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ABSOLUTE gUIDE sERIES to Investment Property

Spain


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Date of Publication: November 2008 © Obelisk 2


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Contents 5. Welcome to Spain

Dedicated to providing impartial information.

6. Economic Growth & Stability

Spain averaged annual growth of 3.6% between 1994 and 2007.

7. Currency & Banking

Spain’s banking system is currently unaffected by the subprime crisis.

8. Foreign Investment

Spain is the 9th largest recipient of foreign investment in the world.

9. Political Situation & Stability A politically stable parliamentary democracy.

10. Tourism

Spain is the world’s 2nd largest tourist destination.

11. Infrastructure

Recent huge investment in infrastructure.

12 - 13. Property Market

Prices increased by 190% in a decade, but the current property market has experienced a downturn.

14 - 15. Secondary Market

Huge shortage of long-term rental accommodation.

16. Mortgage Market

A well-developed mortgage market with wide choice of products.

17. Market Risks

Spain presents some issues for foreign investors.

18. Purchase Process

Buyers need to sign a preliminary contract.

19. Investment Costs

Buying costs average between 10% and 12% of the property price.

20. Summary

Spain has one of the strongest economies of the EU.

21. Verdict

Spain will retain its popularity as a foreign investment location.

22. Obelisk Advantage

Obelisk approaches its projects purely from an investment perspective.

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La Coruna San Sebastian Valladolid

Zaragoza

Salamanca

Barcelona

Madrid Valencia

Merida

Alicante

Seville Cadiz

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Murcia Granada

Malaga

ROMANIA

Teruel


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Spain forms part of the Obelisk Absolute Guides Series, dedicated to providing impartial information to numerous property investment destinations worldwide.

Welcome

to Spain

As the market leader for overseas investment property,

with in-depth, clear-cut knowledge on the most important

we are committed to providing cutting edge information

factors influencing your property investment decision in

for property investors, one aspect that has earned us the

Spain.

award of International Property Specialist 2008 by Business Britain magazine.

In this guide you will find recent economic performance and predicted growth, a profile of the current property

We are therefore pleased to present our latest Property

market and its future potential, along with tourism trends

Investment Guide to Spain, an essential tool for the

and infrastructure improvements. The guide also includes

investor planning to buy property in this country. This

information about Spain’s mortgage market, the buying

guide forms part of the Obelisk Absolute Guide Series,

process and buying costs.

dedicated to providing impartial information about numerous investment destinations worldwide.

Obelisk’s Absolute Guide to Spain offers investors objective and authoritative information to facilitate an

At Obelisk, we are only too aware of the importance of

informed decision about investing in Spain. We trust that

extensive research into an investment destination and, as

you, as an investor, will find this guide indispensable.

part of our policy to offer investors the definitive service, this guide has been rigorously researched to provide you

Here’s to Successful Investing!

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GDP Growth (Q2 2008): 0.1% GDP Per Capita (2008): US$33,700 Inflation (Sept 2008): 4.5% Unemployment (Q3 2008): 11.33%

Economic Growth

& Stability Since the Franco dictatorship ended in 1975, Spain

growth in 2008 is expected to be 0.9% and forecasts

has become one of the strongest economies in the

for 2009 are -0.6% with an improvement predicted for

European Union (EU), averaging an annual GDP

2010 (1.6%).

growth rate of 3.6% between 1994 and 2007. When Spain joined the EU in 1986, the income per

The main symptom of Spain’s economic downturn is

capita was a mere 68% of the EU average. In 2007,

rising unemployment. A country traditionally suffering

this percentage rose to 90% and living standards in

from high unemployment (24% in 1994), Spain has

Spain are now higher than Italy’s.

recently been one of the highest creators of jobs in the EU and jobless levels reached the record low of 8%

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However, like many other EU countries, the Spanish

in 2007. However, unemployment has risen sharply

economy has seen a sharp slowdown since 2007 when

during 2008 and in September 2008, the rate was

GDP growth was 3.7%. According to The Economist,

11.33% with further increases expected during 2009.


