Business & Finance 04.04
Business & Finance,
22 April 2004
A holiday home in the Iberian Peninsula can bring with it a number of legal and financial responsibilities, writes Donal Griffin.
Buying foreign property has always been associated with con artists and rip offs. During the 19805, the word 'timeshare' struck fear into the hearts of property buyer, fearful of getting burnt in the sun. No matter where you've decided to buy a property, getting impartial legal and financial advice is essential. lnvesting in such a property, however, can be immensely rewarding and the undoubted hassle of encountering a property system quite different from the lrish model will almost certainly be worth it.
The lberian Peninsula has long been one of the world's primary tourist destinations. Last year, over 765,000 lrish people chose an Iberian destination - Sj>ain, Portugal, the Balearic lslands and the Canary lslands -for their summer holiday. C1.early, the region has an attraction. Tom McGrath, the principal of Tom McGrath & Associates Solicitor, has been visiting Spain for over 30 yea~ and is well acquainted with the country. He now acts as a legal representative for lrish people interested in purchasing proj>erty in Spain.
"The Irish market has peaked," says McGrath. "Similarly, house prices in Madrid have shot through the roof in the last two year. Malaga and Marbella are super-expensive and 1 think there's probably another year, possibly two, before it peaks. In Murcia {a south-eastern region), however, you will buy properties there for 50% of what you're paying in Marbella. It's known by the Spaniards but it's not known by the Irish yet. l've seen two- bedroom apartments for €100,000 in complexes there and you would be paying over €200,000 for a similar building in Malaga."
John Morgan is the managing director of the Irish division of Andalucian Dream Homes, a company which sells property in the southern region of Andalucia. The Andalucian coastline, which looks out to the Mediterranean Sea, is home to some of the world's most popular tourist destinations. The Costa del Sol runs along the coast of the Malaga province of Andalucia and tourists flock to the likes of Marbella, Torremolinos, Fuengirola and Estepona. This is a highly-developed region and prices, as McGrath says, are not cheap but value can be found. Generally, according to Morgan, the starting price for a quality apartment is approximately 180,000. "That would be for anything quality," he says, "These would be new and built to the highest specifications with air conditioning and fitted kitchens and literally all you have to do is move in the furniture. We've got beautiful two-bedroom apartments selling from €80,000 upwards and they're fully finished and decked out with marble floors. They're beside golf courses with underground parking and air conditioning. There is excellent value down there now."
While rental yield can be lucrative, it may not be the gold mine some may have thought it to be, however. "There is a very healthy demand but a healthier supply," says Michael Keenan of Overseas Property International (OPl), which also deals in property in Hungary, Cyprus, France and Romania. It has declined a bit in popularity in the last couple of years although it looks now as if there's a bit of revival," says Keenan, who has been dealing in Spanish property with OPI for six years. "OPI has always been very forthright and precise about the rental aspect of the investment and we have said that people should not budget on the basis of a significant rental yield. It's not the rosy picture that people imagine in that because it's sunny virtually an the year round, you can rent it an the year round. It doesn't happen like that. The rent will help the apartment to wash its feet in terms of the investment but you would need to subsidise it. It's a help but of no staggering proportions."
The potential of a Spanish property is still impressive considering the growth in the market over the past several years, Capital appreciation can vary between 150/0 and 300/0, according to Morgan, based on the standard of the propertY and where you buy it. He estimates that a property's value can double within three years, Considering McGrath's assertion that the market in Malaga may peak in two years, now may be the last chance to invest.
Buyer Beware
While the Spanish and Irish property systems share some similarities, there are differences which a buyer must be aware of. For instance, registration of the property is not compulsory. The closing of the deal is done before a notary public, a civil servant who ensures that the transaction is closed properly. However, if you don't register the title of the property after this, the vendor can see the property to someone else. The fact that you signed a contract before a notary public is not conclusive proof of ownership.
"Most people go over and it works out for them but I've heard some horror stories," says McGrath. "I've heard of people doing stupid things. We an do stupid things but you have a couple of glasses of sangria, you sign on the dotted line, you pay your money and you don't know who you're paying it to. What I've also found is large developers moving into a place, buying up the land and then they begin selling on it before they've even gotten their licences; he continues. "Now, most of the time they get their licences but only most of the time,"
An important difference between the Irish and Spanish systems is that the mortgage is attached to the property in Spain whereas in Ireland, as McGrath says, "it's the person who will be chased." The system in Ireland generally works on the premise that a buyer takes out a mortgage and uses this long- term loan to purchase a property. He then pays this back to the bank. ln Spain, however, the mortgage is attached to the house. "You can end up losing your house if the vendor hasn't settled with the bank," says McGrath. "I've had cases when a buyer agreed to buy property and suddenly it was discovered that there was a mortgage on it that hadn't been paid off, If they hadn't discovered it and they had gone ahead, the bank would have come looking for their money and the new purchasers would have had to pay it, Obviously, you would have a case against the vendor but if they're long gone, what do you do?" One cannot overestimate the importance of legal and professional advice when purchasing property and this applies to Spain as much as anywhere else.
