Don’t mention the bust

Ibiza, a traditional German haunt
Ibiza, a traditional German haunt

Britons piled into Spanish property and got burnt. The Germans bided their time. Now they’re starting to come back, should we follow?

We may fancy ourselves as a nation of hot shot property investors, but are we really any good at investing abroad? Not if our record in Spain is anything to go by. Many British investors crashed and burned in Spain over the last decade, using their favourite investment strategy of ‘follow the herd’.

First published in The Sunday Times Home section

German investors, on the other hand, largely avoided the bubble, and are now taking back their favourite haunts like Mallorca from distressed British vendors in full flight. Could it be that the Germans are just better at football AND buying overseas property than we are? And if so, shouldn’t smart investors be following German buyers back into Spain, rather than just watching our fellow Britons stampede for the exit?

The Germans always used to be big buyers in Spain, but from around 2003 onwards they retreated as the British advanced, with many selling out to British buyers after several years of surging property prices. Now it looks like they are back, at least in traditional German strongholds like Mallorca and Gran Canaria. “Ja! More Germans come back now,” confirms Margret Düllman, head of Düllman & Hundertmark, an estate agency catering to German buyers in Gran Canaria. It’s a similar story in Mallorca. “They bought low and sold high, and now they are back to buy low again,” explains Martie Quick, a local estate agent in Mallorca.

To a certain extent the Germans have just been lucky with their timing. One reason they left Spain after 2003 was an economic recession at home that dented their confidence, and made surging Spanish property prices look crazy in comparison to their own declining house prices. But they also deserve some of the credit for their cautious attitude to buying property abroad.

For a start Germans don’t like borrowing money, unlike the British who will happily borrow more than 100% given half the chance. “They are always looking for a good investment but only something they can afford with cash,” explains Brigitte Wendel, a German estate agent. “They want to be able to sleep at night.” Without mortgages they were priced out of the market during the boom, which turned out to be a blessing in disguise. Rising prices just encouraged the British to borrow more, like a red rag to a bull.

The Germans are also canny buyers who instinctively go for good beach locations in places like The Balearics and The Canaries, where there is always strong demand from holiday makers. Many British investors, on the other hand, were easily persuaded that new developments in obscure parts of inland Spain, miles from the sea, would make a good investment.

German buyers head for the beach
German buyers head for the beach

And finally, Germans are fussy about quality and like to see what they are getting, so they found the off-plan boom a turn-off. Nonchalant British investors, on the other hand, piled into off-plan investment with gay abandon. All these factors together kept German buyers out of the market as the bubble inflated and then burst. By 2007, German buyers were just 10% of British demand, according to figures from the Property Register.

So what is starting to lure the Germans back? “Prime property at reasonable prices, at least in Mallorca,” explains Quick, who claims that prime property prices on the island are down by as much as 25% in the last few years. “You can now buy apartments in good locations with sea views for around 350,000 to 400,000 Euros, down from 550,000, and villas are down to 1.5 million from above 2 million Euros. The crisis has created a window of opportunity that the Germans are exploiting. They are after the best properties, in the best locations, with the best views, for the best price. If the price isn’t right, they won’t buy.”

Of course there are also some British buyers who can see the opportunity. Last October Pauline Lewis, 62, an antiques dealer, and her semi-retired husband Robert, 65, from Halesworth, Suffolk, spent 1.1 million Euros on a 4-bed apartment with sea views in Costa de la Calma, just 5 minutes drive from Port Andratx, in the South West of the Island. “The asking price originally started above 1.45 million Euros, but when it dropped another 150,000 Euros last autumn we decided that it was time to make our move,” explains Pauline Lewis. “Also, we didn’t want to waste more time wondering what will happen, saying shall we, shan’t we. At our age if you don’t get on and enjoy life it will pass you buy.” The Lewises took out a foreign exchange option contract to ensure they get money back if the Pound rebounds.

Though there is little evidence that Germans are buying outside of their usual haunts, you could argue that this is the best time in years to buy property in other popular destinations around Spain. For a start there is a glut of brand new, key in hand properties languishing on the market, so investors are spoilt for choice. Many of the urban planning scandals and illegal building problems that were hidden dangers are now out in the open and being dealt with, and prices are down between 20% and 40% or more, regardless of what the official price index says.

In Marbella, Spain’s flagship resort, savvy Spaniards who know the market are doing most of the buying. “It depends on the property, but in general terms asking prices are down 20%, and closing prices down 30% since they peaked in 2006,” explains Diana Morales, head of the eponymous estate agency in Marbella. “That means prices are back where they were in 2004 or before. You can now buy lovely villas for between 1 and 2 million Euros, that’s less than the replacement value. And for lower budgets a town house recently went for 250,000 Euros that was sold for 375,000 Euros in 2005. I can’t see it getting better than this.”

In Lanzarote, which is fast becoming a major destination for fitness freaks thanks to its amazing climate and terrain, there has never been a better time to buy, says Mario Izquierdo, a local lawyer. “It’s incredible, you can now buy villas with a pool in Playa Blanca for less than 200,000 Euros. That’s less than the construction price,” says Izquierdo.

And in Ibiza prime property with sea views is selling quickly if the price is right, showing that the market is far from dead. “We are getting a lot of enquiries for villas between 1 and 1.5 million euros, and anything really good in that range – private, with sea views – gets snapped up,” explains Cathy Ouwehand, head of estate agents Ouwehand & Wall. “There are also some fabulous deals to be had with newly built apartments by the beach, mortgage financing included.”

Of course prices may continue falling, but it would be foolish to expect prime properties to be given away. “British people making offers 50% below asking prices are going home empty handed,” notes Morales in Marbella, whilst in Mallorca “Germans know they won’t get bargains, but they think now is a good time to invest, and better and safer than having their money in the bank,” says Wendel. It’s a different story in Spain’s most over-developed coastal areas where a monumental glut of unsold new properties mean that subprime locations could be depressed for a decade or more.

And what about the tens of thousands of bank repos that Spanish banks will have to sell sooner or later, especially now that the Bank of Spain is forcing them to make bigger provisions for their property portfolios? Some of that stock is in the wrong places, and banks are not yet realistic about their pricing, so opportunties are limited for the time being, though that may change. “Our resales are cheaper than the few bank repossessions of interest in Marbella,” points out Morales.

But in places like Mallorca, the window of opportunity may shut sooner than people think. “Vendors are still open to offers, and it’s far easier to negotiate with them just before prices start rising than just after,” says Quick. “But for the first time in 18 months we are actively having to look for property, so the supply of properties priced to sell is getting tighter again.”

Of course the big problem for British buyers right now is the weak Pound. There are ways to mitigate this, such as forex option contracts or taking out a mortgage (if you can), but there is no escaping the fact that British buyers with Pounds do not benefit from lower prices as much as German and other buyers with Euros.

The British may have dominated the mass market during the boom, but today there are plenty of other Europeans interested in prime property now that prices are coming down. So Spain may be in the middle of a massive real estate crash, but it could be a mistake to think that prices for the desirable properties in good locations will go down much further. Warren Buffett famously said that he tries to be greedy when others are fearful and fearful when others are greedy. Right now British property investors are fearful, but German buyers are showing signs of an appetite. If we have anything to learn from the Germans it is that the time to buy property is during the bust, not the boom.

Related article (from The Sunday Times): You crazy English: a German’s view of our buying habits