After the Boom

Property Prices Stabilise

Average Spanish property prices are still rising sharply, at least according to the figures provided by the Spanish Ministry of Housing. However, there are signs of the wind
leaving the market’s sail, reports Mark Stucklin of www.spanishpropertyinsight.com

The latest figures from the Spanish Ministry of Housing show that average Spanish property prices for unregulated property (excluding social housing) increased by 1.6% in the third quarter of the year, taking the average price of property up to €1,781.50 per square meter. This latest increase means that Spanish property is now 13.4% more expensive than it was a year earlier.
After the latest increases, prices have now risen for 27 consecutive quarters – the longest series of increases since records began. The last time prices actually fell was in the final quarter of 1998, almost seven years ago. No other European country can match such an impressive bull run for property prices.

Despite these impressive growth figures there are also some welcome signs that the Spanish property market is beginning to cool. The 1.6% quarterly increase in the 3rd quarter was the lowest quarterly increase in almost three years, since the last quarter of 2001. Likewise the 13.4% rate of annual property inflation was the lowest since the beginning of 2002, not long after annual Spanish property inflation first hit double figures. The latest figures confirm that the growth in property prices is on a clear but gradual downward trend, exactly what the government wants and the economy needs.

Looking at price developments over 12 months, the most spectacular increase was in Albacete (31.9%), an inland province of Castilla La Mancha where very few Brits visit, let alone buy. The Valencian Region, Almeria and Girona/Costa Brava did well with price increases of around 16%, followed by Asturias (13.6%), Galicia (13.52%), The Balearics (13.25%) and Murcia (12.81%). The worst performing region in all of Spain over this time frame was Málaga and the Costa del Sol, with prices up by only 0.38%. This is well below consumer price inflation of 3.7%, which means that the real price of property on the Costa del Sol has fallen by over 3% in the last 12 months, always according to the government figures.

News of the stagnation of falling property prices on the Costa del Sol will not surprise estate agents working in the region. If anything the government’s figures significantly understate the problems that Andalucia (Costa del Sol), and to a lesser extent Valencia (Costa Blanca) and Murcia (Costa Cálida) are suffering at present. After several years of dramatic construction increases there are now too many properties chasing too few buyers, while distressed off-plan speculators who bought in 2002 and 2003 are depressing prices by having to sell under pressure. Sales to foreigners in some of these coastal regions are now down by between 40% and 60% compared to 2003, though this only means a drop to the more ’normal’ level of sales in 2001. Prices may continue to fall gently in coastal areas where the British buy, though no one expects the market to collapse while interest rates remain so low and the demand from Spaniards continues to support the market. Over the long-term the market fundamentals for regions like the Costa del Sol are excellent.

Capital Locked Up In

Your Spanish Property

Could Your Spanish Property Be Hiding
An Offshore Bank Account?

If you’ve owned your Spanish property for a few years, or even purchased it recently for cash, then odds on you’re sitting on a substantial amount of capital that’s simply not working effectively for you. Sure – you’ve got a roof over your head and, given good market conditions, the value of your property continues to grow each year – but what is that large amount of capital actually doing for you?
The answer is – not much actually. Yet it could be doing a lot more and, rather than sitting stagnating, it could be working far more effectively for you – either by generating some additional income for you or allowing you additional investment opportunities – say investing in an apartment for rental purposes or just to put friends up when they come to visit.
This latter suggestion has actually been put into operation by myself when my wife – after the first flush of being happy to see all our friends come to stay with us in Spain – soon became fed up with being back in the hotel business! We bought a two-bedroomed apartment in Calahonda and put our visitors in there. They’re only ten minutes away and we can see them any time we want but we, and they, still have our privacy and not feel that we’re under each others feet all the time.

Releasing the Capital Locked Up In Your Spanish Property
As long as your property is valued at more than 350,000 Euros you could release up to 25% of its value and put it to whatever use you want – without restriction. For example, on a property valued at 450,000 Euros a typical situation would be one where, using the property as security for a loan of 360,000 Euros, you could take 90,000 Euros in cash to spend on whatever you wanted. This might, with some added funds from your cash deposits, enable you to pursue other investment situations like the one described above. On the other hand you might like to completely renovate the kitchen in your existing home, make some other improvements, replace the family car and still have enough for a really good party to celebrate an important anniversary or take that special cruise.

