October 2006 news review

Tackling property-related corruption is one of the biggest challenges facing Spain today (see news item ‘Corruption follows Spanish property boom’). Fortunately, the national government does appear to be taking the matter seriously, announcing a policy of zero tolerance, and creating a new police task force dedicated to fighting corruption in the property sector. I shall be doing my bit to help improve standards by producing a guide to the best new developments in Spain. All of the developments I include will be 100% legal, and free of corruption-related scandals (where there are illegal properties there is often corruption). The guide will be ready in January, and will help potential buyers identify the best developments in Spain, where one can buy with peace of mind. Make no mistake, if you avoid the pitfalls, there’s no better place in the world to own a home than Spain.


Corruption follows Spanish property boom
Spain’s 8-year-long property boom has not been an unmitigated blessing. Many attractive areas have been mindlessly overdeveloped, rising prices have shut young, first-time buyers out of the market, and the economy has diverted productive recourses into building a glut of empty properties. But perhaps the worst consequence of the boom has been an increase in corruption, particularly in town halls.

Property-related corruption scandals are now reported almost daily in the Spanish press. Anti-corruption prosecutors are investigating dozens of cases, largely concentrated in municipalities on the Mediterranean coast, and around Madrid. Marbella may be the best-known, and most egregious example of town hall corruption in Spain, but it is also just the tip of the iceberg.

The majority of the corruption cases under investigation involve mayors, or other officials, taking bribes for issuing building licences, or for reclassifying land from rural to residential – known as a ‘pelotazo’. For example, 2 ex-mayors of Ciempozuelos, near Madrid, have been arrested on suspicion of taking bribes worth 40 million Euros for reclassify land, whilst in Murcia, a well-connected developer was able to buy protected land for 30 million Euros, have it reclassified with the help of local politicians, and sell it 2 years later for 105 million Euros. Pelotazos enable corrupt officials and their cronies – usually property developers – to make tens of millions of Euros overnight, and without even having to lay so much as a brick.

Though corruption harms the long-term interests of Spaniards more than anyone, it can also affect foreigners buying property in Spain. Many English-speakers have invested a chunk of their life’s savings in a property in Spain, only to find that corrupt local practices have left them with an illegal property. It is some consolation to know that even Spain’s former Prime Minister – José María Aznar – is in the same situation (see news item ‘Spain’s Ex-Prime Minister own illegal property’).

In response to the hullabaloo in the press, the socialist government has announced a policy of zero tolerance of corruption in town planning departments, and the Guardia Civil (the Civil Guard – one of Spain’s law enforcement organisations) is creating special teams to fight corruption in the real estate sector. The teams will start operating in Madrid, Malaga and Murcia from January.

What to expect next? More scandals are bound to emerge over the next few months. But at the same time it looks as if town halls are taking the new anti-corruption climate of seriously, and have taken on board the lessons of Marbella, where a corrupt town hall was closed down, and many officials thrown in jail. But property-related corruption in town halls won’t go away completely until there is root and branch reform of the town planning process, local government financing, and better oversight.

Capital Gains Tax for non-residents reduced from 35% to 18%
Legislation to reduce Capital Gains Tax for non-residents from 35% to 18% (and increase it for residents from 15% to 18%) was approved by the Spanish Senate in October. The new regulations also reduce the withholding provision that non-residents pay when selling property in Spain from 5% to 3%. The new regulations come into force at the beginning of January 2007. Non-resident vendors should try to delay completion until January 2007 to benefit from these lower taxes.

European Commission ultimatum on ‘land grab’ laws
The European Commission (EC) has given Spain 2 months to do something about the Valencian Region’s so-called ‘land grab’ laws, or face legal proceedings in the European Court of Justice.

Under pressure from the EC, the Valencian Government replaced the original ‘land grab’ law, known as the Ley Reguladora de la Actividad Urbanística (LRAU), with a modified law called the Ley Urbanística Valenciana (LUV) or Valencian Town Planning Law in English, which came into force on 1 February 2006. But the EC considers that, although the LUV streamlines the procedure to select property developers, it still contravenes EU procurement directives in several important respects.

The Generalitat Valencian (Valencian Regional Government) has responded to the EC’s threat of legal action with tough talk intended to face down the Commission. Cristina Serrano, the Valencian minister responsible for territory and housing, told the EC to “stop issuing ultimatums” and challenged it to carry out its threat of referring the Valencian town planning law to the ECJ. So it looks like the matter will not be resolved any time soon.

