Location, Location, Location Returns
01 November 2008
By Ioulia Satsouk, Managing Partner, Husky’s Exclusive Private Services / Marià Salat Armengol, Economist
For REC
In the current climate the best investment opportunities are in places with historically high prices such as the center of Barcelona, where construction on the Sagrada Familia church has been ongoing since 1882. / INCLUDEPICTURE " \* MERGEFORMATINET
INCLUDEPICTURE " \* MERGEFORMATINET
Those of us who once faced Perestroika know that any crises and structural changes, though not easy, present new opportunities if people are ready to look at things afresh and actively participate in the new system.
After recent global events in what is now a highly interconnected world the Spanish real estate market is going to experience some major changes. We are currently facing a general structural crisis, which can be compared to what the world faced in 1929. In Spain, this has been preceded by a real estate boom. Over the last few decades Spain's economic model has been based principally on construction and tourism. Construction companies, developers, private and corporate investors, and the government have all been interested in the dynamics of fast, short-term benefits. As a result over the same period building companies, developers and banks have shown huge profits: either by selling their assets or by marking them at a high price on their balance sheets. Now the situation is different. Many developers are facing liquidity problems and are being forced to renegotiate their debts with the banks or even sell developments at cut-down prices, far below the original acquisition costs.
It is also a difficult time for investors to decide where is best to put their capital. From savings and deposit accounts in banks, which are overshadowed by investment in public debt, to currencies and gold, investors remain uncertain as to the most prudent way forward. Nevertheless, there is still something to be said for investing in real estate.
The concept of location, which is so crucial in any real estate purchase decision, should now be reconsidered once again. We need to return to the key piece of real estate wisdom: location, location, location. Investors can no longer afford to try to second guess the market and buy in exciting, slightly eccentric locations with the expectation that values can only appreciate. This expectation should now more correctly be characterized as hope, and most likely hope in vain, at least in the short term.
Now more than ever, the best piece of advice is to choose those places where value is least likely to depreciate and prices are historically high. As in most countries, these are the centers of the big cities like Madrid and Barcelona. However, in Spain investors should also consider as part of this sector luxurious private residences in locations deemed exclusive, such as the heart of the Costa Brava. The top Costa Brava locations are centered around Tamariu, Llafranc and Calella de Palafrugell, which have not been touched by the construction boom owing to a land deficit and the protective environmental policies of the local government.
Different regions in Spain have slightly different emphases. Catalonia, the region that includes Barcelona and Costa Brava, is very bourgeois. Its cities and people are business-oriented and there is a high standard of living everywhere. The region caters for both local and international tourism. The Basque Country, in the north of Spain, is industrial and businesslike, and more focused on local tourism. Andalusia and Murcia, along Spain's southern coast, are predominantly agricultural regions, centered on international tourism. The main difference between properties on Spain's coastline, the Costa Del Sol, Costa Brava and Costa Blanca, and what is available in the country's cities, is how far buyers' money goes. On the coast buyers can get more for less, better access to nature, bigger and more comfortable properties for the same price as a simple apartment in the city.
When it comes to business investments we recommend buying into hotels in the big cities and regional capitals as well as in prestigious, world-famous resorts on the Costa Brava, Costa Daurada and Tenerife. It is important to remember that in times of crisis the hotel business enjoys a higher level of protection from defaults and insolvent clients as payments are made beforehand or guaranteed by a credit card.
In spite of the crisis, or maybe because of it, rental rates are currently on the up. The demand for renting properties rather than purchasing them has increased among locals, who now appear reluctant to assume the risk of buying with a mortgage. Consequently, buying into rental properties is again becoming popular. Properties in areas where rental apartments are in demand are currently making annual profits of between 5 to 10 percent. What's more, the availability of apartments in the rental market is limited for the time being. However, we expect that developers who fail to sell will start renting out their properties in order to be able to repay debts, thus increasing supply and balancing the growing demand.
In order to make the investments in the real estate market more attractive, the Spanish Government has approved a law abolishing the Wealth Tax, which means that the owners now no longer have to pay an annual tax after acquiring real estate. It is still to be approved by parliament; however, it is certain to pass and come into force from the beginning of the new year.
Currently there is an enormous stock of available housing on the market. Around 1 million units are free throughout the country, which are mostly apartments. And this is happening while demand in the residential market has nose-dived. As a consequence, the Spanish real estate market has finally turned to face those looking to buy. Supply is outstripping demand and buyers are now in a much more powerful position to choose what suits them. Where before buyers were much more beholden to the market and forced to take what was available within certain parameters, the situation now allows them to be more demanding in getting the best for their money.
With supply growing there are a wide variety of options open for those looking to purchase real estate. The majority of opportunities for purchases in the residential market are city apartment blocks and holiday apartments. Some single-family houses and detached houses are available and it is also possible to find luxury villas in exclusive locations.
According to the Spanish government the average deal in the secondary housing market decreased by 4.9 percent, while the prices for newly built properties increased by 5.3 percent, all this as prices in the US have slumped 16 percent in one year.
However, there is a certain divergence between the data that is published by the government's Ministry of Housing and the reality that you find on the street. Official valuations only take into consideration the final sale and purchase price and it is on these that the government bases its statistics, in reality buyers have to negotiate hard in order to get the lowest possible price. And it is impossible to show the difference between the initial asking price and the price of the final deal in any report.
Many developers no longer expect big profits and they are now setting their prices as low as they can. However, with others only after tough negotiation does the buyer find out the real price. Estate agents can assist clients in this negotiation process, which can help them to secure a 3 to 20 percent discount depending on the case.