The property tax system in Spain should be noted and especially by those on a tight budget. The buyer must pay 7% VAT plus 1% stamp duty. In the case of second hand property, the rate of VAT is 6% plus the same rate of stamp duty. As Spain is largely divided in autonomous regions, there are different rates of local and municipal taxes. This makes it essential to research your desired area well. For example, as Tom McGrath describes, "the annual real estate tax on Spanish property must be paid by all owners, This tax can vary widely from town to town for the same type of property, because it is a municipal tax, it is known as IBI. It can vary from 200 to 2,000, depending on the type of house and location."
There is a flat rate of 25% on all rental or business income, Capital gains tax is a hefty 35% for non-residents and 15% for residents. A resident aged over 65 who has lived in the property for more than three years is exempt from capital gains tax. A tourist only becomes a resident for tax purposes if he spends up to 183 days in Spain. After that, he must pay income tax on earnings, no matter where they originated, On top of legal fees and various costs and other local charges, it is advised to assume that 10-11% of the property price will account for the taxes and charges.
Property in Portugal
Portugal is less than a fifth of Spain's 504,782 sq km in size and its 10.1 million people would account for only 25% of the Spanish population. As a result, the Portuguese property market is more centred and more regulated than its Spanish cousin, For example, it is recommended that you deal with estate agents who are government-licensed and, as with Spanish property, it is essential that you obtain the services of a solicitor who is familiar with the market and its regulations, Legal fees will cost approximately 2-3% of the property price, according to Mark Dwyer of IFG Property Finance.
Buyers had previously benefited from a tax loophole by purchasing property through the formation of an offshore company. There is now; however, a flat property tax rate of 15% on all purchases bought through this method and a 5% annual charge. The standard rate of tax on property varies between 1-6% on the property’s value (less the value of fixtures and fittings) and stamp duty is 1%.
Vat and Mortgages
Vat (IVA) is only payable when you build the property and, according to Dwyer, all building materials and builders fees are usually charged at 17%. The title document, known as the Escritura, is signed in front of a Portuguese Notary Public, similar in function to the Spanish one. The Notary's fees will amount to roughly 1% of the property's value. Land registry fees will cost approximately 0.5% of the property's value and the lender valuation cost is currently €150.
If you do not intend to live in Portugal all year round, you must appoint a Fiscal Representative', to whom all your correspondence from the tax authorities will be sent. The appointee is your choice.
As is the case when buying Spanish property, an lrish buyer must be aware that the mortgage is secured on the property in Portugal, something which could potentially become one of those horror stories if you haven't procured a decent lawyer with a working knowledge of the Portuguese market.
On Portugal's southern coast, the Algarve is the Portuguese equivalent of the Costa del Sol in its power to attract millions of tourists from around the world. The region's climate mixed with its range of championship golf courses and long stretch of beaches all attract holiday-makers as well as home buyers.
The Algarve is truly a stunning location with an impressive range of facilities ind amenities and the properties are often the last word in luxury. The buyer will pay for this, however. For example, Dublin-based property agents Aquarius properties are offering a two-bedroom apartment for as much as €490,000 in Quinto do Lago. Although scant in bedrooms, the apartment is set on a hillside in a luxury cluster of apartments and offers an exotic style of garden. The buyer of the apartment has access to a swimming pool and tennis courts. It's costly but a luxury two-bed apartment set on a hillside looking out to the ocean and overlooking a lake under an almost African sun doesn't really exist in lreland.
If luxury is out of your range, two-bed apartments in the Algarve generally range between €200,000 and €300,000. It is costly and the market is well-established, unlike certain parts of Spain such as Murcia where the bargain hunter can be rewarded. According to Dwyer, the western Algarve, based Iround the town of Lagos, is an area of potential as it's only recently had its road infrastructure developed. Dwyer is cautious when estimating the rental yield and capital appreciation of a property in the Algarve, however.
"I would be reluctant to go for a particular figure because it totally depends in the type of property that you have," he says. "Quality apartments, be they in Spain, Budapest or in Portugal are generally going to hold their value and will rent well. It's just a case of 'let the buyer beware'." In the case of a new, quality apartment costing approximately 250,000 in the western Algarve, Dwyer says he would be comfortable with predicting a rental yield of 5%. Rental yield would depend to an extent on the management company and their spend on marketing and development. "There are so many factors at play," according to Dwyer.
While Iberian markets can throw up a bargain, the sheer beauty of many popular locations, and their resultant development, has led to established economies of scale and you wi11 genera11y get what you pay for. It is important, however, not to let the welcoming culture of the likes of the Algarve or Murcia cloud your judgement and research the area with legal advice as you would in Ireland. Be smart and enjoy the benefits. As Tom McGrath says, "it's a whole continent waiting to be explored.