Please note that the information provided in this article is of a general interest nature and intended as a basic outline only. Nothing contained in this article should be seen or taken as the writer or publisher providing legal or financial advice. PS. I am a lawyer – not an accountant or IFA. I have prepared the following figures to the best of mine and my calculator’s combined abilities - e&oe!
Nic Cicutti’s excellent article - “The great PS3 rip-off: are Brits being fleeced?” - on MSN Money (22.03.07), started me to conduct my own research. I wanted to see whether life – aside from all the usually substantial health and well-being benefits ascribed to a life in Spain - could be significantly cheaper here in Spain than the UK – and for whom.
Let’s start with some basic UK property costs. These are, of necessity, based on a sample of available historic data. They are the mean of all properties countrywide and form some base points.
It’s appreciated that across the UK that there will be substantial variance in values. A beachfront apartment in Brighton is likely to be worth substantially more than a flat with a front line view of the North Circular. A Manchester lock side warehouse may well have a completely different appeal – and commensurate value - to a two up two down in a Durham mining village.
08.02.07 the BBC reported that the average cost of a detached property in UK was £285,697 (€421,831.00) and an apartment was £174,052 (€256,987).
In the UK the costs of buying are an average of circa 4%. So, respectively, £11,427 (€16,798) and £6,960 (€10,231) needs to be added to the relevant purchase price.
In Spain, figures are difficult to come by and there are vast – perhaps even greater regional differences than in the UK - but in 2006 Spanish-Property-Service.com reported that the average price of the new house on the Spanish Costas reached €2.400 per constructed square metre (m2). If we take 175 m2 as an average size of a detached property then that would equate to €420,000 (£284,456). For apartments – according the Spanish Ministry of Housing – they had a coastal location average in 2006 of circa €2000 per m2 – suppose an average size of 125m2 that would make €250,000 (£169,319).
In Spain, the average costs of buying, with a mortgage equal, are circa 10% of the purchase price. So €42,000 and €25,000, respectively, needs to be added to the relevant purchase price.
It is argued that the following categories are the most likely who may be interested to re-locate – either physically or financially:
1. The retired couple. Often called “empty nesters”. They jointly own a property worth £400,000 and need to dispose of it in order to move abroad.
Many people who plan to purchase a retirement property abroad may be able to do so without needing a mortgage. According to new data published by Retire to the Sun (23.03.07) online mortgage company - mform.co.uk - showed that 13 per cent of UK citizens planning to buy a new property in the near future expect to be able to do so without borrowing money. The majority are older people looking to downsize and take advantage of recent house price increases.
Buying in locations, such as Spain, where it is typically cheaper than in the UK, meaning that people who retire abroad could free up more cash from the move and enjoy a better standard of living.
Being aware that one in three purchases in the UK falls over before completion we feel that opportunities exist for the keen seller who wants to become a cash buyer – quickly - to avail them selves of certain guaranteed property purchase schemes. One such scheme that enables sellers to - “get on with it” - is PSS, run in Nottingham by UK property veteran Ben Whitaker.
PSS commissions a formal valuation of the UK property and promptly indicates a figure that they would pay for the property. Arguably far less hassle than working with an estate agents and having potential buyers roaming around your home. We believe this is likely to be very attractive to those sellers who enjoy substantial and long-standing equity in their property.
Becoming a cash buyer enables the UK seller – now a Spanish purchaser - to negotiate hard in their preferred location. This may mean securing a desired property at a lower price. Through further careful management, including using various currency management options, it is believed that the UK seller may recover some of the costs of sale in the UK.
Our empty nesters will be able to use their say £375,000 (€551,250) – “investing” 50% - €275,625 - into their new Spanish apartment and banking the remaining sum after taking tax, professional and furnishing costs into an account in either the UK or Spain to supplement their combined annual pensions.
Their costs of living in Spain will be, according to figures analysed by Othercountries.com, around 20-30% less than the cost of living in the UK. However they caution – “do bear in mind that heating and air conditioning may mean you pay rather a lot more in electricity in Spain” – it’s hot after all! However, during the hottest months – June July and August - it wouldn’t be unusual for local residents to leave to visit friends and family in cooler parts of the World.
During these months a good apartment in an attractive location with swimming pool access would command a rental in the region of £250.00 per week. Even at 50% capacity that’s £1,500 (which may be subject to income tax) to contribute towards your travelling budget.
For the Silver Sellers or Empty Nester – the above model seems very attractive – and frankly you be the Coolest Grandparents on the block for your teenage Grandchildren. Want to spend a couple of weeks with your Grandma in Spain? “Yes please!”
2. The four person family unit – where the breadwinner(s) have sufficient job mobility to live in Spain whilst continuing to work in their chosen field in the UK or elsewhere. To re-locate they need to sell their UK property worth £400,000 with an outstanding mortgage of £250,000. Annual servicing costs at 6% - £15,000 (£1250 pcm). £130,000 (€191,100) will be introduced into the new purchase after they settle car and credit card debts totally £20,000.
