Published by Financial Times: August 3 2007

If you have ever sat on a Spanish beach dreaming of owning your own place in the sun, this could be the time to make it happen.Recent tax rule changes that allow UK individuals to purchase property abroad through a company, combined with a strong British pound, are boosting sales of foreign property. And of all the destinations available it is the sunny climes of Spain that usually attract the most interest.But stories of scandalous corruption in the Spanish property market have scared off many prospective investors and cut demand for sea view apartments on the Mediterranean coast.With hundreds of thousands of properties still due to be built in Spain this year, the country is turning into a buyers’ market Stuart Law, managing director of Assetz Finance, the property investment advice group, believes.“You have the opportunity to buy for a good price in Spain, with little chance of prices going down,” he says.Law points to particular developments in Marbella where some investors have withdrawn from buying apartments off plan and lost their deposits. Developers are now willing to sell these off at discount prices. While the chances of finding an undiscovered area are few and far between, the country benefits from its close proximity to the UK and a greater degree of certainty regarding weather and infrastructure than emerging countries.The decade-long housing boom may have passed but the predicted property crash, which led thousands of investors to sell up, has not yet emerged. This, says Law, has blown some of the froth from the market and opened up opportunities for new investors. “You can still buy properties for competitive prices,” he says. “There are two-bedroom apartments overlooking golf courses near the coast for £120,000 (€178,000). Even if European mortgage rates increase, this is still a good deal.”Mortgage rates in Spain are lower than UK rates since the European base rate is 4 per cent compared with the UK rate of 5.75 per cent. European rates are however expected to increase in coming months.Spanish banks lend money based on their valuation of the property, not the price you pay, and with the depression in property prices it is possible to find that you have paid less than the bank estimates the property to be worth.But, bargains aside, buying a home abroad is not without its risks. The popularity of Spanish property as holiday or retirement homes for the British, French and Germans has led to serious over-development along the Spanish Mediterranean coast. Regions such as Valencia, Murcia and Andalucia are replete with concrete apartments and golf courses, some of which should never have been built.The fact that real estate stocks in Spain returned an average of 48 per cent a year over the past five years makes it easy to see why property developers were so keen to keep building. But it is feared that some 30,000 buildings were put up illegally – many of which were bought by Britons – and now face demolition.In July two former mayors of Marbella and 20 former town councillors were charged with bribery, embezzlement and fraud. According to the judge presiding over the case, developers gave out millions of euros in bribes. Property managers and advisers say that people should still tread carefully as some of these cases may not yet have come to light. It is essential to hire a good lawyer and not accept the local Spanish notary recommended by your estate agent. Simon Conn, managing director at overseas mortgage specialists, Conti Financial Services, says that if buyers are careful they can largely avoid these problems.“People rushed out to buy without taking advice,” he says. “But there are some reasonably priced new sites in Barcelona, Valencia and what is called the Spanish Algarve between Portugal and Gibraltar.“There are also some good bargains to be had inland, where you will find prices are up to a third less than they are on the coast. We expect there to be a 10 per cent reduction in prices but not a huge drop. The market is settling itself out.”When panic set in regarding a possible Spanish property crash, investors ran to dump shares in property-related industries such as construction. The problems began after Astroc Mediterraneo, a development company based in Valencia, lost 80 per cent of its value following financing concerns. Following this the largest groups lost €7bn of market capitalisation in the second half of April.Because such a large proportion of the country’s gross domestic product is centred on the construction industry, the sell-off triggered concerns about the economy.The Spanish economy has the second highest current account deficit after the US and is spending vast amounts of borrowed money and some feared the housing market could be subject to a correction. However, three months on and the Spanish economy is looking fairly healthy. Growth may have slowed from last year, but the market is not widely expected to crash.Although the housing market has slowed, it is still growing. In Seville prices have gone up 6.2 per cent in the past year, and in Granada they have risen by 10 per cent. Other areas such as Barcelona and Alicante have seen prices go up more slowly, 5.2 per cent and 2.1 per cent respectively. The Royal Institution of Chartered Surveyors says there does not seem to be a real risk of major price falls. “House prices still rose 5.8 per cent in the year to the end of the second quarter,” says David Stubbs, senior economist at Rics. “And any market rising at close to 6 per cent cannot be said to be stalling.”Miranda John at Savills Private Finance says the number of destinations is increasing. “There are now encouraging signs for clients looking for a bargain in cities such as Granada and Barcelona,” she says.It still pays to be cautious when buying abroad, however good the prices are, Leonie Kerswill, tax partner at PricewaterhouseCoopers says. Tax rules in Spain are different to those of the UK and you will be subject to charges such as local government taxes and VAT on new purchases. You should allow at least 10 per cent of the price of the property to cover fees. In addition to this, expect to pay 7 per cent in property transfer tax and 1.5 per cent in land registry fees. Setting up utilities also incurs charges.However, it is not uncommon to be able to
get a property for 85 per cent of the price the seller asks for. You will need to pay a deposit of between 10 and 15 per cent, which you will lose if you renege on the deal. There are a few things you can do to reduce your tax bill if you have a holiday home abroad. If you elect your holiday home as your principal primary residence a few weeks before you sell it, you will get the last three years of value growth free of UK tax. Spanish assets left to a husband or wife are also liable for Spanish inheritance tax. You can reduce the bill by remortgaging the property and putting the capital into alternative investments held jointly.  

http://www.ft.com/cms/s/0/0cae88d8-41b0-11dc-8328-0000779fd2ac.html