be 30,000 Euros off the bank debt. This, needless to say, was laugable - given the 1,265,000 sale price and the fact that Spanish property since 2007 has probably fallen, for the most part, in excess of 30%.

Grumbling, I was eventually passed onto the Spanish bank’s head office to the manager dealing with the repossession of both properties. After some bargaining I managed to get the initial discount bettered by around another 100,000 Euros. So, after a struggle, the sale price for both properties (if bought together) stood at very roughly 1,1,00,000 Euros. However, the 15% discount by the Spanish bank hardly made the properties a bargain – particularly as the hotel had not been open for almost a year and therefore had negligible ‘goodwill’.

My ‘buyer’ asked me to try again to negotiate down the price of the two Spanish properties. This I attempted but with a complete lack of success. I met an absolute barrier regarding the price. The Spanish bank said it was ridiculous to reduce the price further as the valuations (from 2007!!) for the two properties showed them to be worth pretty much the existing bank debt of 1,265,000. Finally, I was advised that the Spanish bank would not, under any circumstances, pay a fee or commission (to anyone) who introduced a ‘buyer’! This made any further negotiations pointless with a clear message attached...

The point of relating this is to illustrate that the ‘stories’ of the Spanish banks giving less away than they appear on their Spanish property sales appears to be true. Furthermore, clearly it is not in a Spanish bank’s interest to sell reposseessed properties when the disparity of their debt to the current value of their properties is considerable. The reason is obvious:

If a Spanish bank has a repossession property on its books it will probably not show those properties as a ‘loss’ on the ‘books’ whilst it holds a valuation (albeit an old one!) that shows that the value matches, more or less (and very much in theory), the debt. However, should the Spanish bank sell the properties (almost certainly at a loss) then on the bank’s ‘books’ the loss is absolutely and irrevocably proven. In other words, it is better for a bank not to sell some properties which have big losses attached - whilst it can maintain that the loss does not exist.

Of course, this is a book keeping exercise. However, if I am right, then it may well suggest that the Spanish banks (as many suspect) are hiding far greater losses than they have so far admitted.

Time, of course, will tell. However, I think the hotel in Spain close to me and its accommpanying villa will be on the market (but not, in reality, purchasable!) - for quite some time. It is rather sad for all concerned...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 ESTATE AGENTS – THE DANGERS OF A BUYER’S PREMIUM

A while ago, I commented on sales commissions for estate agents in Spain. At the time, what I had no space for was a critical warning to any buyer of Spanish property to be very careful about ‘buyer’s premiums’.

‘Buyer’s premiums’, over the years, have been nothing if not contentious - not least because invariably they have taken unwary foreign buyers by surprise. Indeed, as far as surprises go - few can be as unpleasant as finding that you are unknowingly liable to pay a ‘buyer’s premium’. These can be substantial and can badly destabalise your finances, particularly if you are stretching your budget to buy a property in Spain. Certainly, any benefit derived from the low prices produced by the Spanish property crash could be quickly lost...

So far as I know, ‘buyer’s premiums’ are unknown within conventional UK estate agency although they are commonly used in auctions. In effect, a ‘buyer’s premium’ is an amount that a buyer pays to a broker or auctioneer when he purchases something. Normally, at the same time, the seller will also pay the broker or auctioneer a fee – the two sums amounting to the broker or auctioneer’s full sales commission on a transaction.

In Spain, it is not uncommon to find that you could be liable for a ‘buyer’s premium’ when you purchase a Spanish property. Spanish buyers, particularly in urban areas, are used to paying 1.5% commission to a Spanish estate agent if they buy a property - knowing that the seller will also pay the agent 1.5%. There is nothing wrong with this and both parties are invariably fully aware of this deal and accept it as a matter of course.

The problem is that foreign buyers are sometimes ‘tricked’ into paying a ‘buyer’s premium’. Worse still, the ‘buyer’s premiums’ can be a good deal more than 1.5% and, in my experience, can reach 5% of a Spanish property purchase price. Of course, 5% on a 300,000 Euros property is 15,000 Euros – a lot of money!

I say ‘tricked’ because for a ‘buyer’s premium’ to be enforceable there must be written evidence that a buyer willingly agreed to pay the ‘premium’ to the Spanish estate agent concerned. However, invariably this evidence does exist, is available in written form and signed by a buyer.

So, you may ask, what is the problem?

Well, it is the classic one of foreign buyers (or people generally) signing a form/contract that they either did not read properly or did not fully understand.

In the case of ‘buyer’s premiums’ the agreement concerned is most often in the shape of a ‘standard’ form. This form, in essence, commits a buyer to purchase a particular property (if the buyer decides he wants the property!) only from the agent who shows him that property first. This is fair and protects an agent from showing a client a property in Spain which the client then buys from another agent - or directly from the owner (thus cutting out the ‘primary’ agent).

The trouble is that this ‘standard’ form/agreement can sometimes have a clause in it that states that if you (the buyer) purchase a property in Spain from the agent concerned - then you also agree to pay a ‘buyer’s commisssion’ of x% to the agent concerned.

Unfortunately, frequently this very important clause is ‘hidden’ within the depths of the ‘buy only from the agent concerned’ agreement. In fact, I have been shown an example by an agent (an Englishman working for a Spanish inland agency) who proudly explained how the English translation of this clause was deliberately poorly translated - so as to ‘effectively’ conceal its true meaning.

Certainly, the last thing that you expect in any mundane, ‘fair-looking’ agreement is a clause of real importance half-way through the contract. So, almost understandably, potential buyers have a habit of signing this type of agreement with their ‘friendly’ agent without a second thought.

Needless to say, every single person I have met who has paid a buyer’s commission in Spain (100% of them) only realised thier liability when they were ‘reminded’ (clearly and unequivocably) of their liability to ‘their’ agent – after they had already paid a 10% deposit for their desired property to the sellers.

As a buyer you are then faced with only two options: lose your 10% deposit and walk away from the property you are buying or pay (say) 5% in ‘buyer’s commission’ and keep the validity of your 10% deposit and your on-going purchase?

In my experience, everyone liable for a ‘buyer’s commission’ paid it - albeit through hate-filled, gritted teeth!!

The answer, of course, is devastatingly simple. Never, ever sign anything whatsoever (irrespective of the pressure) without your Spanish lawyer present and having read a full and proper translation of any document that you have been asked to sign. If you break this cardinal rule – then, frankly, you deserve everything you get.

I should qualify the above, as I do in my 'Move Safely' book, by saying that the majority of estate agents in Spain do not charge ‘buyer’s premiums’. However, there are certainly those that do – so be very careful if an estate agent in Spain asks you to sign something!!!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