Spanish property: Find out how to survive the crash
News Article Date: Monday 07th of May 2007
The party may well be over for investors in Spanish property, where shares in construction companies plunged last week amid fears of a property crash. But for prudent, small-scale investors, the hangover should not be disastrous.
Jet-set buy-to-let investors will be reassured to know that income from holiday lets should remain stable. "Lettings have not been affected, though they may come down a bit because there are more becoming available," says James Stuart, who sells property in the south of Spain in association with Savills.
Investors who bought in good quality developments in pleasant surroundings should not be worried, he says, as the capital value of bricks and mortar is likely to be worst affected at the top and bottom of the market. "There is considerable oversupply at the bottom end, and the top end has been overpriced for years. At the top end I would expect prices to decline by up to 20 per cent over the next few years, but wealthy second-home owners can probably afford it."
However, Stuart advises against short-term investment in Spain: "If what you want is a big profit quickly, now is not the time."
For those who already have property in Spain, the best advice is not to panic. The slump in construction sector shares last week was so severe that analysts overlooked the fact that Spanish property prices are still rising, albeit at about 7 per cent a year instead of the 17 per cent that was the norm from 2002 to 2005.
Even if property prices start falling in earnest, Stuart Law of buy-to-let specialists Assetz believes it could actually help the market. "It will reduce the high levels of housebuilding, which has led to some oversupply in the market, and also decrease levels of illegal housebuilding in Spain. It is very distressing for buyers when they discover that their purchase is not secure," he says.
Law claims that the Spanish property boom was largely artificial, caused not by the market but by a government clampdown on tax avoidance. Until recently, the selling prices declared by developers bore little relation to real values, because a large proportion was paid under the counter. This is now virtually impossible, so "official" prices have risen to match actual levels.
"Black money - cash passed over the table at the time of purchase to reduce capital gains tax - has been reducing over the last two years or so under legal pressures, which has led to reported prices of sales transactions increasing, which has counteracted the actual new-build price reductions," Law explains.
Now that the tax evasion is under control, prices should remain stable, he says. "Our view is that house prices in Spain are firm and sustainable, not least as a result of the strong demand from British holiday-home owners who continue their love affair with Spain. The holiday home market is also underpinned by strong rental yields in holiday hotspots of 7 to 8 per cent, and good yields will always ensure a healthy capital value of a property."
The end of the property boom will also eliminate speculators who have driven prices up by buying units off plan and selling, or "flipping", just before the contract must be completed.
"This represents the start of a long-anticipated correction in the market, and has been evident in accepted offers over the last few months," says Tim Hodges, local director for the County Homesearch Company in Spain. "It offers clear evidence that the quality of housing stock must now be reviewed and that the issues about off-plan investors clouding the real marketplace must be addressed."
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