Why are current events in Spanish real estate so important for the Spanish economy? Over recent years it has been generally accepted that housing is a fundamental component of Spanish families' wealth. According to analysis by the Bank of Spain, the value of property accounts for around two thirds of the total wealth of Spanish families and at the same time it represents one third of the total assets of Spanish credit entities. Since 1976 and Spain's transition to democracy, the Spanish have traditionally preferred to buy rather than rent. Consequently, the average price of Spanish residential property has multiplied by 16 in nominal terms and doubled in real terms. In comparison to the situation elsewhere, Spain is among only three or four OECD, Organization for Economic Co-operation and Development, countries with a major real increment in the prices of housing over a long-term period.
For REC / INCLUDEPICTURE " \* MERGEFORMATINET
INCLUDEPICTURE " \* MERGEFORMATINET
In Spain real estate has always been considered a secure and guaranteed investment, based on the general belief that the housing prices would never fall and that renting was not a profitable alternative. During the recent boom prices have doubled. This growth has been fueled to a large extent by foreign investors, many of whom have moved to Spain's coastal resorts from northern European countries in later life. Elderly Germans account for high investment rates in property in Mallorca, while elderly British buyers prefer Almeria and Murcia. Spain has reputedly become to Europe what Florida is considered in the US: a place of retirement.
Other factors that have influenced the real estate market recently include the influx of immigrants into Spain following the construction boom and the widely-held perception that there is a land deficit, despite the fact that Spain has one of the lowest population densities of any country within the EU.
Russian Buyers
Over the last few years our Russian clients have been watching happenings in Spanish real estate with interest and at the moment their acquisitions are concentrated on private residences, like apartments, in big cities such as Barcelona and houses in picturesque areas along Spain's extensive coastline. Our clients like to negotiate hard, so times of crisis are very appropriate, as there is a variety of properties on sale to choose from.
Russians are attracted to Spain by a range of factors. It has mild temperatures all year round, a high standard of living and quality of life, where you can escape from Moscow traffic jams, stress and cold. Also, the visa procedures are easier for real estate owners.
Typically Russians come to Spain looking for a second home in order to spend their vacation time. Some of their key demands include proximity to the sea, as well as access to a big city, a quiet area and a decent level of communication. Other locations requested include apartments in Barcelona, as a first residence for students, which are usually bought by well-off parents, apartments in the suburbs of Barcelona either to spend vacations or establish permanent residence and apartments in the prestigious areas of the city such as Paseo de Gracia, Sarria-Sant Gervasi, Pedralbes, Bonanova and also the new Diagonal Mar for those who prefer skyscrapers.
Although the situation is now different and credit facilities are restricted, Spanish banks are interested in continuing their business and providing mortgages to their clients, including foreign investors. Banks are studying clients' solvency more carefully and are giving between 50 and 65 percent of the evaluation price. Mortgage quotes can now typically represent up to 33 or even 40 percent of family income. Banks are more worried about the effort that the repayment of the mortgage would represent for the family.
Nevertheless, there are still exceptions like in Tenerife, the Canary Islands. The Eurohouse complex, in Lajas de Chapin, belongs to a credit institution, which is offering mortgages of up to 100 percent of the sale price as it was before, due to the fact that in reality it represents some 70 percent of the official evaluation of the property. Yet there are still paradoxes even in a crisis situation. Although supply on the market is huge, normally it takes some time to find what really meets our Russian clients' expectations. They normally expect bedrooms to be big, while in Spain bedrooms are traditionally small. Often the combination of location, price and quality needs to be revised while conducting a search.
What Foreigners Need to Know
There are basically no limits on foreigners buying property in Spain. The procedures are simple and transparent. Foreigners can buy land or buildings either in their own name or for a company. It is important to note, however, that it is not only the property that stands as a guarantee for the payment of a debt, but that debtors are also responsible for repayment, guaranteeing this with all their personal assets. Unlike in the US, an apartment cannot simply be returned to the bank in Spain.
In order for Russian investors to get a mortgage in Spain it is important that they be recommended by someone who is already known to the bank and that they have opened a bank account at least some months before signing a mortgage agreement. A Spanish bank account is needed in order to make the repayments.
Once a buyer has chosen a property, they need to obtain a N£mero de Identificaci¢n de Extranjero or Foreigners' Identification Number. Real estate agents can easily arrange this, usually for a cost of around 500 euros ($626). If the buyer has the money ready, they can normally proceed directly to arranging the Notary Deed and finalizing the purchase. Otherwise, if more than 10-15 days are necessary to transfer funds or obtain a mortgage, the buyer can make a reservation by signing a private sales and purchase contract, the contrato de compraventa, and providing a deposit of 10 percent, though this figure does vary in some cases.
Apart from the real estate agent and lawyers, a notary will also check the entire situation with the property and inform the buyer of any obligations or debts on the property. To obtain a Notary Deed all the parties have to meet in either the notary's office or the bank. The buyer(s) and seller(s) and a notary, who checks the deal and certifies it; have to attend. In addition, the following people may attend if required: a translator, estate agents from both sides, lawyers and a representative of the bank. If the purchase involves a mortgage agreement from either side, the presence of a bank representative becomes obligatory. In Spain all the parties can be represented by someone else using a special power of attorney. Once completed, the Notary Deed, or la escritura, goes to the Registro de la Propiedad, or the Property Registrar and the deal is then finalized.