Mallorca Property Market Summary

Since tourism started to develop in the 1960’s, Spain’s residential property market has grown to become one of Europe’s most successful destinations for second homes and in recent years for first homes. Latterly, many other destinations have emerged, particularly in Eastern Europe. However, Spain’s excellent climate, wonderful coastline and varied countryside, sophisticated infrastructure and facilities, relaxed lifestyle and easy access by air/rail/road from the main markets continue to attract buyers for second holiday homes or retirement.

This report was written by local estate agents.

Even though the rapid investment returns of previous years has slowed down, for long term capital growth quality residential property in Spain still represents an excellent investment, where the main buyers are British, German and Spanish. According to the findings of this report, in 2007 projected property increases will be approximately 4-10%, depending on location.

There is still a great variety of pricing in Spain. The most expensive areas on the Spanish Mainland, outside of the main cities, tend to be around the Marbella area. However, there remain plenty of areas which still represent good value particularly along the coastal areas of the Costa Brava, the mountain areas such as the Pyrenees and northern Spain.

The Balearics, which have become established as one of the most chic locations to own a quality holiday home in The Mediterranean, are easily accessible and only a two hour flight away from key cities in Europe with hundreds of direct flights from the main European cities year round.

In addition, over a 100 years of tourism and investment means that residents can enjoy the inherent benefits of the one of the most sophisticated infrastructures in the Mediterranean.

Investment in Infrastructure Impacts Property Values
Over the past few years, large investment has been made into improving highways, motorways, rail links and airports throughout Spain. Increased TGV rail links between Spain and its bordering countries plus the development of the smaller regional airports, which attract low cost airlines, bring tremendous benefits for the investor. The findings in this report demonstrate that wherever there has been improved transport infrastructure there is
a direct benefit to the property market with some areas reporting up to 10% increase in sales as a result.

Financing
There has been a complete shift as to how buyers purchase their property. Twenty years ago the majority of homebuyers were cash buyers today approximately 85% finance the purchase with a mortgage.

Over the past five years, Spanish banks have made it increasingly attractive for outside European investors to maintain their capital whilst taking advantage of the financial offers available to them. This is based generally on 70% financing of value of the property over a 15 year period which, according to age, is also flexible, therefore providing a longer mortgage repayment period.

Recently, fierce competition between the financial institutions throughout Spain has created even better conditions for European buyers. Some financial institutions are now offering 80% finance over a 10-15 year interest only period, albeit with a slightly higher interest rate, this type of deal makes a good investment option due to the steady increase in property prices.

British clients also have the added option of buying in Spain with financing from a UK financial institution.

The Rental Market
Many clients buy properties with a view to rent them out for part of year or on a long term basis. All rental incomes must be declared to the local government and only villas/fincas can apply for a holiday rental let short term licence. As property values have risen dramatically in the past five years, so have rental yields depending on location and area. This document outlines average potential rental yields on a long term rental basis.

New Tax Legislation for Non Spanish Residents

Capital Gains
The Spanish Tax office has introduced new tax laws for non Spanish residents. Capital Gains Tax (CGT) will be reduced from 35% (in 2006) to 18% from 2007 on-wards. CGT is payable on the profits made from selling real estate in Spain. The profit is the difference between the purchase and sales price after taxes and costs related to the sale and purchase have been subtracted.

Buyers’ Tax Retentions
Tax retentions for buyers on the sale of property sold by non-residents has now been reduced from 5% to 3%. The buyer of a property, which was sold by a non-resident vendor, must make this retention tax of 3% from the total sales price of the property because of the vendor’s own Capital Gains Tax liabilty. This retention tax is paid directly to the Spanish Tax Office.

Non resident vendors of Spanish property should also be aware that they may have residual CGT liability under tax regulations applicable in their own country of residence. This liability will be subject to any relevant double taxation treat between Spain and their own resident country.

Conclusion
Further to the meteoric price rises of the past five years, Spain’s property market has slowed down in the last year. However, the market is still growing and property values will continue to increase this year by a forecasted average of approximately 7%.

Inspite of some recent speculation in the media anticipating a property crash in Spain, we have not seen any real evidence that this is the case. On the contrary, for the prospective investor it is an excellent time to research the market carefully and find some good deals for prime property.

Finally, Spain’s excellent infrastructure, political stablility, wonderful climate and sheer variety of property in countryside and coastline locations,provide the investor with one of the best choices in Europe for second home investment.