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Still plenty to gain from a home in Spain

With tax rates now reduced, a home in Spain makes a shrewd investment, as long as you do your homework

Sunday Times Home Section, 21 January 2007

With tax rates now reduced, a home in Spain makes a shrewd investment, as long as you do your homework

Who says nothing good ever comes out of Brussels? Britons selling their holiday homes in Spain used to be clobbered with a capital-gains tax (CGT) rate of 35%, while permanent residents (Spaniards and foreigners alike) paid only 15%. Now, under pressure from the European Union, Spain has finally changed the rules. Since the beginning of this year, all EU citizens have been liable for the same rate of 18% Spanish CGT when they sell property there.

Lower taxes should make Spanish property a better investment for nonresidents, but taxes aren’t the whole story. With stiff competition from cheaper destinations such as Bulgaria, and Spanish property prices looking a bit peaky, is it still worth buying a holiday home in Spain?

Undoubtedly yes, in my opinion, but only if you are prepared to do your research, develop investment strategies based on local market insight and take a long-term approach. Buying any old property won’t work in a market that has risen by 100% in five years and now shows signs of fatigue. But if you are prepared to make the effort to become a well-informed investor with realistic expectations — rather than basing your decision on investment tips from pushy sales reps during whirlwind inspection trips — then here are some pointers.

The Gibraltar effect

With low taxes, minimal regulations and endless sunshine, all just a couple of hours by plane from London, Gibraltar is having no trouble attracting new businesses such as internet gaming and financial services companies (rumour has it that Gib’s ambition is to become the Hong Kong of Europe). This is creating well-paid new jobs, but few of the new residents want to live on the rock, fuelling demand for quality housing over the border in Spain. Sotogrande — arguably Europe’s top residential golf resort — stands to gain the most. At least one internet gaming entrepreneur has been investing in multiple units there to use as housing for his company’s employees.

That’s not all: a new agreement between the UK, Spain and Gibraltar means that Spanish domestic flights can now land at Gib. This will cut down the journey time from Madrid by a third — a huge improvement. Madrileños are big buyers in this area — a majority of buyers at Sotogrande last year were Spanish — and easier access should boost demand.

Contrarian investment strategies in Marbella

Marbella is having a terrible time with corruption scandals, illegal building and mindless development, all of which turn off buyers. Furthermore, a glut of two-bedroom flats is stunting prices because the market cannot digest all the new properties, with the result that prices across the board are either stagnant or falling.

But Edward Kay, 43, from London, is bullish about Marbella even as the market falls. Kay, formerly an investment banker with Merrill Lynch, is hunting down detached and semidetached beachfront properties, priced to sell, anywhere near Marbella.

“The glut of apartments is depressing the whole market, and distorting prices for other types of property,” he says. “As a result, you can pick up villas for less than they cost to build. Prices may fall further, but I don’t mind because I’m confident that the properties I’m buying will one day be worth a lot more. Based on fundamentals, this area has a great future.” Fincas in southern Catalonia The price guides produced by Kyero.com, a leading Spanish property portal, show that Tarragona, in southern Catalonia, has emerged as a popular region with buyers. A new airport under construction nearby in the province of Castellon should help fuel demand for property around the Ebro River delta, one of Spain’s most beautiful regions.

Newly built villas on the coast are often wildly overpriced, but fincas (country properties) with a few hectares of land, not far from a village, still represent good value. “If it’s just land with planning permission, then prices start at about €30,000 [about £20,000],” says Mary Sidman, director of Catalunya Property Services. “Fincas with a habitable house start at about €200,000 [£132,000]. Younger buyers, families with children, are coming here for a change of life, and that demand is not going to disappear.”

Flight to quality

Buying off-plan proved to be an unpleasant experience for many homebuyers and investors alike in recent years, due to the flaky conduct of countless mediocre developers. A difficult market, and risk-averse buyers, should cause a flight to quality, which will benefit developers with good reputations. You will have to do your homework to identify the best developments, and don’t rely on an estate agent for your information.

So much for what you should buy: what should you avoid? For a start, keep away from two-bed flats in mediocre locations on the Costa del Sol. There is a surplus of these, and prices need to fall further before the market clears.

Patience is also required. It used to be possible to make a quick killing by “flipping” properties bought off-plan, but this is no longer the case. Spanish property is not a good short-term speculative investment because transaction costs are high, at about 10%, both when you buy and sell.

A final word of warning: as Bill Blevins, of tax specialists Blevins Franks, points out, if you are a UK resident buying in Spain, you are still liable for British CGT — 40% after allowances if you are a higher-rate taxpayer. In other words, you may have to pay less to the Spanish, but will end up paying correspondingly more to Gordon Brown.

And, be warned, keeping your Spanish property dealings secret from HM Revenue and Customs is becoming more difficult. British and Spanish tax authorities are starting to cooperate, and the taxman is snooping on you like never before.

© Mark Stucklin (Spanish Property Insight)

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