During March news of a huge money-laundering scam in Marbella on the Costa del Sol hit the Spanish press like a Tsunami. Grubby details of organised crime, local corruption, money laundering and fiscal fraud, all wrapped up in real estate speculation flooded the papers like sewage. Solicitors known to many overseas buyers on the Costa del Sol were arrested and charged, along with a bunch of dubious foreigners. 3 Spanish Notaries, of all people, were also temporarily detained. And at the centre of this scandal is Marbella’s real estate market. Local corruption makes it the perfect vehicle for laundering dirty money. A side effect of this is that illegal developments of the lowest quality get built, destroying a beautiful natural environment and enriching some really unwholesome characters, including some very grotty British and Irish estate agents.
This scandal has made me realise something that I was aware of but hadn’t fully comprehended. That high levels of corruption in some parts of the Costa del Sol, basically Marbella, invite ill-gotten money to gush into the region and take a bath in the local real estate market. You don’t have to be a genius to work out how this can artificially inflate prices whilst distorting supply. And corruption on this scale means that greed becomes the only game in town, which can drag down standards across the board.
However several good things are emerging from this scandal. First of all it has galvanised the Government of Andalusia, based in Seville, into action. The Minister for Public Works – Concepción Gutiérrez – has made it clear that strong measures will now be taken to clean up the Costa del Sol’s real estate sector.
To start with action will finally be taken to sort out the illegal developments in the municipality of Marbella. Though there could be as many as tens of thousands of properties in Marbella that in one way or another fail to comply with building regulations (as reported in La Vanguardia), the big immediate problem is some 1,600 properties in Marbella that are completely illegal. These properties were built on land, such as parkland (zona verde, zonas naturales especialmente protegidas, y para equipamiento público) that will never under any circumstances be legally accepted as land for private properties. How did they get built in the first place? A previous mayor of Marbella – Jesús Gil – approved a zoning plan for Marbella that was illegal and then did his business. So in a sense these developments are legal according to Marbella’s illegal urban plan and of course illegal in terms of the overall urban plan for the region approved by the Regional Government in Seville.
In the last couple of days Concepción Gutiérrez has stated publicly that she wants the land upon which these illegal developments have been built to be returned to it’s original condition (estado físico anterior). The President of the Government of Andalusia – Manuel Chaves – has confirmed that this is the wish of his government. The original physical condition of the land was of course empty, with nothing built on it. Although the Government has avoided using the D-word (demolition) you would have to be quite dim-witted not to get the picture. This means that the Government is talking about the nuclear option, with grave consequences for people who have bought on these developments. But buyer’s are innocent 3rd parties who would have to be compensated so who would pay? Certainly not Marbella’s local government as it doesn’t have the cash. The millions made from these illegal developments went into private pockets not government coffers. Of course it could be that the Government of Andalusia is just talking tough for now, sending a strong message to prevent this happening again but planning to reach a compromise over what has happened in the past. I guess this is the most likely case, though it wouldn’t surprise me if the Government went as far as to knock down a couple of developments just to ram the message home. Knocking down illegal developments is exactly what Antonio Romero, a local politician and member of the party IU, has been calling for. He states that knocking down illegal developments would be “the best preventative medicine and powerful disincentive against speculation and corruption in granting licenses.”
The Andalusian Government has also just announced plans to completely overall the Costa del Sol’s urban planning process (reforma en la Ley de Ordenación Urbanística de Andalucía). In essence the proposed plan will take away zoning and licensing powers from local authorities that consistently fail to implement the appropriate building regulations and laws, which will go a long way to reducing the sort of corruption that has blighted Marbella. Marbella is suffering because the long-term effects of local corruption on quality of life in an area are enormous. Local corruption tends to focus on the real estate sector, as that is where the big money is. But the way in which an area is developed, from a real estate point of view, has a huge impact on quality of life. Corrupt local officials aren’t capable of overseeing intelligent, visionary, and harmonious urban development that integrates well with the natural environment. Corrupt local officials don’t give a damn what happens to the area in the long run. All they care about is stuffing their pockets in the short term. So any measures that reduce their influence on the development of Marbella are most welcome.