Funding the Transaction
Your cash release can even be completely self-funding. Using the previous example and investing the 250,000 Euros balance of the secured loan in a specially formulated investment portfolio you could generate not only enough profits each year to service the interest on the loan but you could even generate an additional income for yourself to make your retirement here in Spain even more comfortable. By borrowing the money in a currency with a low interest rate – such as the Swiss Franc at 2.75% – and investing in either the Euro or Sterling at 7%, you could generate up to 17,500 Euros each year, use 9,900 Euros to service the interest on the 360,000 Euros loan and keep 7,600 Euros each year for yourself. Remember, this is in addition to the 90,000 Euros cash release you took to either spend or invest elsewhere.
By borrowing in one currency and investing in another, you are taking on a currency risk but as long as you are not stuck in a particular currency you can always move if either the interest rates or the strength of the borrowing currency start to cut down your margins. You do need to understand the risks and you should really have someone who is knowledgeable on the subject to monitor your positions for you on a regular basis.

Getting Things Arranged
There are a number of people offering this type of arrangement so how do you choose who you deal with?
Our first recommendation, as you might expect, is only to deal with a licensed, regulated broker. It’s not enough that your adviser claims he’s regulated in the UK. He should be licensed directly by either of the two Spanish regulators – the Dirección General de Seguros or the CNMV – and hold Professional Liability Insurance covering his activities in Spain.
Secondly, they should be able to demonstrate that they have at least a few years experience of arranging these equity release schemes.
Thirdly, they should be able to offer more than one lender, thus offering you a choice of scheme - otherwise how do you know if you’re getting the best deal.
Fourthly, they should be able to offer a multicurrency facility. You can still select a Euro loan/Euro investment option but at least you’d be able to switch if, for example, interest rates in the Euro rise over the next few years (as is anticipated!).
Fifthly, they should offer you an ongoing review of your arrangement to ensure that as little as possible goes wrong.
Sixthly, they should be prepared to give you everything in writing – both before you make a decision and then afterwards – so that you are both absolutely certain as to what you are doing and why. Remember that a verbal contract is not worth the paper it’s written on!

Conclusion
With all the considerations mentioned above, you could well find that your Spanish home is like an offshore bank account you didn’t know you had. Not only could you fund one or two projects but it could also be completely self-funding and even give you a little extra money each years to enhance your quality of life in retirement.

Colin McCready is the Chairman and Technical Director of Offshore Money Managers CDS S.L. one of Spain’s very few fully authorised and licensed expatriate independent brokers. You can contact Colin on 95 283 09 16 or by e-mail at info@offshoremoneymanagers.net

The Secrets of Successful

Equity Release on

Spanish Property

Wealth Warning
Equity Release on Spanish Property could well be the next big ‘miss-selling scandal’ to hit the expatriate community in Spain.
Why do I say this? Well, quite simply, many people are being encouraged to go into Equity Release without a genuine understanding of what they are actually doing, without sufficient knowledge of the risks (as well as the benefits) to allow them to form a balanced judgement as to whether or not Equity Release is appropriate for them, with unrealistic expectations of investment returns, no inkling of what could go against them as far as adverse interest rates or currency exchange changes are concerned and no protection whatsoever if anything does go wrong following negligent advice from the broker.

Defining/Quantifying the Risks
Equity Release can definitely be a very useful arrangement for many expatriate owners of Spanish property. They could reduce their liability to Inheritance Tax, release cash from the capital otherwise locked up in the property and/or create an income to supplement their retirement income.
However do make sure that the adviser explains carefully - in “non-jargon” language - all the associated risks. Here are the main questions you should be asking:
1. “What would the effect be on my situation if interest rates were to rise significantly” and “what could I do about it?”
2. “What would happen if the investment returns did not come up to projected levels?”
3. “Is the proposed investment a suitable one in terms of risk and volatility levels for someone with my attitude to risk?”
4. “If I borrow in one currency and invest in another, what would the effect be on my situation if currencies should go against me and what could I do about it?”
5. “What would happen if property prices were to fall? How much would they have to fall by before the bank wanted its loan repaid?”
6. “What would happen if my investment were to fall in bad markets – especially if that coincided with a fall in property values?”
7. “What steps will you, the adviser, take to ensure that I am always kept fully in the picture?”
8. “If anything does go wrong because I was given inappropriate advice - what rights do I have under the law?”
9. “Do I have everything in writing (with copies of any relevant investment material) signed off by a director of the advisory company? Have they shown me evidence of their regulatory status, as well a copy of their Professional Liability Insurance Policy?”
10. “Who will be keeping an ongoing ‘eye’ on interest rate movements, investment returns, property values and currency exchange rates so as to avoid potential disasters occurring? Will I get a written report each year on the state of my loan/investment – signed off by my adviser?”
It is simply not sufficient for Equity Release to be considered a sort of ‘one-off deal’, i.e. you buy it and then forget about it. It’s a long term arrangement that needs to be structured correctly and appropriately and then monitored regularly. Remember that, to achieve the IHT savings, the loan must be in place at death – and this, hopefully, will be many years in the future.

