Big reductions on Spanish holiday homes might look tempting. Just make sure you know what you’re getting into

Sunday Times Home Section, 26 October 2008

Buy a townhouse on the Costa del Sol for 790,000 Euros and get a condo on a golf course for free. Discounts of up to 40% on new developments if you club together with other buyers in a scheme being pushed Costa del Sol estate agents Andalucian Dream Homes. Internet auctions run CB Richard Ellis, a property consultancy, promising properties at ‘2005 prices’. These are just a few examples of the many deals now being hawked around the ruins of Spain’s property market.

With sales down by a national average of 27% this year, and 45% in key regions like Catalonia, you would expect prices to be tumbling, as they are in the UK and the US. But according to the Ministry of Housing, average Spanish property prices are still rising, by an annualised 0.4% in September, with prices up by more than 3% in coastal provinces like Valencia, Tarragona, and Almeria. Bargains galore and rising prices; if true it would make Spanish property the perfect investment.

So what’s really going on? Is Spain really the Costa del Bargain, or is it all just marketing guff?

First, it’s important to realise that after Spain’s credit-inflated property bubble, even significant prices falls don’t necessarily mean bargains, just a return to more reasonable values.

Second, how do you judge a bargain in Spain? 50% off? But off what? Of a wildly inflated asking price? Off a dubious mortgage valuation? How about off sale prices for comparable properties? That’s the kind of information you will struggle to find. A lack of reliable housing market data is always a problem in Spain.

And if you are a British buyer you probably have to factor in exchange rates, which have made Spanish property, priced in Euros, 10% more expensive over the last year.

Radu Tatar, 39, a university lecturer in Liverpool, who has been watching the market for over a year, sees little evidence of great deals. “Asking prices in Murcia and Almeria are down about 20%, but they are still way over-priced. After-tax rental yields on the cheapest apartments are still only 1%.”

So, though talk of bargains might be premature, it is fair to say that prices in Euro terms are falling significantly, especially in coastal areas where the British tend to buy.

You can, for example, get discounts of around 20% off list prices on smart new developments on the Costa del Sol, and potentially much more if you are not fussy about what you buy. This is now “real value for money” argues Desmond O’Connor, head of Alanda Homes, a leading developer on the Costa del Sol.“Be carefully with anything really cheap, as it is cheap for a reason,” he adds.

Is 20% off a bargain? Maybe not, but it is certainly the best value in years. And on the most attractive developments it might not get any better, if developers can afford to dig their heels in on price. Note that you won’t normally find discounts published on developer price lists – you have to negotiate them.

But many developers are so indebted they can’t drop prices any further without selling at a loss. “You can all forget about prices falling 30% to 40% because I’ll give it to the bank before that,” Guillermo Chicote, president of the Association of Builders and Constructors of Spain, said last week at a conference organised by Spain’s Association of Financial Journalists.

Despite Chicote’s macho talk, that’s probably what will happen. Dozens of developers, like Martinsa-Fadesa, one of Spain’s biggest, have already been forced into administration, causing grief for their British clients who have no property to show for their stage payments (which highlights the risk of buying off-plan in this market; better to buy something newly built but already finished). More are likely to follow.

So unless the government steps in and bails out the sector, large scale repossessions of new developments by banks look likely. That suggests that prices might start testing bargain territory when those repossessions flood onto the market.

Unfortunately for bottom-fishers, that will take time, and much of the property won’t be very nice anyway. After all, who wants a property on a half-built development behind the motorway? Even so, there may be real bargains when the time comes.

What about the resale market, where private vendors often have more room for manoeuvre on price? Any steals there?

Well, sadly, many of the people who invested in recent years have large mortgages, putting them in the same bind as developers. There may be hundreds, possibly even thousands, of British investors who can’t sell up in Spain because of negative equity.

But vendors who bought 5 to 10 years ago or more should have plenty of negotiating margin, if they are serious about selling.

Regional variations are significant, but there is no doubt that resale prices have fallen. The consensus figure amongst agents seems to be around 20% off the peak, though Santiago Baena, president of the Council of Real Estate Agents of Spain, forecasts at total of 30% by year end.

As always, it depends what you want. If you don’t mind a cramped 2-bed apartment looking onto another block in an over-developed area of indistinguishable new developments, then hang on, because prices might plunge. But if you want something special, for example a house on the La Almuña estate near Guacin, in the hills behind Estepona, then you will have to pay good money if you are lucky enough to find anything for sale. With just 12 houses set in stunning countryside, La Almuña is highly sought after amongst British buyers, but houses rarely come onto the market, so vendors are in a strong negotiating position.

For the mass market, repossessions might change the game, given that mortgage default rates have started to rise rapidly in recent months. But it will take many months for today’s repossessions to reach the market, as everything moves slowly in Spain, unlike the USA. Then the best repossessions will get snaffled up by insiders as usual.

So if you are really determined to bag a bargain in Spain, you will need patience, and might be disappointed by the quality. There is also the small risk that the market will roar back to life and deny you a bargain, though I can’t think why. But if you want to buy now, and you are looking for quality, then you should be able to get at least 20% off last year’s prices, for both new build and resale. That’s much better value, but not the same as a bargain, whatever agents may say.

© Mark Stucklin (Spanish Property Insight)