The full press release from the EC is as follows:

Public procurement: Commission requests Spain to modify Valencia town planning law

Reference: IP/06/1370 Date: 12/10/2006

Public procurement: Commission requests Spain to modify Valencia town planning law

The European Commission has sent Spain a further formal request to modify the law on land-and-town planning that applies to the Valencia Community – the Ley Urbanística Valenciana (“LUV”). This request takes the form of an additional “reasoned opinion”, the second stage of the infringement procedure laid down in Article 226 of the EC Treaty. If there is no satisfactory reply within two months, the Commission may refer the matter to the European Court of Justice.

The Commission has already sent a letter of formal notice and reasoned opinion (IP/05/1598, 14 December 2005) to Spain regarding law 6/1994 on land-and-town planning (“LRAU”) of Valencia. In these, the Commission took the view that the award of integrated action programmes (Programas de Actuación Integrada – “PAI”) constitute public works and/or service contracts that should be awarded in accordance with Directives 93/37/EEC and 92/50/EEC (now consolidated and amended by Directive 2004/18/EC). PAI are contracts awarded by local authorities that include the provision of services and performance of public infrastructure works by property developers (“agentes urbanizadores”) selected by the local authority. The LRAU was revoked by law 16/2005 (“LUV”), which entered into force on 1 February 2006.

The Commission sent a second letter of formal notice on 4 April 2006 (IP/06/443, 4 April 2006) asking the Spanish authorities for their observations on several provisions of the LUV and on their compliance with previous warnings regarding the continued award of contracts that were based on the LRAU and were in breach of the EU procurement directives.

The Commission now considers that, although the LUV streamlines the procedure to select property developers, it still contravenes the EU procurement Directives in several respects. These include the position of bidders who request contracting authorities to open a procedure to award a PAI; the contents of contract notices and tender documents; some of the criteria for the award of the contract; and the possibility to make various amendments to the contract at the time of the award or during its performance. The Commission further considers that the Spanish authorities did not comply with their EU obligations by failing to adopt measures to prevent the award of contracts based on the LRAU, and in violation of EU legislation, in the run-up to the adoption of the LUV and until its entry into force. Finally, there is still a difference of opinion as regards the core issue of whether PAIs are public contracts subject to the EU procurement rules. The Spanish authorities maintain that PAIs are not public contracts, and therefore, that neither the LRAU nor the LUV contravene the EU Directives. The Commission holds the opposite view.

Spanish press examines outlook for Spanish property market
A number of articles on the outlook for the Spanish property market were published in the Spanish press in October.

On 6 October there was a piece in the Spanish daily ‘ABC’ reporting recent comments by Gergorio Mayayo – president of the Spanish Mortgage Association (AHE) – to the effect that Spanish property prices are overvalued, and due for an adjustment. But Mayayo subscribes to the ‘soft landing’ theory, and expects the rate of property inflation to fall gradually to the general inflation rate. According to Mayayo, a sharp fall in Spanish property values is “inconceivable” given present economic circumstances (Spain’s economy is growing at 3.7% – the highest rate in the industrialised world after Sweden). As far as the Spanish Mortgage Association is concerned, speculators have not driven up Spanish property prices. The real driver of prices has been new demand from immigrants, first-time young buyers, and women entering the expanding job market. Nevertheless, Mayayo accepts that a small minority of homeowners will struggle with higher interest rates.

On 9 October, in the Spanish financial daily ‘Expansion’, there was an article on falling demand for newly built property in Spain. According to the article, rising interest rates, and high property prices, combined with low salary increases, leave many in the real estate sector expecting a significant drop in demand until 2008. The article refers to various industry reports showing that demand for new developments fell 9.5% in 2004 and 3% in 2005. The expected fall in demand this year is over 10%, followed by a drop of 4.6% in 2007, and 2.9% in 2008.

Also on 9 October, an article in the Spanish financial daily ‘Cinco Días’ talked of property prices peaking in Alicante, Malaga and Almeria – three areas popular with English-speaking buyers. According to the article, developers and other real estate professionals accept that high prices and excessive housing starts have created a glut of properties, which is putting downward pressure on prices (and sales velocity) in the provinces of Alicante, Malaga and Almeria. The article notes that the Costa del Sol (Malaga province) has the added problem of urban planning corruption scandals. In the light of this, the article argues that the Cantabrian coastline, in the north of Spain, is emerging as a serious alternative to the Mediterranean coast for property investors. On a brighter note, the article finishes by saying that property prices in towns near the big regional capitals are still buoyant.

And on 13 October, in the Spanish daily ‘El Mundo’, there was an article noting that despite signs of slowdown coming from almost all corners of the Spanish property market, there is almost no trace of it in the official figures. The article quotes figures from the Ministry of Development showing that between August 2005 and July 2006 there were 787.273 housing start approvals in Spain, an increase of 12.8% on the previous 12-month period. And as the next news item shows, the latest figures from the Ministry of Housing hardly paint a picture of a Spanish property market in crisis.