The Andalusian Government is also starting to release details of a master plan for the region that includes major infrastructure upgrades and new guidelines for development. The natural beauty of the area, not to mention its comparative advantage (quality of life) that is the principal source of its wealth-creation today and in the future, needs to be protected and one can only hope that the new plans reflect this. Because let’s face it, if they don’t take steps now to protect the environment and implement a more harmonious style of urban development, the day will come when nobody wants to live in Marbella, sunshine or not. Early indications of the new plan are reassuring and with a bit of luck this scandal will create enough public disgust and political will to put Marbella and the Costa del Sol on more enlightened path of urban development. It’s not too late to save one of Europe’s most attractive regions.
Lastly one very important learning point form this scandal, and something that I have to repeat to buyers over and over again, is the importance of finding your own lawyer and not using one recommended by the estate agent you buy from. The reason why so many foreign buyers are familiar with Del Valle Abogados, the firm of solicitors at the centre of the scandal, is because they were the recommended lawyers of some of the biggest estate agents selling to foreigners on the Costa del Sol. Which makes you wonder, would irreproachable estate agents recommend crooked lawyers? I don’t think so.
There are of course many superb and 100% legal developments around Marbella, lovely areas there in which to buy property and some really excellent companies to help you do it. But in future foreign buyers of property in Marbella and the Costa del Sol will have to be much more careful about the estate agents, lawyers, and mortgage brokers they use, and the developments they buy on. And it’s about time too.
In due course I will prepare a guide to the quality developments and areas of the Costa del Sol and let all of you on the mailing list know when it is ready.
According to a new study by Grupo Lar – a Spanish developer – Spain is the first choice location for 65.7% of British people who intend to buy a second home abroad.
For 17.4% of British respondents the property will be used as a permanent residence in the future, whilst only 0.7% are buying as investors with the intention of reselling. (Note from Spanish Property Insight: Our experience of the Spanish property market and the anonymous survey we are running online leads us to believe that this latter figure is very wide of the mark).
The MD of Lar Sol – María Jesús De Miguel – explains that low cost airlines, relatively low property prices compared to the UK, and a well established British expat community in Spain all help to make property on the Spanish costas increasingly attractive for British buyers.
Other key findings of the report are as follows:
- 37.3% of British overseas property buyers choose France, and 27.4% choose Florida.
Factors influencing choice of location:
- 42.3% say climate.
- 30.6% say personal and cultural reasons.
- 14.9% say expected quality of life.
- 12.2% say regular holiday destination.
- 77.4% say they take the decision of where to buy jointly with their partner and that they plan to buy a detached house.
Media used by the British to research and shortlist properties and property companies:
- 73.9% use the internet.
- 59% use personal recommendations from friends and family.
- 56% use local estate agents based in the UK.
- 47.3% use specialist magazines dedicated to Spanish property and living.
- 92.5% of Brits have visited Spain at least once before.
- 4.6% visit Spain for the first time when looking to buy property.
Negative opinions towards Spain amongst British respondents:
- 50% report no negative opinions whatsoever.
- 12.2% cite insecurity and terrorism.
- 10.9% cite the effects of mass tourism
- 10.4% cite poor infrastructure
Metrovacesa expects 1.5 million Spanish properties to be sold in 2005
Metrovacesa – one of Spain’s largest developers – expects that 1.5 million properties to be sold in Spain during 2005, up from 1.35 million in 2004. The developer also forecasts that 600,000 new properties will be completed in the course of this year, and that mortgage rates will rise from 3.4% annual effective rate in 2004 to 3.75% in 2005.
Spain second only to Ireland in EU property price increases
According to The Economist, property prices in Spain rose by 149% between 1997 and 2004, the second highest increase in the EU. Ireland experienced the biggest property price increases with 187% over this period, followed by Spain (149%), and the UK (139%). European countries with more moderate growth rates in property prices include France (76%), The Netherlands (76%), Italy (69%), Belgium (50%) and Switzerland (12%). Property prices in Germany decreased by 2% over this period.
