August 2007 news review

Spanish Property News

+ Illegal rentals take place mainly on the coast
+ Most new builds already sold say developers
+ Foreign investment in Spanish property up by 19%
+ Real Estate agents in Spain fold in tough market
+ Developers need to “adjust their prices”
+ How to become a tax resident in Spain
+ Spanish mortgage news

Illegal rentals take place mainly on the coast

According to officials from the Spanish Ministry of Finance, 66% of Spanish properties rented out illegally without paying tax are located in Spain’s coastal provinces, stiffing the Spanish government out of 1.2 billion Euros annually in lost tax revenues.

An estimated 977,306 properties are rented out illegally in Spain each year by owners who do not declare rental income to the Spanish tax authorities. 650,000 of these properties are located in coastal provinces.

Catalonia has the greatest number of illegal rentals, with 24.5% of the coastal total, followed by Andalusia, The Canaries, and The Valencia Region.

The Spanish government is trying to clamp down on illegal rentals.

Most new builds already sold say developers

According to an article in the Spanish daily ABC, the association of Spanish developers (APCE) asserts that almost all of the 1.6 million new properties built in Spain over the last 3 years have already been sold, refuting claims that 1 million newly built Spanish properties remain unsold. The association also argues that reports of 800,000 odd housing starts each year are substantially exaggerated, as this figure relates to planning approvals, not all of which get built. According to the Spanish housing ministry’s figures 665,000 new properties were started last year, and 597,600 were finished.

Foreign investment in Spanish property up by 19%

Figures from the Bank of Spain reveal that foreign investment in Spanish property increased by 19.2% in the first 5 months of the year compared to the same period in 2006. The amount invested by Spaniards in property outside of Spain almost doubled over the same period.

The total amount invested by foreigners to the end of May was 2.252 billion Euros, almost the same as the amount invested in 2005, though still significantly below the 2.925 billion Euros invested in the peak year of 2003.

How does one reconcile this increase in foreign investment in Spanish property at a time when the market is clearly turning down?

One explanation might be that many of the off-plan sales made in 2004 and 2005 are only now being recorded as investments as buyers take possession of their properties and complete the purchase before notary. This is the moment when the investment is recorded in the national accounts.

Nevertheless, the figures do seem to suggest that foreign demand for Spanish property has picked up significantly since last year, even though property professionals report that the market is still very slow. By the end of the year we should know whether foreign demand has rebounded, or whether these figures can be explained by some other factor.

Real Estate agents in Spain fold in tough market

Recent news of estate agents going to the wall has provided more evidence of the downturn in the Spanish property market.

Alicante’s local daily ‘Informacion’, quoting the regional real estate agents’ association, reports that a severe market shakeout will drive many opportunistic and unprofessional estate agents “established in the shade of the boom” out of business.

Alicante’s real estate agents’ association blames the existence of a “large number of agents that operate without any kind control or appropriate guarantees” on the market deregulation of 2000, which enabled anyone to act as a property broker in Spain. These agents will be first to fold in Spain’s property downturn, the association argues.

According to the article there are some 170,000 companies in Spain’s property sector, 75% of which may have to close over the coming years, with many of the remainder facing financial difficulties.

Fincas Corral – one of Spain’s largest agents – is a good example of the difficulties facing Spanish estate agents in today’s market. According to an article in the Spanish financial daily ‘Cinco Dias’, Fincas Corral has gone from 350 offices in February 2007 to 180 offices today, downsizing by around half. The article quotes a company spokesman saying “the market situation and rising interest rates have hit sales.”

According to Eduardo Molet – president of Spain’s network of real estate experts (REI) – 30% of agents will close this year, and the survivors will need to adapt their marketing to the new situation. Quoted in the Spanish press, Molet says that the market has suffered “a major slowdown since the 2nd quarter of the year,” resulting in a fall in sales that “many agents can’t cope with.” As a result “the stock of unsold properties grows every month,” leading to an “excess of supply.”

“Sales are falling, time-on-the-market is increasing, and estate agents need to develop a new approach to keep selling,” says Molet, who thinks that September will reveal how serious the market downturn is, and how many agents will still be in business after the holidays.

Developers need to “adjust their prices”

An article at the Eroski consumer website reports that the holiday home market on the Spanish coast is the most vulnerable to a downturn, and that developers operating in the sector may have to adjust their prices if they want sell their properties.

Luis Eugenia Martin – from the property consultancy Roan – is quoted as saying that developers will have to make “a real effort and adjust prices” of holiday homes on the coast to sell their stock of new properties. Although he expects prices for primary residencies to stabilise, “a more severe adjustment” may await the holiday home market.

In the coming months “prices for holiday homes on the coast will stabilise or even fall,” says Martin, though he expects primary homes in urban areas to continue rising by 4% to 5%.

Martin advises investors to “wait 6 to 8 months”, as the “increase in supply might mean that developers and owners make a bigger effort to reduce prices, which investors can take advantage of.” First home buyers, on the other hand, are advised to buy now because “first home prices are not going to fall substantially under any circumstances.”

How to become a tax resident in Spain

If you move to Spain permanently for six months or more you will almost certainly become tax resident and be obliged to pay income, capital gains, and wealth taxes on your worldwide assets and be subject to Spanish inheritance and gifts tax rules.

You will become tax resident in Spain under Spanish rules if:

a) You spend more than 183 days in the calendar year in Spain. These days do not have to be consecutive, and temporary absences from Spain are ignored unless you can show habitual residence in another country for more than 183 days in the year.

