Spain - Investment Strategies

Spain greets 80 million foreign visitors per year, the second highest number in the world (based on 2005 figures). It is also the top European destination for golfers and regularly hosts major sporting events, such as The Americas Cup in Valencia in 2008, 1999 Ryder Cup, the 1992 Olympic Games in Barcelona, and the World Cup finals of 1982.


General Factors

Spain has many different market attractions. The Costa del Sol for example is considered expensive, but this area has the highest visitor levels throughout Spain and property prices are stable. Meanwhile, areas such as inland Andalucia and the Costa de la Luz could almost be considered as emerging markets themselves with much higher appreciation potential and lower prices.

Spain has benefited from massive EU subsidies over recent years, allowing for significant improvements in the infrastructure away from traditional resort areas.

This year saw a decrease in package holidays to Spain, but not a decrease in tourist numbers. This reflects the fact that visitors are becoming ever more sophisticated in the way they book their travel and accommodation and rural and city breaks are becoming ever more popular. This is a good sign for property investors on mid-to-long term investment strategies, who will be looking to promote their properties for rental over the internet.

With increased competition amongst airlines and a fall in flight prices, more visitors are choosing Spain owing to its easy accessibility as a short break destination.

Clients have the opportunity to invest in anything from grand, all inclusive tourist complexes to smaller reform projects. However, buying off-plan property at reduced prices with unique terms of investment is always suggested as the best course of action.

Despite increased interest in all global destinations, Spain will continue to be a tried and tested market for clients seeking a safe investment.

Economic Factors

National Statistics show that travel and tourism makes up 12% of Spanish GDP and is of enormous importance to the Spanish economy. In fact, Spanish GDP has been growing above the EU average for the past 3 years, with growth of 7.8% in 2005.

Spain’s high economic performance is due largely to increased domestic demand in both consumption and investment. Employment figures continue to improve which, as a direct result, is increasing disposable income levels in Spain.

As a member of the Euro with other strong European countries, Spain can draw on the strength and stability that this offers. Inflation in Spain is currently marked at 4.1%, which is higher than many other ‘Euro Zones’.

Political Factors

Spain has a Constitutional Monarchy, with King Juan Carlos I as its Head of State since November 1975. King Juan Carlos was crowned after the death of the Dictator Franco, who had ruled since the end of the Spanish Civil War over half a century earlier. The Spanish Prime Minister, currently Jose Luis Rodriguez Zapatero, is nominated by the monarch after a successful election campain.

As a result of the progress of the past 30 years, Spain is no longer considered to be the third world country it once was. Following massive economical and political upheaval, it is now one of the EU’s major powers and is considered to be one of the world’s most stable democracies.

Natural Factors

Spain is ideally located for the enormous Northern European tourist markets, as detailed in the General Factors section.

Average temperatures on the south coast of Spain are 14ºC during the winter months and 26ºC during the summer. The country has 3,085 miles of coastline on the Mediterranean Sea and the Atlantic Ocean, offering some of the best and safest bathing environments in Europe.

Spain is home to Europe’s most southerly ski resort at Sierra Nevada, just outside Granada. The ski season here lasts from November until late April, and most would be surprised to know that the resort is of a high enough standard to have hosted the 1999 World Championships! This in particular, is a fantastic investment area. The Pyrenees Mountains are also popular for skiing on the Spanish/French border.

Rural tourism is booming, thanks to the beautiful and dramatic landscape in regions such as Andalucia. In addition, the major cities of Spain are vibrant, with a mixture of modern and traditional elements. Barcelona, Valencia, Seville and the capital city of Madrid are top destinations for short city breaks.

Logistical Factors

Having benefited from massive European subsidies in the 1980’s and 90’s, Spain has established impressive road, rail, sea and air links with the rest of Europe and beyond. This is evident both in rural locations and in established tourist destinations.