Spanish property inflation drops below 10% for first time in 5 years
The latest figures from the Spanish Ministry of Housing reveal that annual property inflation at the end of September was 9.7% – the first time in 5 years it has fallen below 10%.

Once again, the Government has used the figures to argue that its housing policies are working, and that the Spanish property market is on course for a soft landing.

As always, the headline figure disguises considerable regional variations. Property prices rose by 7.3% in Madrid, 14% in Aragon, and 15% in Cantabria.

Spain’s Ex-Prime Minister owns illegal property
The Spanish press reports that José María Aznar – the previous President of Spain – owns a duplex on a development afflicted by planning problems in Marbella. Although the development, called Hoyo 15 in Guadalmina, was over built, there is little risk of the Ex-Prime Minister losing his property to the wrecking ball, as Marbella’s new urban plan is expected to legalise all properties on this development.

13% of Spanish properties bought by foreigners
13% of Spanish property transactions in June of this year involved a foreign buyer, according to figures provided by the Ministry of Housing. Unsurprisingly, in popular tourist areas the proportion of foreign buyers is much higher than the national average. The proportion of foreign buyers is highest in the Balearics, at 19.5%, followed by the Canaries with 18.7%. Foreigners make up 14.1% of buyers in Catalonia, and in inland areas such as Castilla-La Mancha, the ratio drops to 9.3%. Foreign buyers in the interior of Spain are more likely to be economic migrants buying first homes than Westerners buying retirement homes or second homes.

Resale property asking prices stagnate in Spain’s biggest cities
Resale property asking prices in Barcelona, Madrid and Valencia barely budged in the 3rd quarter of the year, according to Idealista – Spain’s leading property portal. Between July and September resale property asking prices rose by 0.7% in Barcelona, 0.6% in Madrid, and fell by 0.1% in the city of Valencia. Idealista uses the asking prices of resale properties in its database to track quarterly changes in asking prices.

Newly-built property prices in Barcelona rise 15% in 6 months
Whilst resale property asking prices in Barcelona (and other large Spanish cities) may have been more or less stable in recent months, newly built property prices in Barcelona have shot up by 15% in the first 6 months of 2006. News of this increase in Barcelona’s newly built property prices comes in a new report (informe sobre el sector de la vivienda en catalunya. primer semestre del 2006) from Catalonia’s ministry of housing and environment, which reveals that prices rose by 15.2% to 5,856 Euros/m2. The report also reveals that rents in Barcelona have risen by 12.5% over the same period. Carme Trilla – Catalonia’s director of housing – describes newly-built property prices in Barcelona as ‘extremely high’, but goes on to say she sees no sign of price increases abating.

Regional government of Valencia punishes Catral for illegal builds
The regional government of Valencia has stripped the local government of Catral (Alicante) of some urban planning powers for allowing the illegal construction of 1,270 homes on rural and natural parkland. Many of the illegal homes are owned by English-speakers, and it is far from clear what the government intends to do about them. There has been some talk in the British press of homes being demolished, and owners being left to seek compensation from developers, which would of course leave them with no compensation at all. However, it is far more likely that nothing will happen in the foreseeable future, and the illegal homes will remain illegal but standing. In fact, the Catral scandal appears to have more to do with local party politics than a clamp down on illegal building. Urban corruption scandals are dominating the news in Spain, and regional government in Valencia, run by the Popular Party, has come under heavy criticism from the opposition Socialists for urban planning corruption and over-development. The Socialist, who run Catral’s local government, accuse the regional government of ignoring far more serious illegal building scandals in PP-run municipalities, and of using relatively minor problems in Catral to divert attention from more serious problems in PP municipalities. The Socialist Mayor of Catral has accused the Valencian government of “scandalous political opportunism”. The regional government is now threatening to dissolve the local government of Catral.

Spanish property rental prices up 4.3%
Rents in Spain have increased by 4.3% over the last 12 months, just 1.4% more than the general inflation rate, according to the National Institute of Statistics. Spanish rental yields continue to fall.

New law to reduce mortgage-related costs coming in early 2007
A new law that reduces notary and registry fees for mortgages, and that reduces to 0.5% the maximum penalty mortgage lenders in Spain can charge for early cancellation of variable-rate mortgages, will be introduced during the first quarter of 2007. The new law is expected to reduce mortgage-related transaction costs by up to 40%.

European Central Bank raises base rates, mortgage rates follow
The European Central Bank raised base rates on 11 October from 3% to 3.25%, and made it clear that another increase is likely in December. The markets expect the ECB to raise Euro Zone base rates to 3.50% by the end of the year. Euribor – the rate used to calculate interest payments for most mortgages in Spain – also rose in October to 3.799%, the highest level since June 2002.


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