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Currency

& Banking Since the Franco dictatorship ended in 1975, Spain has become one of the strongest economies in the European Union (EU), averaging an annual GDP growth rate of 3.6% between 1994 and 2007. When Spain joined the EU in 1986, the income per capita was a mere 68% of the EU average. In 2007, this percentage rose to 90% and living standards in Spain are now higher than Italy’s. However, like many other EU countries, the Spanish economy has seen a sharp slowdown since 2007 when GDP growth was 3.7%. According to The Economist, growth in 2008 is expected to be 0.9% and forecasts for 2009 are - 0.6% with an improvement predicted for 2010 (1.6%). The main symptom of Spain’s economic downturn is rising unemployment. A country traditionally suffering from high unemployment (24% in 1994), Spain has recently been one of the highest creators of jobs in the EU and jobless levels reached the record low of 8% in 2007. However, unemployment has risen sharply during 2008 and in September 2008, the rate was 11.33% with further increases expected during 2009.

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Foreign Companies Investing in Portugal Boeing International, Cisco Systems, Ernst & Young, General Electric, Kraft Foods, Orange, PricewaterhouseCoopers

Foreign Investment In terms of foreign direct investment (FDI), Spain is the 6th

out of the top 25 countries for foreign investment. In the

largest recipient in Europe and the 9th largest in the world

Forbes Best Countries for Business 2008, Spain ranks in

(it is also the world’s 7th largest foreign investor). FDI inflows

35th place and achieves high scores for personal and

in 2007 reached a record level of US$53.4 billion, a

trade freedom, but low for its corporate tax rate and red

massive increase from the previous year’s US$23 billion.

tape. However, in the Index of Economic Freedom, Spain ranks above the European average.

Foreign investment in Spain has recently been dominated by the construction sector – accounting for 40% of total

Keen to attract FDI, Spain offers numerous investment

FDI inflows over the last decade – although industries

incentives particularly for sectors such as research,

such as information technology and renewable energy

development and innovation, tourism and renewable

are now emerging as main recipients of FDI. Main

energy. As Spain is an EU member, investors are able

investors include France, Germany, the UK and US who

to access European aid programmes, which provide

between them total 60% of investor stock in Spain.

additional incentives for investment. The official investment agency, INTERES Invest in Spain, acts as

According to the latest AT Kearney FDI Confidence Index 2007, Spain has fallen from its 17th position in 2005

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a central body to promote FDI.


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EU Member: Since 1986 NATO Member: Since 1982 WTO Member: Since 1995 Political System: Parliamentary monarchy Ruling Party: Partido Socialista Obrero Español (PSOE), socialist Next General Elections: 2012

Political Situation

& Stability After nearly 40 years of dictatorship, Spain became a parliamentary monarchy in 1976 and has since enjoyed its longest period of democracy. A stable country politically, Spain is currently ruled by the Socialist party (PSOE) led by President José Luís Rodríguez Zapatero who was re-elected in the last general elections (March 2008). King Juan Carlos is Head of State. Spain has 2 main political parties, the PSOE and the Partido Popular (PP), right wing. Regional political parties such as the Catalan CiU and the Basque PNV are also prominent in national politics. Spain is divided into 17 autonomous communities led by regional governments.

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Visitor Figures (Jan-Sept 2008): 47 million Tourism Contribution to GDP: 17.2%

Tourism Tourism is one of Spain’s most important industries and according to the World Travel & Tourism Council (WTTC), represents 17.2% of the country’s GDP (US$276.7 billion). Growth in the tourist sector is expected to average nearly 3% between 2008 and 2018, and the travel and tourism industry provides employment for almost 18% of Spain’s workforce. Spain is the world’s 2nd largest tourist destination and a perennially favourite holiday spot. Spain received 47 million tourists in the period January to September 2008, a slightly lower figure than the previous year. Between them, visitors from the UK (27.5%) and Germany (17.3%) account for nearly half of Spain’s tourism. The recently launched government plan, Turismo 2020, plans to develop a comprehensive strategy to improve the tourist sector and ensure Spanish tourism remains attractive in an increasingly competitive market. The ‘Winter in Spain’ plan aims to attract tourists to Spain out of season and has a budget of €500 million for refurbishment of hotels and resorts. Spain also plans to set up tourism offices in the emerging markets of China, India and Russia.