Major airports such as Malaga, Alicante, Valencia, Barcelona, Gibraltar and Murcia handle the majority of Spanish tourist traffic, and most resorts are within one hour’s drive of an airport. Regional airports also have international services, such as Granada and Almeria, for example. The brand new Madrid International Airport is also a major hub for flights from all over Europe to Latin America. Iberia Airlines is one of the world’s largest carriers, and serves many global destinations with South and Central America as its specialty.

Short Term Investment Strategy

Key Opportunity

Spain is the largest market for Northern Europeans buying abroad, with an estimated 135,000 purchases taking place every year. Of this figure, 36% are British and 23% are German, with French, Italian and Irish buyers making up the remaining top places in the rankings.

Of Spain’s 22 million home owners, 3.8 million are foreigners with this figure predicted to keep increasing. By 2008, international financial analysts predict that over 200,000 properties will be purchased by overseas buyers in Spain each year. This represents an enormous potential market for those looking to flip their investments.

Off-plan prices are always far lower than completed prices, giving buy-to-flip investors good potential returns while the increase in value between off-plan release and completion of a project varies, subject to its location. Due to the high levels of construction, there will always be projects looking for substantial early investment to fund a project. This gives larger scale purchasers the opportunity to invest with certain guarantees on sales returns at an early stage. However, these opportunities are usually sourced on a bespoke basis by specialists upon request.

Supply in most destinations is staying ahead of this demand, with traditional tourist destinations such as Costa del Sol, Costa Blanca and Costa Brava maintaining construction levels. Growth areas of Spain with renewed building and resort programmes include the Costa Calida, Costa Almeria, Costa de la Luz and inland Andalucia. Outstanding resorts are under construction or going through the planning process across all the Spanish coastal areas, giving investors a wide choice of options.

Timescale

Average construction time on Spanish projects is 18 months from breaking ground. If investors are looking at the short term, the average term of the investment should be between 12-16 months from reservation to resale. As with all property investment, the earlier you proceed in the timescale of a project, the higher the eventual returns.

Payment terms on average tend to be 20% of the purchase price upon reservation and a further 10% is required after 6 months, leaving the remaining 70% to be paid upon completion of the project. Buy to flip investors would exit the investment prior to the due payment of 70%, entailing a minimum of capital investment and no need to obtain finance solutions.

Level of Complexity

Short term strategies in Spain are low in complexity due to the fact that there are no ongoing property costs applicable in terms of property management. The purchase consists of a simple capital investment; with no need to progress to a purchase contract or make any finance arrangements.

There may be charges made by the developer to assign a contract before completion, which should always be checked out before proceeding with a reservation.

The ‘flip’ can normally take place at any stage after the signing of the purchase contract and payment of full deposit in most cases. However, this should again be clarified at the time of committing to a project.

Key Risks

The past 2-3 years has seen the emergence of new ‘super resorts’ containing thousands of units on the Spanish coasts and it is important to be aware of the project size when purchasing off-plan on these sites. Possibly up to 50% or 60% of the total units purchased are made by investors with similar short term strategies.

Investors generally need to look to popular areas for their short term flip investment in order to give themselves the opportunity to gain a buyer when exiting the investment. These areas typically have increased competition from other investors and considerable construction so it is therefore important to ensure their unit stands out from the rest when they look to flip the investment.

Investors with standard units on a buy to flip strategy can easily become engaged in a ‘price war’ with fellow investors when looking to exit, and as a result are often simply content to walk away from the investment having broken even. Don’t let this happen to you!

On a purpose built tourist resort, investors must ensure adequate and multiple facilities are on-site. Unique residential complexes may not have on-site facilities and the development should therefore not be located in too remote a location and appeal to a bespoke market (such as skiers looking for property in Granada for example).

Spain continues to be a buyers’ market, with a wide choice and the ability to obtain property at excellent prices. However, if a buyer is not found prior to completion of the property, the investor needs to be confident that they will be able to continue to completion of the unit and adapt their strategy comfortably.