OR       b) Your ‘centre of interests’ is in Spain, e.g. the base for your economic or professional activities is in Spain.

OR      c) Your spouse is resident in Spain and you are not legally separated, even though you may spend less than 183 days there (unless you can show habitual residence in another country for more than 183 days in the year).

The tax year in Spain ends on 31st December. You are either resident or not resident for the whole tax year (subject to any residence elsewhere under treaty rules).

So, the date from which you become resident will largely depend on the time of year you arrive in Spain.

If you arrive in Spain in the first six months of the year with the intention of staying there indefinitely, you are likely to be regarded as tax resident for the full calendar year. However, if you move directly from the UK, then it is likely that, because of the UK/Spain Tax Treaty, you will be regarded as UK resident up to the date you leave the UK and resident in Spain thereafter.

If you move to Spain in the latter half of the calendar year, then you are likely to find that you are regarded as non-Spanish resident for that year, on the basis you have not spent 183 days there during the year.  However, if you have made previous visits to Spain and these have been significant or frequent, the Spanish authorities could deem you to be resident in Spain from an earlier date, and regard any subsequent time spent outside of Spain as a temporary absence (unless you were clearly resident at that time in another ‘tax treaty’ country such as the UK).

UK/Spain Double Tax Treaty

The UK/Spain Double Tax Treaty has a tie-breaker clause that comes into operation if you are resident both in the UK under the UK rules and in Spain under the Spanish rules.  The purpose is to determine in which country you will ultimately be regarded as tax resident – it cannot be both.

The agreement works as follows:

  • If you are dual resident in practice, you are deemed to be tax resident in the country in which you have a permanent home available to you.
  • If you have a permanent home in both countries (or neither), you are deemed to be resident in the country where your ‘centre of vital interests’ lies. ‘Vital’ means the whole pattern of your life.
  • If this test is indeterminate, you are deemed to be resident in the country in which you have an habitual abode (a place where you spend most of your time during the tax year), but if this is not clear you are deemed to be resident in the country of which you are a national.  UK nationals will at this point be regarded as UK residents.

If you are thinking of making a permanent move to Spain it might be worth giving some careful consideration as to the timing of your move. As the UK tax year runs from 6th April until the following 5th April, you could, for instance, leave the UK near the end of a tax year, move to another country for a few months, or travel, and be in Spain for the latter part of the year for less than 183 days. This way you can avoid becoming Spanish tax resident for that tax year.

It is always best before making the move to Spain to take professional tax advice from a specialist who knows both UK and Spanish tax legislation.

By Bill Blevins, Managing Director of Blevins Franks

Spanish mortgage news

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – rose again last month to 4.666% (to be confirmed by the Bank of Spain). This will push up the cost of financing a Spanish property purchase with a mortgage in Euros.

There have now been 23 consecutive monthly increases in Euribor, pushing it up to its highest level in 7 years since December 2000. Euribor is now 29% higher than it was a year ago, and 122% higher than in June 2004.

For a typical 25-year Spanish mortgage of 150,800 Euros with a rate of Euribor + 0.5%, monthly mortgage repayments will rise by 89 Euros a month to 895 Euros, adding roughly another 1,000 Euros to the annual cost of paying the mortgage. 95% of mortgages in Spain are variable rate – a much higher proportion than for most other Eurozone economies – so borrowers in Spain will bear the brunt of the rise in Euribor.

Euribor rose in August despite the massive injection of liquidity by the European Central Bank to prevent the subprime mortgage crisis in the US turning into a credit crunch in the Eurozone. A re-pricing of risk and tightening credit markets mean that Euribor can be expected to continue rising.

According to the Bank of Spain, mortgage repayments now eat up 44.8% of gross household income, well above the recommended level of 30%, and the Spanish savings bank ‘Caixa Catalunya’ estimates that average household debt is now 115% of household income, compared to 71% in the year 2000. The organisation of users and consumers (OCU) has warned that the latest increase in mortgage interest rates will “stretch households to the limit.”  But mortgage delinquency rates, though on the rise, are still close to historic lows.

Many mortgage analysts expect Euribor to keep rising in the second half of the year, though at a slower rate. However, Pedro Solbes – Spain’s finance minister – is of the opinion that Euribor will soon peak. In the face of rising interest rates, and falling consumption and construction, the government has revised downwards its forecast for GDP growth from 4% to 3.8%

The holiday home market will be the first to feel the pinch from rising mortgage rates. Financially stretched Spanish households will abandon the holiday home, or plans to buy one, before defaulting on the main home. The Spanish are the biggest buyers of holiday homes on popular Spanish coasts, so rising interest rates are bound to have a big impact on the property market in these areas.

Base rates

Euribor is derived from the Eurozone base rate set by the governing council of the ECB during monthly meetings presided over by Jean Claude Trichet – President of the ECB. The ECB raised base rates from 3.5% to 3.75% in March, and then by a further quarter point to 4% on 6 June, but then left them unchanged in July and August.  The ECB was widely expected to raise rates again in September, to 4.25%, but after recent turbulence in the credit markets the bank is now tipped to hold rates at 4% in September.

© Mark Stucklin (Spanish Property Insight)

 

Comments

comments

Leave a Reply

Profile photo of Mark Stücklin

About Mark Stücklin

Mark Stücklin is a Barcelona-based property market analyst and consultant, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on ms@spanishpropertyinsight.com.