The Irish Independent 04.07

Irish Independent
April, 2007
Hasta La Villa, Baby
Has the dream turned sour for Irish property investors in Spain?

For tens of thousands of Spanish property owners, the unthinkable almost came to pass last week as Spain's building sector threatened a meltdown. Triggered by the share collapse of one of the country's biggest construction groups, building companies saw 65% wiped off their share value. • Now fears are growing that stock market panic may prompt a full- blown housing crash, leaving overseas investors, of whom the Irish are a significant percentage, dangerously exposed. But few would be surprised should the Spanish housing bubble burst; it has seen developments spring up unchecked along coastal regions, often in contravention of planning regulations.

"We will definitely see house-price growth stop and a fall in nominal prices is likely in Spain over the next 12 to 18 months," said economist Diana Choyleva. "We have had over-investment on a gigantic scale. This is not good for investors in Spain." Complicating the outlook is a series of planning scandals, which have resulted in the Spanish government threatening to demolish apartment complexes green-lit by corrupt local governments. In Marbella recently, officials were found to have reaped billions in kick-backs, prompting Madrid to order the dissolution of the town council. Raids carried out during the investigation uncovered graft on an astonishing scale — police seized works of art, jewellery and even helicopters.
However, corruption is not endemic throughout Spain — for most Irish investors, the risk of an overheating market and a consequent slump in values and rental yields poses the bigger threat "Don't buy in Spain if you are depending on rent to make the mortgage," advises Neil Doyle, who owns three apartments in Alicante. "The rents are quite soft at the moment and you may also have trouble selling your apartment.

"The problem is that many people buy in the hope of getting back out at a profit in five years or so. What seems to be happening now is that a great many people are trying to get out at the same time, which is causing a slow-down."

This week's stock market wobble was prompted by the collapse in the share price of Astroc, the multibillion-euro Valencia bricks and mortar developer. Astroc's worth tumbled 60%, amid growing unease about overheating in Spanish property.

Domestically, at least, there have been indications of a softening for some time — prices have flatlined recently, having climbed 270% in the past decade. Simultaneously, borrowing costs have climbed considerably since 2005 — significant in a market where 98% of owners are on variable rate mortgages.

And for Irish investors, getting out of the market is not easy. Second-hand property is in far less demand than new developments, especially in areas popular with overseas buyers (most of whom prefer to purchase new or off the plans).

Added to this are legal complications: if you are selling your property to< another overseas buyer, you may face a long wait while they seek mortgage approval from a bank, typically in the UK.
And the elephant in the bedroom is supply: more than 800,000 homes were built last year, beating France, Germany and Italy combined, and leaving a glut of property in the market Consequently, many observers in Spain believe a crash overdue.

"I can see a mortgage crisis building," says Manuel Romera, director of Madrid's Instituto de la Empresa. "We have a serious property bubble and everyone is in denial; it's worse than the US."

Not everyone agrees with this gloomy prognosis, however. A cooling in Spanish property values was overdue and is unlikely to develop into a long-term slide, believes Tom McGrath, a solicitor specialising in overseas property.

“What doesn’t seem to be reported is that the share values of most of the businesses affected last week recovered within a few days. A slow-down in prices had to happen because the cost of property had gone through the roof.

"Things have been very, very good for Spanish property, so we shouldn't be too surprised to see a re-adjustment. The Irish economy and the Spanish economy are the two best performing European economies of the past few years, so the long-term outlook in Spain remains extremely positive."

Nevertheless, Michael, a retired businessman from Dublin, is relieved to be out of the Spanish property. When he went to sell his three-storey townhouse near Torrevieja last year, he discovered there was no planning permission for the top floor.
"We had a buyer who was very interested. But when his surveyor looked at the plans, he told us we had planning permission for just two storeys.

"What we discovered was — and this happens frequently in Spain — the builder applies for permission for a two-storey house and builds a third without telling anybody. I asked my Spanish solicitor why he hadn't noticed this and his reply was, You don't think I actually go out and look at the houses, do you?'

"It delayed the sale by a considerable length of time. In fact we lost the first buyer. We had to go and get planning permission and that cost us around €5,000 to get it all straightened out

"I'd say to anybody who is thinking of buying, don't use the solicitor that the developer or the agent suggests, because they are just rubber stamps.

"We found another buyer, and I'm glad we got out"
Joseph, a marketing manager, owns a two-bed penthouse apartment on a golf course near Murcia. He says what's currently happening is "a wobble rather than a crash".

"I started buying in Spain in 1999 and I've bought and sold several times since then. This is my fifth property. It cost me €180,000 in 2003, so even if I got that for it now, it's not a loss.

"What I'd say to anybody looking at property in Spain is if you're depending on rent to carry it, don't buy, because the rental market isn't reliable.

"Where I am, some guys have bought 200 apartments. They're the ones who are most exposed just now. I use my place six times a year. I have no worries at all. This is a huge Europe-wide market, it's not governed just by local market forces. It will come back"
Additional reporting by Willie Dillon