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Tourism Contribution to Employment: 17.7% World Ranking: 7/176 (in terms of absolute size)


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Infrastructure €249 billion investment in infrastructure from 2005 to 2020 High-speed railway network to cover most of the country €18,000 million in airport investment between 2007 and 2010 Spain has recently made huge investment in infrastructure,

According to government estimates, by 2010 Spain

particularly transportation with the main emphasis on

will have more kilometres than any other European

roads, airports and high-speed railways. In 2005, the

country and by 2020 every Spaniard will live within

government announced a €249 billion strategic plan

50km of a high-speed train station.

to be implemented from 2005 to 2020 on a range of large projects. The European Investment Bank is

Airports are another major investment target with a

providing €10 billion to fund some projects from

total investment of €18,000 million between 2007

2007 to 2013.

and 2010. Madrid and Barcelona airports are the main recipients with Malaga airport, the gateway to

Since 2006, Spain is the world’s top spending country

the Costa del Sol, also set to receive substantial

on high-speed railways with a network planned to

investment.

cover most of the main population areas in the country.

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According to The Economist’s Global House Price Index, Spanish property prices have increased by 190% in the last 10 years. Capital Growth (Q2 2007 to Q2 2008): -0.3% Average Annual Rental Yield: 3.65% to 4.7%

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Property

Market

Spain has an established reputation as one of the world’s

option. However, in recent years, the massive increase in

most popular places to buy property and according to

properties prices has meant that Spain has also been an

the Foreign and Commonwealth Office estimates, around

investment location offering huge capital gains. According

1 million Britons own a property in Spain. The country

to The Economist’s Global House Price Index, Spanish

is also a favourite with other Northern European buyers,

property prices have increased by 190% in the last 10

particularly from Germany and Scandinavian countries.

years, a similar rise to the 213% experienced in the UK.

Favourite destinations within Spain include the Costa

However, since 2007 in common with other European

Blanca, Costa del Sol and the Balearic and Canary

markets such as Ireland and the UK, Spain’s property

islands, although in recent years, many other coastal

market has experienced a downturn. The Spanish National

areas such as the Costa Brava and Costa Cálida have

Statistics Institute reports that house prices fell by 0.4%

become popular with foreign buyers.

and 0.3% in the first 2 quarters of 2008 with experts expecting higher decreases in the near future. Although

The increased availability of low-cost flights and the warm

the Knight Frank Global House Price Index Q2 2008

climate on Spain’s islands and Mediterreanan coast has

reported a 2.4% rise in Spanish property prices, the

led many investors to buy in Spain primarily as a lifestyle

report warns that “wider price falls could be imminent.”

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Secondary

Market

Many of the millions of tourists who visit Spain every

from income tax on all rental earnings if the tenant is

year stay in rented accommodation. According to

under 35 and 50% exemption if the tenant is older.

the Spanish Institute of Tourist Studies (IET), 8.2% of Spain’s 58.2 million visitors chose rental holiday

Spain’s buoyant property market from 1999 to 2006

accommodation in 2006. This figure, around 4.8

led to high capital gains, no longer the case in the

million people, is indicative of Spain’s buy-to-let potential.

current market. However, falling prices, the country’s depressed economy and the huge supply of housing

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Spain has a huge shortage of long-term rental

means that Spanish property currently represents a

accommodation and just 8% of properties are rented

good long-term investment. Aguirre Newman believes

(the European average is 30%). According to one of

the resale market will decrease by 45% in 2009 and

Spain’s main property consultants, Aguirre Newman,

that price adjustment needs to be 23%. This means

the rental market is expected to grow 15% during 2008.

that the Spanish property market should offer good

Government tax incentives for rentals include exemption

investment opportunities in 2009 and 2010.


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8.2% of Spain’s 58.2 million visitors chose rental holiday accommodation in 2006. This figure, around 4.8 million people, is indicative of Spain’s buy-to-let potential.