Decisions as to potential location will be governed by access to good schooling, convenience to local amenities such as airports and motorways and value for money. Mr and Mrs. have a history of renovating older and tired property and making money for their family as they sell on.
They find a forty year old, three bed roomed small villa property on a good 1200m2 plot in a good area of the Costa del Sol – let’s say Elviria just to the East of Marbella. The asking price is €550,000 and they successfully negotiate a reduction to €500,000. With all taxes and legal costs – out of their savings - they will pay a total of €550,000.
They will require a mortgage of €310,000 but as they’ll need funds to renovate of circa €40,000 they decide to raise their borrowing to €350,000 - a loan of 70% loan to value and perfectly within the tolerances for mortgage lenders in Spain. A 4.75% interest rate mortgage is available and annual servicing costs will be €16,625 (€1385 pcm)(£11,309 pa/£942.00 pcm). This is a saving of around 25% on their previous UK mortgage expenses.
Their school fees will be around 30% cheaper than the equivalent schooling in the UK.
Their commuting costs for essential meetings in UK – even by Easyjet - may be as much as 50% of the equivalent UK travel costs. A randomly plucked example Manchester to London return train trip £ 219.00 (06.06.07 to 08.06.07) whereas Easyjet – same dates and approximate times - Malaga to Gatwick return is £145.00.
3. BARBies - the new demographic for those who Buy Abroad and Rent in Britain. It is reported by Newskys’ that as many as 40% of young people are now considering buying overseas as the first step on to the UK property ladder.
Such purchasers will be looking for capital growth and yield which will be needed to service the finance and running costs of the property. Capital growth will follow the usual economic factors – under or inadequate supply of the “right” property. Capital growth in the Spanish market is, in my opinion, a medium to longer-term investment. Despite reports from certain Spanish banks that prices will rise by an average of 8% year on year 2006 to 2007 other elements come into play.
Breadth of choice – many of the off plan purchases of the last three to four years are coming to completion. It’s a buyers market with sellers having to accept substantial negotiations on price in order to make a sale. The old adage of a property “being worth what a buyer is prepared to pay for it” is particularly apt at present.
Neighbouring urbanisations may have been completed in the last year or so and the golf courses are starting to bed in. Whilst many completions in such developments will be made by “jet to let” purchasers there seems to be an increasing stock of properties that bulk purchasers could not complete on. Does this provide a stock of ready properties for the BARBy purchaser?
I would add only one word to the tried and trusted three rules of property purchasing “location, location, location” - and that is “quality”. Well finished, equipped, designed and well located property will have higher demand from long and short term renters which will generate the yield required to make the funding exercise work. So do your homework.
It’s not just about price. You could find a “cheap” property in the middle of a building site that has been a building site for the last two years and will be a building site for the foreseeable future – don’t kid yourself with back of the fag pack maths. Caution should be exercised in making any such purchase as it will have limited appeal to any tenant – or even to the new owner if they – their friends family and co-workers - cannot enjoy the well marketed but unfinished facilities!
Don’t fall for the old 5% 3 year rental guarantee trick - unless its an aparthotel or similar - where the main purpose of the building is to provide temporary holiday accommodation to a market where there is always demand for such space. The guarantee is usually only offered as a result of a hike in the price you are paying – you will be paying hard cash for your “rental guarantee”.
For the BARBy purchaser the idea is to create wealth quickly from the sale of an overseas property to repatriate to the UK market to put down a chunky deposit against a UK purchase. Think very carefully about this model.
Even with recently reduced levels of Capital Gains Tax in Spain – and an appreciably higher rate in the UK – gains will therefore not be tax-free. Making the gain is the big thing. I suspect that the gain will only be appreciable where the purchaser can take a minimum 5-year view. If you cannot take this view this model is not for you.
If you buy a developer’s “bin end” offer – one of the last apartments on a finished development often priced at two year old prices - that will value up well for mortgage purposes – you’ll need to be clear that there will be a market of ready purchasers down the line. I have my reservations that these will exist in those economies where mortgage models are very rudimentary. However, in Spain, over the four years of my activities here new entrants have made their way into the property funding market and its no longer in its infancy. The mortgage business is being dragged kicking and screaming into its adolescence by aggressively pitched market forces. It won’t be long before the full range of UK type products will be available here with long term fixed rates, high loans to value and proper self-certification. Combine available funding with a very good rental operation and a clear buy to let funding model will be established.
I can see this as a driver for the new wave of Spanish investor purchasers – but it will require some portfolio bundling. A corporate purchaser, an Investment Fund or similar, may well be attracted to “real” high single figure yields. This model will not evolve overnight but for many it may well become a firm part of their exit strategy.
If the BARB model is for you what will it costs?