In summary, short term flip investments are far more risky in Spain today than in previous years when prime locations were still being developed. Construction has now been pushed away from frontline beach and main tourist centers’, meaning the best option is to look for frontline golf projects. However, with the level of construction ongoing, IPIN would recommend caution when considering Spain for a short term flip investment strategy and to seek advice from one of our Investment Advisors before proceeding.

Return

Capital appreciation levels are at their highest early in an investment market. In Spain’s case, this was over 5 years ago, with the peak time for Spanish investors actually being well over 10 years previous to that.

However, short term gains are still a realistic possibility due to the continuous flow of buyers to Spain. Investors should however be aware that there are now more effective emerging markets elsewhere, ideally positioned to offer greater returns over a short term period.

Potential returns in Spain differ subject to the investment location. An emerging region as detailed previously could realize annual growth of 15%, but more established areas are more likely to realize an annual figure of anywhere between 5% and 10%.

For the most effective buy-to-flip investment in Spain, IPIN suggests that investors reserve a unit on a project at its pre-release stage, where prices are at their lowest and subject to successful planning applications, followed by pricing uplift. Reservations on these projects should be fully refundable, and by choosing this strategy a greater time frame for capital appreciation is created due to a reservation made earlier than normal.

Please see the example below

  • An investor purchases an off-plan 2 bedroom unit close to the beach on Costa Calida for €250,000 plus 10% tax/costs.
  • The investor pays a €50,000 deposit of 20% upon signing the purchase contract
  • Also at this point, the investor pays half the legal fees up front of €1,250, plus IVA on the deposit payment of 7% (€3,500).
  • Total capital invested at this point is €54,750.
  • The second stage payment is completed 6 months later for a further 10% of the purchase price at €25,000 plus 7% IVA of €1,750.
  • Total capital invested after 6 months is €81,500.
  • After year one of the investment, capital appreciation has realized at 10% for the year, meaning the property is now valued at €275,000.
  • The investor decides to instigate an exit strategy after 16 months (just prior to completion), with capital appreciation continuing to perform at 10% per annum. The property is now valued at €284,167.00
  • The investor finds a buyer for the property before proceeding to purchase contract, 14 months into the investment. At this point, to facilitate the sale, the investor settles remaining legal fees of €1,250.
  • Total capital invested upon exit is €82,750.
  • Sale price is €284,167.00
  • The investor recoups capital invested, less the IVA and legal payments made of €7,750.
  • Having recouped €75,000 of capital invested and seeing growth on the sale of the unit of €34,167, the total profit realized in using this short term strategy is €26,417, a return on capital invested of just under 32.5% over a 16 month investment timescale.*

*This is a simple example without taking any potential capital loan arrangements/costs into consideration, and also assuming that growth of 10% per annum remains constant. This figure is used for example purposes only.

Financing

As a short term flip, no finance arrangements shall be necessary as this is a simple capital investment. However, in order to cover all eventualities, short term flip investors must be confident that they can complete with finance if no buyer is found and a full purchase is necessary. If necessary, consultations can be arranged on equity release from existing property

Taxation

On a buy to flip strategy, the investor must pay 7% IVA on every stage payment completed. Capital Gains are currently 30% of declared gains, although this figure is set to fall to 17% in January 2007.

We recommend research into any double taxation treaties in place between Spain and the investor’s country of residence.

Medium to Long Term Investment Strategy

Key Opportunity

A buy-to-let strategy is highly recommended in Spain due to high levels of sustained visitor numbers. If investing for a rental return, any well established area is recommended although the choice of unit and project, preferably with full rental management and marketing, will ultimately determine how successful the investment is. Ideal locations for buy-to-let are the Costa del Sol, Costa Blanca, Costa Brava and in and around Granada for year round rentals covering the ski season at Sierra Nevada. Also to be considered are city rental strategies in locations such as Barcelona and Madrid, although these would be longer term, lower yielding rents.

With continuous high levels of construction taking place along the Spanish coast, a mid-to-long term strategy is always recommended rather than short term flip. This is due to increased competition from other investors and the relatively low capital appreciation potential over a short term investment period.