Foreigners spend 5.162 billion Euros on property in Spain during 2004
New figures from the Bank of Spain reveal that foreigners invested 5.162 billion Euros in Spanish property during the course of 2004, down 1.3% on the amount spent by foreigners on Spanish property during 2003. Bearing in mind that property prices increased in Spain by over 17% during 2004 this means that the number of Spanish properties purchased by foreigners during 2004 must have fallen by considerably more than 1.3%.
Spaniards spend 55.5% of income on mortgage payments
The Bank of Spain has published figures showing that on average Spaniards who buy property in Spain have to dedicate 55.5% of their income to covering mortgage payments. This is considerably higher than the 33% guideline that most mortgage lenders use to avoid mortgage defaults. Nevertheless mortgage defaults are at an all time low at present in Spain.
Spaniards consider access to housing to be 3rd biggest problem facing society
The cost of property and it’s implications for access to housing is the 3rd biggest anxiety for Spaniards, behind unemployment and terrorism, according to a new study by the Centre of Sociological Research in Spain. Next in the anxiety-rankings after housing are Immigration and crime.
The age of the golf development
According to Inmueble Magazine the potent mixture of property and golf is demonstrating its commercial muscle in Spain, with 250 golf developments and property to the value of 5.9 billion Euros on the market. 30% of people who buy property on golf developments are investors, who divide into 2 groups: those looking for short term capital gains and those looking for longer-term rental yields. Investors focusing on short-term capital gains (selling on before completion) have in some cases seen their investments increase by up to 30% in a year. Average rental rates on golf developments, as reported by Inmueble Magazine, are as follows (low season / high season, all figures are Euros / day). Studio apartment: 45 / up to 90. 2-bedroom apartment: 55 / 110. 3-bedroom apartment: 70 / 140.
Construction cost increases in Spain among highest in the EU
Figures released by Eurostat show that Spain experience one of the highest rises in construction costs in the EU during the 2nd half of 2004. However the same figures show that, over a 12 month period, construction costs in Spain rose by 5%, below the 6% average for the EU, and significantly below countries such as the UK (16.5%) and Ireland (12.7%).
According to a study by the Association for the Defence of Property Owners (Asociación de Defensa del Propietario de Vivienda -Adeprovi), 44% of all complaints in Spain during 2004 regarding new developments concerned the delivery of built areas that did not match the specifications in the plans. In the light of these and other problems the report by Adeprovi states that off plan property sales “continue to be inadequately documented” and points out that “the rise in property prices has not been accompanied by a corresponding rise in quality, given that the number of complaints rises year after year”.
The report reminds prospective off plan property buyers that Spanish consumer protection laws give them “significant rights” regarding the information that developers are obliged to provide them with and that they should insist on adequate documentation regarding build specifications from developers before proceeding to purchase. Buyers who experience problems as a consequence of poor build quality or failure to meet build specifications are urged to file complaints against the developer.
The report also gives the following statistics for new build problems in Spain during 2004:
- 21% of complaints concerned the inappropriate installation of fixed elements such as radiators, loos, etc.
- 10% of complaints concerned garages and parking spaces, which are difficult or impossible to use.
- 5% of complaints concerned build locations that were not indicated in the plans or that had other unforeseen and undesirable consequences.
- 1% of complaints concerned unexpected changes to interior distributions such as the elimination of a bedroom or the change in shape of a room.
- 57% of faults detected in new build properties in Spain were related to damp (damp rising from the ground, or through poorly insulated walls and ceilings).
- 18% of faults concerned defects in wooden flooring.
- 15% of faults concerned poor insulation.
- 7% of faults concerned poor tiling.
- 3% of faults concerned poor paintwork and other details such as scratched fixtures.
According to a new report from BBVA – one of Spain’s largest banks – property inflation in Spain will fall to around 3% in 2006, close to the expected rate of consumer price inflation. This compares to Spanish property inflation of over 15% in recent years (17.4% in 2004). The bank bases it’s forecast on an expected moderation in demand for Spanish property, including a slow down in foreign demand for Spanish property, along with the impact of an expected increase in mortgage interest rates.
