Distressed property sales in Spain

It’s a buyers’ market on the Costas – with a glut of off-plan investors desperate to sell before having to complete. Prices are plummeting, so is it time to go bargain-hunting?

Sunday Times Home Section, 20th November 2005

The Costa property markets were set ablaze by off-plan investors in 2002 and 2003. To the enthusiastic amateur speculator, such Spanish property apparently offered a risk-free, tax-free, high-return investment; unscrupulous but persuasive estate agents had no trouble selling “hot projects” to credulous British and Irish buyers, many of whom went to Spain for the weekend to buy a holiday house and came home with several off-plan investments.

It was a classic greed-driven stampede that distorted demand and fed construction frenzy. If asked about the risk of a dearth of buyers down the track, an agent’s standard reply was: “It’ll never happen.” Now, lots of those off-plan developments are finished, and it’s crunch time: investors must either take possession of properties they never meant to own, sell on, or lose their stage payments. Many people now face losing tens of thousands of euros if they fail to complete, or can’t find a buyer quickly.

The problem is that demand has slumped – by 40% or more. Developers are also making life difficult for off-plan investors by denying potential buyers access to sites; they still have about 25% of their own properties left to sell, so there’s fierce competition for buyers. The situation is grim and likely to grow worse as more developments reach completion.

For those who can afford it, completion may be the best option, always assuming that they have avoided the most mediocre developments. The long-term market fundamentals are good. But the reality is that many do not have finances robust enough to hang on until things improve. They over extended, confident of finding a buyer and never having to complete. Now they must find a buyer, fast, or breach their contracts with developers, losing some or all of the money they’ve put in. Most have made stage payments of at least  30,000 (£20,000), although some stand to lose much more.

One Irish investor, Sinead, faces losses of £92,000, plus interest on a 20-year loan. Sinead (she’s too embarrassed to have her full name mentioned), bought two off-plan sites in the Reserva de Marbella II project, hoping to use one as an investment to pay for the other, which she would rent out. “I have not been able to sell either and completion is rapidly approaching,” she explains. “I do have the option of abandoning one property only, losing the £44,000 I have paid for it so far, and completing on the other. But this makes me very nervous, as I’m sceptical that rental income will cover the mortgage payments, and doubt I will be able to sell it even in a few years’ time. The developer is apparently now offering apartments for sale at £135,000 – which is 10% less than I paid for one of them. The situation is a complete disaster.” Sinead needs an 11th-hour buyer to limit her losses, but buyers are scarce. The only way to guarantee interest is by slashing the price, and she will still have to pay a hefty commission.

These sorts of difficulties haven’t gone unnoticed. Sinead is using www.spanishpropertydiscount.com, which promises bargain- hunters “a genuine saving under current market values”. The fact that such companies exist says a lot about the state of the market.

Lighthouse, tied to umbrella organisation the Interagency Network, has also started offering an online auction service, www.lighthouse-auctionroom.com, modelled on eBay. Shaun Powell, head of Lighthouse, says it will appeal to a niche market of cashed-up, well-informed buyers ready to grab a bargain. “All the properties in our auctions have a reserve price at least 20% below the market price.” That depends on how you define the market price.

So just how many investors are in this pickle? Probably thousands, given that many 2002-2003 sales were to people like them. While Powell believes the market has turned the corner after 18 months in the doldrums, others, including myself, think it will take another year at least for it to bottom out, certainly as far as “bog-standard” apartments go. So bottom-fishers, who can wait until the squeals of pain get louder, should stay at home.

Meanwhile, buyers who can’t wait any longer can already find properties available for less than they cost two years ago. The buyers’ market on the Costas is just getting going.

© Mark Stucklin (Spanish Property Insight)

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