It is important to search for something unique, bearing in mind the highly competitive nature of the Spanish market. Always research the area thoroughly and define why your rental client or buyer will choose your property over others?

Look for hooks such as Guaranteed Rental and Leasebacks in particular, high bank valuations over purchase price for instant equity, low capital requirement, or just a unique location or situation. Simply purchasing a standard, middle of the range apartment on an off-plan project, with no outstanding highlights can be a risky choice.

In most locations, growth is steady if not dramatic. Spain is considered to be a safe investment location, while growth is lower in comparison with emerging countries, but the market is very well established and has strong appeal for the more cautious investor. The best areas of Spain in which to invest for growth potential as of the end of 2006 are the Costa de la Luz, inland Andalucia, Costa Calida and Costa Almeria. Estimates indicate that each of these areas should see growth in excess of 13% over the next year.

Timescale

Average construction time on Spanish projects is 18 months from breaking ground.

Five year strategies are suggested, to make the most of steady appreciation over a longer period, while funds are also generated via rentals to cover ongoing costs. As with all property investment, the earlier you proceed in the timescale of a project, the higher the eventual returns.

Payment terms on average tend to be 20% of the purchase price upon reservation and a further 10% is required after 6 months, leaving the remaining 70% to be paid upon completion of the project. This is a standard term, although better payment arrangements are available on good investment projects.

There are no price ‘crashes’ predicted for the Spanish market over the coming years. Prices do however, perform in cycles in established locations such as Costa del Sol, peaking, leveling and decreasing slightly over periods of around 2 years.

In comparison with emerging markets, a 4 year investment period in Spain making a 30% return on capital invested, would actually take around only 18 months to achieve in an emerging market, based on growth alone.

Level of Complexity

A purchase in Spain is relatively low in complexity as this is one of the more substantial markets in Europe and a well established process is in place.

Initial capital is generally spread between 1 and 3 payments over the construction period, with the balance payable upon completion, either with further capital or using one of many finance arrangements available.

Tax and costs are paid up to 10% of the property purchase price, including 7% IVA (VAT), 1% legal charges, notary fees, stamp duty and other miscellaneous charges. This top figure of 10% is rarely breached, although if finance is being arranged, these costs could increase to between 12% and 13% of the purchase price.

Sound, independent legal representation needs to be appointed to look after the purchase of a property in Spain. It is highly recommended that investors choose companies who are completely independent from the developer in question, to ensure a fair and objective service. These can either be appointed via the investor’s own research, or through propertyshowrooms.com and IPIN recommendation.

Many of the complexities of running and maintaining a Spanish property can be taken care of by a good management company, whether this is offered by the developer themselves upon completion or an independent company could be appointed by the investor. Ongoing maintenance costs, utility bills and taxation payments will need to be maintained and recorded. A Spanish bank account is necessary to facilitate these charges.

Key Risks

The past 2-3 years has seen the emergence of new ‘super resorts’ containing thousands of units on the Spanish coasts and it is important to be aware of the project size when purchasing off-plan on these sites. Possibly up to 50% or 60% of the total units purchased are made by investors with similar investment strategies.

Good marketing of the investment property is necessary on a buy-to-let strategy as this will maximise rental returns. Projects offering substantial management and rental packages are highly recommended and allow the property virtually to run itself.

There have been well documented cases of a phenomenon known as ‘land grabbing’ in Spain over recent years, where the local authorities have compulsorily redeemed land or property owned by foreign nationals for construction of infrastructure and/or facilities. This was mainly limited to one area of Spain only, due to local laws which have since been amended to protect the home owner. However, investors should clarify the potential for ‘land grabbing’ with their lawyer during the purchase process.

If a unique unit is purchased with investment hooks as detailed previously, within a growing area that offers excellent tourist rental potential, the element of risk is very low in comparison with early emerging property markets.