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Mortgage

Market Spain has a well-developed mortgage market and a range of banks offer a wide choice of mortgage products. Mortgages are available to residents and non-residents who are citizens of the EU or North America. Spain has recently introduced mortgages for clients from Eastern Europe. As a eurozone country, Spain’s mortgage lending rates are linked to the European Central Bank’s benchmark rate, known as the Euribor. In October 2008, the 6-month Euribor was around 4.5% with mortgage interest rates slightly higher. Banks need to be satisfied that you can meet your mortgage repayments and the amount you can borrow is based on your affordability or 70% of the property valuation, whichever is lowest. Mortgage terms are up to 40 years (or the age of 80). In the current global economic downturn, Spanish banks are less ready to grant mortgages and in September 2008, Reuters reported a year-on-year drop in mortgage borrowing of over 40%. However, Spanish banks have not been affected by the subprime crisis and are, according to Forbes, “looking stronger than ever amidst an unprecedented financial crisis.”

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The current resale market should provide some good long-term opportunities for the investor.

Market

Risks

Property investment into emerging markets may carry

property analysts expect resales to fall by 45% during

some degree of risk. However, the degree that market

2009. However, this situation should provide some good

risk in a particular country affects a property investment

long-term opportunities for the investor since predicted

depends largely on thorough due diligence conducted

price adjustments should lead to the availability of many

prior and during the purchase process.

low-price properties.

A major problem currently facing Spain (and many other

Recently, there have been numerous scandals regarding

countries) is the downturn in its economy, which has led to

Spanish property, particularly ownership issues, illegal

a sharp fall in economic growth and a huge rise in

construction and municipal corruption. These include the

unemployment. This situation is expected to continue during

so-called ‘land grab’ issues in the Valencia region, illegal

2009 with improvement in 2010. According to the

properties built on rural land in Almería and corruption

International Monetary Fund, Spain’s economy is strong and

by councillors in resorts such as Marbella and Estepona.

will return to its potential growth path in the medium term.

Property investors are advised to carry out comprehensive due diligence on a purchase and employ the services of

Oversupply in the housing market is another risk in Spain

an independent lawyer to revise all legal aspects of the

where the resale market is currently saturated and

investment.

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Purchase Process Spanish laws and legal processes may be very different to what you are used to and Obelisk strongly recommends that independent legal advice be taken during a property purchase. Below is the standard purchase process in Spain and issues that may affect a property purchase: In order to purchase property in Spain, a Numero de Identificación de Extranjero (NIE) is required. The NIE is a unique identification number required to open a bank account or purchase property. The NIE must be obtained in person at a Spanish police station. An initial reservation deposit of between €3,000 and €6,000 is normally required, although this may vary depending on the purchase price. Once the offer of purchase is accepted, both parties sign a sales contract or ‘option to purchase’ contract and the buyer pays a deposit of 10% of the purchase price. This is non-refundable if the buyer decides not to complete. If the vendor decides not to sell, they must usually return double the deposit to the buyer. The title deeds are signed by both parties in the presence of a Notary Public and the buyer makes final payments. Purchase taxes and fees must be paid and the title deeds are registered in the buyer’s name at the Land Registry.

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Investment Costs Spanish taxation is complex and subject to change. You are therefore recommended to take expert and up-to-date advice on taxation issues affecting the purchase and ownership of property in Spain. The costs of a standard property purchase in Spain may include the following: The costs of a standard property purchase in Spain are high and average between 10% to 12% of the property price. They include the following (all percentages are of the purchase price): Property Transfer Tax is payable on the purchase of resale property between 6% to 7% depending on the region. VAT (IVA) is payable on the purchase of off-plan property at 7% depending on the region. Notary and Land Registry fees are fixed by law and based on a sliding scale. They range from 0.5% to 2% of the purchase price. Stamp duty is payable on the purchase of off-plan property at 0.5% or 1% depending on the region. Legal fees are payable and range from 1% to 1.5%. Capital gains tax is payable on profits (adjusted according to inflation) at the rate of 18% for EU nationals and 35% for non-EU nationals. Profits from principal residences are exempt provided the profit is reinvested in another principal home within 2 years.

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Summary The following summary provides key highlights to consider when investing in Spain’s property market: Spain has become one of the EU’s strongest

Spanish property prices have increased by

economies and averaged an annual GDP

190% in the last 10 years.

growth of 3.6% between 1994 and 2007. Around 4.8 million tourists stay in rental The Spanish banking system is currently one of

accommodation every year.

the few in Western countries unaffected by the subprime crisis.