If you are in any doubt as to whether or not an Equity Release arrangement is appropriate for you then make sure you seek advice from more than one broker or adviser. Make sure they’re prepared to put what they say in writing and that you find out what comeback you have if it subsequently turns out that you have been given misleading or incomplete information which causes problems. Make sure they’ve got Professional Liability Insurance which covers their activities in Spain and also ask to speak to people who have already had the arrangement in place for at least 2 or more years - someone who has had actual experience of the scheme – and from whom you could expect an independent, unbiased opinion.

Ensure that your adviser is genuinely independent and able to offer you a number of lending sources from which you can choose the arrangement most appropriate to your particular circumstances. Beware of advisers who can only offer you one scheme - because that’s what they’re going to recommend even if there are better schemes available though other brokers. It shouldn’t matter to an adviser what Equity Release arrangement you use – all that matters is that it is one which is appropriate for you – and do make sure that you have, in writing, the reasons why a particular scheme is being offered over another.

All in all take sensible precautions on what is, in actuality, a very large financial transaction. Do not simply look at the benefits (great as they may be) - also look seriously at the risks. Do not enter into an arrangement which will give you sleepless nights. A good Equity Release Scheme will take away some of your worries - it should not add to them.

Investment

Opportunities

Stock Market vs Property

Know Your Objectives
Are you looking for an investment with potentially high returns albeit with performance that will probably be highly volatile (i.e. risky) or are you after a steady, reliable, more modest return but where your capital will be more secure?
If you can afford to lose a substantial part of your capital without it significantly affecting your lifestyle then you might be tempted by the first option and hope that you get the timing of your investment right. If you can’t afford to have capital possibly disappear or think that you’ve already missed getting into the markets more or less at the bottom, then you’d probably choose the second option.

Timing
Successful investment in the stock markets of the world depends on knowing when to buy and when to sell. You buy at the bottom and sell at the top. But how do you know when the bottom or the top has been reached? This is the million euro question. Most people get it so wrong that they end up losing their shirts. What usually happens is that they wait too long, until they’re “certain” that the markets are recovering, and then buy in at or near the top of the market and then they come out when the markets start falling again, thereby capitalising a loss.
In 1998/99 investors were flocking into the markets – they were going in when their confidence was high - but this was near the end of the Bull Market and so they were buying in at the top. When the “crash” came in 2000, followed by another on in 2001, another in 2002 with the bottom arriving halfway through 2003 they got out. Many investors lost 50% of their capital – and all simply by bad timing.

An Alternative
If your knowledge of the markets is limited then maybe you should just stay away from them (unless you’re a gambler, love the thrill that the uncertainty gives and can also afford the possible losses). Perhaps you should consider an alternative where timing of your investment is relatively unimportant but where you’re still going to get a pretty attractive and hugely more reliable return. For this you should consider an investment which does not, in general, exhibit very significant rises and falls. You should look for an investment where a graph of its performance shows a relatively smooth curve combined with a steep gradient. The smoother the curve the less the risk and the steeper the gradient the better the return.

Property Funds
An excellent alternative for the investor less willing or less able to take the volatility of stock markets – despite the potentially higher returns – are Property Funds. Not only do people in general feel that they understand property better but they feel more comfortable with the inherently less volatile nature of investment property.
The Irish Life International Property MultiFund is an excellent example of a smooth-curved investment with very favourable results compared to stock market investment and substantially better performance compared to leaving money on deposit - as this graph clearly demonstrates. Timing is not a concern with such an investment and the prospects of serious capital losses are – in the author’s opinion – minimal.
Over a relatively long period – say 15 to 20 years – the stock market investor who rode the highs and lows would have averaged around 10% per annum. Good shorter term performance depends almost entirely on either good timing or good luck! So if you have no particular “market insight” (or a crystal ball) then make sure that you only have a small portion of your investment portfolio in stocks and shares. The more cautious investor will probably do far better with investments which show much less volatility (risk).
With investment starting from just 15,000 Euros, the Property MultiFund is such an investment and is within everyone’s grasp.

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