Meanwhile a new report by CesIfo tries to strike a balance between denying the existence of a property bubble in Spain and warning that prices could fall if interest rates rise, as they are expected to do. “The longer that prices continue to rise, the more certain we can be that prices will stagnate or even fall in the future” states the report prepared by the Centre of Economic Studies of the University of Munich (CES) and the German Institute of Economic Research (Ifo). Nevertheless the authors of the report discount the possibility of a property bubble in Spain, claiming that although property may be overvalued in Spain “it does not fall beyond the range of reasonable values, so claims that prices might crash lack credibility”.
Source: Eroski Consumer
Madrid’s Association of Real Estate Developers forecast 12% price increases for 2005
Madrid’s Association of Real Estate Developers (Asprima) forecast that Spanish property prices will increase by an average of 12% in the course of 2005, falling to 9% in 2006. In a report on the Spanish property market co-authored by Planner and Analistas Financieros Internacionales, Asprima points out that although Spanish property has become more expensive in recent years “a family with two incomes only has to dedicate 20% of household income to mortgage payments, compared with 25% in France and the UK”. The General Secretary of Asprima – José Manuel Galindo – described 2004 as an “record year” with 700,000 housing starts in Spain. In his opinion demand for property in Spain will remain robust whilst interest rates remain low.
Between 1995 and 2004 average Spanish property prices have increased by 143.2%, according to Asprima’s report. Over the same period average Spanish household incomes have risen by 61.7% whilst average annual mortgage rates have fallen from 11.07% in 1995 to 3.36% in 2004.
Source: Eroski Consumer
Rents in Spain rose by 4.1% in 2004
The National Institute of Statistics (INE) reveals that residential rental prices in Spain rose by 4.1% in the course of 2004. When you consider that inflation in Spain during 2004 was 3.2% this means that real rents rose by less than 1% in 2004. With property prices increasing by over 17% in 2004, rental yields will have fallen by over 10%. Furthermore the annual rate by which rents rose in 2004 was lower than in previous years, compared to 4.26% in 2003 and 4.24% in 2002. Over 3 years average residential property rents have risen by 15.11% in Spain.
Looking at rental increases to the end of February 2005, figures from INE show that rents increased by 4.2% over the same period the previous year, whilst inflation was up by 3.3% over the same period. Areas with the highest increase in rents were Murcia and Extremadura, with increases of 5.7%, followed by Andalusia with 5.2%.
Note that according to the Spanish housing census of 2001 there are approximately 21 million properties in Spain, of which 14 million are primary residencies, 1.5 million are rented out and 3 million (14% of total) stand empty.
Bank of Spain recommends 80% loan-to-value mortgage limit
The Deputy Governor of the Bank of Spain – Gonzalo Gil – has recommended that mortgage lenders in Spain set a maximum of 80% loan-to-value to avoid an increase in the riskiness of loans. However it is quite common for mortgage lenders to arrange for a favourable valuation from compliant appraisal companies, which enable lenders to finance 100% or more of the purchase on the basis of an 80% loan-to-value.
Spanish rental properties are scarce and rents expensive
According to the Spanish magazine ‘Eroski Consumer’ the cost of renting property in Spain makes this option unattractive in comparison to buying. In 2000 the monthly rental cost of a 75 m2 apartment was 359 Euros, whilst buying a similar apartment with a 20-year mortgage and annual interest rates of 4% worked out at 412 Euros per month in mortgage repayments, just 54 Euros per month more expensive than renting.
Channel 4 is looking for contributors for a major new series about making money out of properties overseas.
Each programme will follow British people who are venturing into the European property markets and follow their progress as they restore properties to make substantial profits by selling on or renting.
To take part in the series, you will be looking to make big money from developing property abroad. You can be a first-time property developer or an experienced one. Ideally work on your property will be completed in autumn 2005. Our series will follow your project, and offer expert advice.
© Mark Stucklin (Spanish Property Insight)