There are generous tax incentives for income from long-term rental accommodation.

Spain is Europe’s 6th largest recipient of foreign investment and the 9th largest in the world.

Spain’s mortgage market is well-developed with a wide choice of mortgage products.

Since 1976, Spain has enjoyed its longest period of democrary and is politically stable.

The downturn in the property market is expected to lead to lower prices and good investment

Tourism represents 17.2% of Spain’s GDP and

opportunities.

Spain is the world’s 2nd largest tourist destination.

A 10% non-refundable deposit is paid when the sales contract is signed by both parties.

Spain has a €249 billion strategic plan for investment projects from 2005 to 2020.

Purchase costs are high and average between 10% and 12% of the purchase price.

Around 1 million Britons own a property in Spain.

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The Absolute Guide Series Rating

Based on our extensive research, Obelisk has introduced a 5 star rating system to summarise the investment potential of a country. The availability of finance, economic stability, political stability, the strength of the local market to provide an exit strategy and the potential to earn from investment are the key criteria that determine the investment grade of each country.

Verdict The Spanish property market has suffered greatly during the last 12 months. This has been mainly due to an oversupply of cheap tourist accommodation on the coastal resorts. Spain is still one of the most favoured destinations for foreign investments, mainly due to the climate and this perception is not likely to change. Several infrastructure projects are underway including the new Malaga airport and the AVE train link. The airport is expanding to handle passenger traffic of 20 million each year. The AVE train link at present services Madrid to Malaga and will soon connect Malaga to Barcelona in less than 5 hours. A new rail link between Malaga and the commercial centre of Marbella is proposed. In general, Spain’s future looks very bright.

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Obelisk

Awards Obelisk ‘International Property Specialist 2008’

Advantage

Voted International Property Specialist of the Year 2008 by Business Britain magazine, Obelisk has been recognised as the authoritative voice within the industry and its clients benefit from the company’s uncompromising high standards and professionalism. Obelisk has identified a simple and transparant purchase process for its clients as a simple, four step process: 1.

The client chooses and reserves the unit that best suits their investment requirements, and Obelisk takes the client through a compliance procedure.

2.

An independent lawyer, sourced and appointed for the client by Obelisk, will have already carried out full due diligence on the project. They will issue all purchase contracts and paperwork to the client.

3.

On receipt of this contract, the client will sign and make the first payment. The lawyer will notify the client of all further payments when required.

4.

The appointed lawyer will also represent the client in all aspects legally required within the country of purchase, ensuring that clients of Obelisk enjoy the benefits of simple and hassle-free real estate investment.

For more information about Obelisk’s investment opportunities in Spain, contact us now on info@obeliskinternational.com, visit our website at www.obeliskinternational.com or call us FREE on 0808 160 0670 (UK) or 1800 932 514 (IRE).

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Disclaimer The material contained within this document has been prepared for information purposes only. Information contained herein is not to be relied upon as a basis of any contract or commitment. The information is not to be construed as an offer, invitation or solicitation to invest and opinions expressed are based on market conditions at the time of print and may be subject to change without prior notice. Information contained herein is believed to be correct, but cannot be guaranteed. In case of queries or doubt you should consult an independent investment adviser. No personal recommendation is being made to you and the past is not necessarily a guide to the future. The brochure in its entirety – text, images, marks, graphics, logos, buttons, combinations of colours, and the structure, selection, ordering and presentation of its content – is protected by the legislation on intellectual and industrial property, it being forbidden to reproduce, distribute, publicly disseminate or transform it, except for personal private use. It is also forbidden to reproduce, relay, copy, assign or broadcast, in whole or in part, the information contained in this brochure, for whatever purpose and by whatever means, without written consent.

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Call us free from UK: Tel. 0808 160 0670 Call us free from Eire: Tel. 1800 932 514 For general and international enquiries contact us at: Tel: (0034) 952 820 319 Fax: (0034) 952 825 790 Alternatively you can email: info@obeliskinternational.com or visit: www.obeliskinternational.com

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