Return

Spain is considered to be one of the most established markets in Europe, and therefore the potential returns on off-plan property is lower in comparison with emerging markets. However, emerging markets are considered to be high risk in comparison, so the investor will need to decide upon a high risk, high return investment, or something safer but with a lower return on capital invested.

Over a 5 year period, provided a property has been sourced in a good location for steady growth, investors can expect a conservative annual growth rate of between 8% and 10% as an average. Areas such as the Costa Brava or Costa del Sol could be lower than this, although the likes of Andalucia are likely to be higher.

Please see the example below*

  • An investor purchases an off-plan 2 bedroom unit close to the beach on Costa Calida for €250,000 plus10% tax/costs.
  • The investor pays a €50,000 deposit of 20% upon signing the purchase contract
  • Also at this point, the investor pays half the legal fees up front of €1,250, plus IVA on the deposit payment of 7% (€3,500).
  • Total capital invested at this point is €54,750.
  • The second stage payment is completed 6 months later for a further 10% of the purchase price at €25,000 plus 7% IVA of €1,750.
  • Total capital invested after 6 months is €81,500.
  • After year one of the investment, capital appreciation has realized at 10% for the year, meaning the property is now valued at €275,000.
  • After 18 months, the property has been completed and the investor has settled the outstanding balance of €175,000, plus remaining 7% IVA of €12,250.
  • Other remaining costs are also settled at this point. Half of the legal fees were paid at the outset, leaving another €1,250 to pay plus up to 2% on other costs of €5,000.
  • Total capital invested upon completion of the purchase is €275,000.
  • The value of the property upon completing the purchase (18 months after initial reservation) is €288,750, having continued to benefit from 10% annual growth over the previous 6 months since the last valuation.
  • Over the following 3½ years, the investor decides to rent the unit via a local management company, which generates funds to cover all ongoing costs.
  • 5 years after making the initial investment, the decision is made to exit and recover capital invested and returns.
  • Having benefited from 10% growth per annum over the first 2 years and 7% growth over the next 3 years, the property is valued at €370,575.00
  • The investor sells the property at the valuation price. This represents profit on capital invested and costs met of €95,575.00, a return of just over 38%.

*This is a simple example without taking potential finance arrangements/costs and rental returns into consideration, and also assuming that running costs are covered by rental income which will not always be the case. Growth over this period will of course change each year. Conservative estimates have been used throughout this example.

Financing

Finance is widely available in Spain from numerous lenders of both Spanish and overseas origin.

Inflation is steadily rising in Spain and is currently at 4.5% (end 2006), so it is suggested that alternative lending is investigated before committing to a loan, to ensure the most cost effective deal is obtained (eg, release of equity on a property in the country of origin could be more cost effective).

General costs of making finance arrangements are up to 2.5% of the loan value, which is split as 1% broker’s fee and 1.5% banker’s rate generally.

Excellent deals are available to IPIN clients looking to build foreign property portfolios. For example, free IPIN members can take advantage of a one-off payment of just €895.00 for unlimited mortgages across Spain as well as in markets such as Morocco, Cape Verde, Cyprus, Eastern Europe and the U.S. This also covers equity release packages from existing properties.*

* This offer is subject to terms and conditions.

Taxation

Ongoing property ownership tax in Spain is known as IBI and the amount is subject to a combination of the location (Province) of the property and the purchase price. Different local authorities charge different percentages of the valuation price.

Capital Gains Tax in Spain is 30% of all declared gains, although this is set to be reduced in January 2007 to 17% on declared gains. Investors should check double taxation treaties between Spain and their country of origin.

The breakdown of additional costs associated with purchasing a Spanish property total up to 10% of the property purchase price, which includes 7% IVA (VAT), 1% legal charges as industry standard, notary fees, stamp duty and other miscellaneous charges.

Buy-to-let investors need to be aware of income tax in Spain that stands at 25% on declared income. However, with Leaseback schemes, there are excellent tax breaks available to investors and these are highly recommended by IPIN (see the Investor Report for Terrazas del Sol).

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