With the Spanish property market in turmoil, there are good deals on the costas and inland, but do your research

Sunday Times Home Section, 20 January 2008

Spain has long been the number one European destination for British buyers, and hundreds of thousands of Britons already own property there. But with the Spanish property market looking distinctly wobbly, and some muttering darkly of an impending crash, would you be mad to buy a home there this year?

Not necessarily. As seasoned investors know, where there is trouble there is opportunity, and distress may mean bargains for clued-up buyers who know how to exploit the market. “There will be plenty of distressed vendors in 2008,” predicts Inez Rix, of Direct Auctions in Marbella.

Bargain hunters like David Irvine, 55, a businessman from Glasgow who is looking for a semi-permanent home in the Puerto Banus area on the Costa del Sol area, is already on the case. “With the market stalled and interest rates rising I’m quite clear that 2008 will be a disaster for folk who have to sell,” says Irvine, 55, who has been tracking the market for five years. “My preference is a villa in prime location with sea views, but basically I’ll go for the best deal.”

The market may be turning, but that doesn’t mean that all properties are now for sale at rock bottom prices.  “Many vendors haven’t yet come to terms with reality, and some asking prices are just ludicrous,” says Irvine. “I’m a cash buyer – a rare beast today – and if prices don’t meet my expectations I just won’t buy.  If I come back from this next trip empty handed I won’t be disappointed.”

The first question to answer is how bad is it and will there be crash?

The outlook for the Spanish economy is certainly darkening: unemployment is rising, inflation has hit 4.3%, and the current account is the biggest in Europe.

The over-supply of new properties in many sub-prime locations, such as Duquesa on the Costa del Sol, and Torrevieja on the Costa Blanca remains a chronic problem. A quarter of all properties built in the entire European Union in 2006 were in Spain and Caixa Catalunya, a Spanish savings bank, has estimated up to 500,000 newly built properties remain unsold.

But Spain is a large and diverse country, which means different areas and kind of property will perform differently from each other. “Much of the doom and gloom is misleading because it comes almost exclusively from new-build property development,” says Barbara Wood, who runs the Andalucian end of The Property Finders, a search agency. But bad news in one segment tends to rub off on others, forcing serious buyers across the board to lower their asking prices.

Nevertheless, it’s clearly a buyer’s market in 2008. So how does one take advantage of this? The following tips will help you on your way.

Property information is power

You should always do your homework before buying property abroad, but it’s more important than ever when the market changes, and property values start to jump all over the place. Invest your time wisely in researching the market, and you may be able to save yourself tens of thousands of pounds.  “There’s no substitute for clear thinking and good research ” says Irvine. “You have to be really clued up on the market, clued up on values, and then drive a hard bargain.” To use an analogy from the stock market, you have to be a stock-picker, rather than buy the index.

What kind of Spanish property?

Newly-built flats on the coast are the main culprits in the property glut, much to the distress of the many British investors who purchased them off plan in recent years.  Sea views or not, many of them are mediocre, in poor locations, with little to differentiate one from the other. This leave vendors with little to play with but the price, and given the oversupply of property, vendors may have to drop their pants to shift these properties. So if you don’t mind an identikit apartment, this is where the biggest deals are likely to be found.

 

But when one segment turns down, the bad news rubs off on others. So though villas are in shorter supply, problems in the market for flats means asking prices are also being pushed down for villas. “Prices for attractive villas in the upmarket enclave around Javea on the Costa Blanca are already 20% down,” says Andrew Lupton, of Stacks Relocation Spain. “You can now get a lovely 4-bedroom villa with a pool on a plot of 800m2 for 400,000 Euros that would have cost you 500,000 a year and a half ago.”

Furthermore, planning approvals for detached properties are now falling much faster than for flats, according to new figures from  Spain’s ministry of development. This suggests a shortage of villas in years to come, which will enhance future values.

Which areas of Spain?

Some buyers are, of course, wedded to a particular area or region. But if you are more flexible, then had south for the best bargains. “There are already some real ‘come and buy’ me prices to be found in Andalusia,” says Wood. “For example a brand new penthouse in Nerja with 4-beds, 2 baths, a roof top pool, wonderful living areas and great sea views, that was first on the market for 950,000 Euros, and now is down to 680,000 Euros, with every indication that it can be negotiated further.”

The biggest deals are on the coast, where the oversupply of property is bigger, but inland properties are also being dragged down. On the other hand the inland market is smaller, and prices less volatile, which might appeal to risk averse buyers.

Are Spanish developers ready to do a deal?

Developers are having a hard time of the downturn, which is hitting their sales hard. Desperate as they are to make sales, now’s the time to drive a hard bargain. Many developers are loath to drop prices, but they can offer discounts in other ways, such as mortgage holidays, furniture packages, or guaranteed yields.

But choose your development carefully, as many new developments are so unattractive and over built that they probably don’t have a resale market. And be careful who you deal with, as buying off-plan is getting riskier now that many developers are suffering financial problems, and nothing is a bargain if the developer folds and runs off with your money before the project is completed.. Take your time, negotiate hard, and only buy from the best developers with strong balance sheets and a reputation for quality.

Look for distressed property sales

Distasteful as it is, there’s no better way to get a bargain than find a vendor who really needs to sell due to a setback in personal circumstances. Distressed vendors, especially Britons who need to return home with their money, can’t afford to sit out the buyer’s market, and the longer they delay, the more it costs them in mortgage payments, and other ownership expenses.

Financial difficulties are a serious problem in particular for many off-plan investors who were forced to complete and take on mortgages, and who now can’t cope with rising interest rates. One British owner with financial difficulties recently had to sell his 1.2 million Euro villa on the Costa del Sol for 550,000 Euros, leaving him 600,000 Euros out of pocket once the mortgage was cleared. “One person’s pain is another’s gain,” observes Lupton.

Keep it legal!

This being Spain, it is essential to do thorough legal searches before buying, no matter how good the  price. The regional government of Andalucia has just demolished the home of an elderly British couple in Almeria, claiming that it was illegal, so the risks are very real. A bargain is no good if it then gets knocked down.

That said, buying illegal properties at a discount could be a rational strategy for an investor with a large appetite for risk. Some of the properties might be demolished, but others might pay off handsomely. You would, however, need deep pockets and nerves of steel.

© Mark Stucklin (Spanish Property Insight)