Say the two-bed/two-bath property is on the market at €275,000 – this is from the developer’s own stock. Through good negotiation your agent manages to get it for 15% less than the asking price, €233,750 (£159,013). This is only 10% above the price the development was first marketed at two years ago “off plan”. However the price gives the developer a decent profit on his costs and puts some money “back in his till”. Because of the m2, the completed nature of the development and the sale of “comparables” in the area the mortgage valuer – the Tasador – gives the apartment a value of €300,000.
Sensibly, you have approached your mortgage broker ahead of searching for your property to check out your situation - a combined annual income of £60,000. The broker secures for you an “agreement in principle” or an ”AIP”. Your lender has agreed to lend you an 80% loan to value mortgage - so you can borrow €240,000. This means you’ll have a balance of €6250 towards the costs of furnishing, the legal and taxation costs of purchase - circa €23,375. This leaves you needing to find £11,650 and the apartment will be yours.
Your mortgage is a fixed rate deal for three years at 5% - annual-servicing costs are €12,000 (£8163.26). You will be looking to cover a substantial portion of these costs by rental income.
Should you look for a long or a series of short-term tenants?
A long term rental - often for 11 months - through a reputable agent, subject to their costs – being between 15% up to a maximum of 20% - I would expect you to be able to generate a gross long term rental income of €9350 or net €7947 (at 15%). By keeping August free, for yourselves - two weeks and “selling” two further weeks to friends and family - you should be able to generate a further contribution of €1500. This gives a total rental income of €9447.00 - €2553 short of covering the mortgage and any community maintenance and local tax costs. If we round this figure to €3000 – just over £2000 per annum or £170.00 per month - is the basic annual cost of buying your investment property.
With more fleet footed rental marketing and management you may well achieve a higher yield. This should be calculated on say a 35-week rental year. There will be inevitable voids but the property – if well situated - golf course for example - should generate say an average of €550.00 per week or a net after agents’ costs – 17.5% - being €15,880. Which delivers a yield of over 6.5%.
Please remember in making your own calculations, rental income may need to be declared, depending upon your own tax position, to your home Revenue Authority.
Given the necessity of “sitting” on the rental agency to check that they are marketing and filling your property for the short term, I am concerned that expecting to achieve 35 weeks of short term may be unrealistic. I know clients who have achieved it and more but they really have worked hard to achieve it, often hand in glove with their rental agent.
4. There is another category of purchaser. Let call them the Polo Shirt Tan (“PST” or “PiSTachio”). This purchaser is usually a maturer investor than our BARBy friend but they are confronted by the same economics. The difference being the PST purchaser has a few more years of investment tolerance with which to allow their portfolio to blossom into displaying real capital growth. They are looking for some portfolio building activity to sit well with their equity portfolio in the UK.
This investor may typically own a property in Spain – or have a real feel for the likely demand for rental property in the Spanish market. Often they may have a connection with a golf club or similar such that they can work together with their rental agent to achieve the maximum exposure. They may well be semi-retired.
They are still young enough to get mortgage funding and having seen some cash success in the UK buy to let market which has enabled them to gear heavily on their purchase but manage to ride the void weeks without too much difficulty.
This purchaser needs keenly priced great stock and a good rental agent. They are starting to emerge as a primary buying group. Snapping up developer “bin end” properties - referred to above - or equally becoming the core clients of certain businesses that we know who have established a route for either developers or the owners of uncompleted properties to bring their properties to market. They thereby have the effect of providing a route, in part, for those whose ambition was bigger than their wallets when they first viewed the off plans a couple of years ago.
These businesses tend to provide a package which means that there is a low level of down payment - typically 7.5% to 10% - to secure the property and full funding is secured by a high loan to value mortgage. These properties are usually fully licensed, finished, unfurnished but otherwise entirely ready to enter the rental market.
Using the same economic model that confronts the BARBy purchaser, the Pistachio purchaser is delighted to see 30 to 35 weeks a year of rental income but is sufficiently realistic to re-jig their planning if this is not being delivered. Having essential flexibility they can ride out times of void rentals firm in the knowledge that they bought at a very good price.
Rental demand will be as strong as the golf courses and restaurateurs pay heed – as they seem to be doing – that you cannot kill the golden goose of the tourist economy. Green fees and menu prices seem stable and reports are that hotel bookings are up for the spring and summer. I have long been of the view that a tourist matures into a rental tenant and a renter ultimately becomes a purchaser – it’s the circle of residential tourism.
None of us can predict where we are in the current Spanish property cycle but I suspect that 2007 may well prove to be the lowest point in this current phase. There are many good reasons to believe that the regional council Elections in May 2007 will seek rid the Marbella market of the uncertainty that has dogged it for the last 18 months. Our local Spanish politicians are clear of the need to restore confidence. With such confidence there returns to the market a desire to invest in well-built property and added comfort on real values.
In conclusion, for our categories 1 and 2 above I can see a compelling case for a move to Spain. For me, the jury is out for our BARBy purchaser. Unless they can sit tight and allow their investment to deliver long term capital gains over a number of years – whilst just about washing its face in terms of yield. For category 4 – our PiSTachio purchaser - they may well be in the best shape to benefit from the current market.