Where to Now? The future for property investors in Spain

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Real Estate With No Credit Checks!
CBs #1 Rated Real Estate Program for 3 years in a row! That's a Clue as to how Hot this is!

Author: Lucy Peacock

Article source: http://www.articlealley.com/. Used with author's permission.

For the last two decades, UK investors in Spanish property have had plenty to smile about. Property prices have risen year-on-year and Spain remains the number one destination for British holidaymakers and home to half a million British expats. But what do the next 20 years hold? Are worries about market saturation justified or is the outlook still bright?

Let's start by looking at the property market in Spain as a whole:
Spain's popularity with investors reflects its popularity as a holiday destination. Many Brits see Spain as a 'home from home', with around half a million visiting each year. For buyers needing mortgages, EU mortgage rates are low compared to rates at home. Every year British buyers make up a quarter of all overseas buyers of Spanish properties. The catalyst for the Spanish property boom has been consistently low interest rates which had remained stable for five years until December 2005, when the European Central Bank raised the rate to 2.5% (still significantly less than current levels of inflation in Spain).

The buy to let market has proved an excellent source of income for many investors. As well as capital growth, buy to let investors can expect to earn up to 8% of the value of the property per year after expenses. Buying a property with the intention of selling in the short term can also be very profitable. Prices more than doubled over the seven years up to the end of 2004, and although experts predict a gradual slow-down over the next few years house prices are still predicted to rise 9% in 2006. Investment off plan offers further opportunities for profit. Many investors have also made a profit by taking on renovation projects.

Overall the picture for property owners and would-be buyers in Spain is of a healthy and sustainable market. Demand for new property is still high - there were more new-build projects undertaken in Spain last year than in Britain, France and Germany combined - around 700,000 in total.

Another good indicator of confidence in the long-term sustainability of the property market is massive investment in Spain's infrastructure - the road and rail system has improved immeasurably. This opens up many new areas for development and reflects the new kind of property buyer in Spain -who is increasingly looking away from the saturated coastal tourist hot-spots to inland and rural Spain, where Euros go much further. Even the most secluded villa is now nearer to good roads giving easy access to the beach, airport or local towns. Add to this an increase in cheap flights to and from Spanish airports and you can see why investors feel confident in Spain's continued popularity. Official figures back this up with Spain's Institute of National Statistics predicting a rise in Spain's immigrant population to 5.5 million people by 2010 - that's 12% of the population.

So what areas should investors be looking at?
There has been a distinct shift in type of property and area that the clued-up investor is looking at. Buyers are rejecting the saturation of high-rise resorts and expat enclaves in places like the Costa del Sol and becoming more adventurous. They want more genuinely Spanish towns and villages with less over-development. Properties along the Costa Blanca and Costa Calida (and the gorgeous countryside inland from these coasts) are attracting more and more interest. This south east corner of Spain, with its spectacular coastline, blue flag beaches, peaceful inland villages, world class golf courses and almost year round warm sunshine has a lot to offer. More and more people are waking up to the potential of this area - either to live here, or buy a holiday home. There are still property bargains to be found, especially inland. There is much investment potential in good quality holiday rental properties - for now.

The tourist industry has also discovered the Costa Blanca and Costa Calida, but development is much more carefully controlled than in the past - the Spanish authorities have learned hard lessons with the over-development of tourist hot-spots, where high rises stretch as far as the eye can see and have irrevocably altered the coastline. The intention is now to meet demand from holidaymakers for holiday rentals, but to ensure future developments will enhance, not erode, the attractions of the location. The Spanish Government has played a part in shifting investors' attention away from the established resorts, with tax breaks for developers who build inland. Aware of the damage done to the coastal ecology by intensive building, various restrictions are now in place in different areas - for example banning buildings over two storeys or ensuring green areas are incorporated into new developments. This is good news for the Spanish property buyer - you can be sure that the beautiful villa you buy will not be surrounded by high rise developments in a few years' time.
One of the things you have to consider when buying property in Spain is Capital Gains Tax. For a long time Spain has penalised the foreign investor with a higher rate of 35% on non-residents who sell property on or have a personal income from a buy-to-let property in Spain. Residents pay a maximum of 15%, calculated as part of their Spanish income tax. People who buy from non residents must withold 5% of the total purchase price and pay it directly to the tax agency. For tax purposes residency is usually determined by the amount of time you live in Spain in a tax year - less than 183 days and you will not be classed as a resident.

The European Commission has declared its intention to level the playing field and is taking Spain to the Court of Justice in an attempt to make the Spanish authorities abolish the two tier Capital Gains Tax system - so that everyone will pay the same, resident and non-resident alike. In theory, this will benefit the foreign investor but the situation is more complicated than simply levelling Capital Gains Tax to a flat rate for all. If a British investor is not resident in Spain for tax purposes and instead pays tax in Britain then any capital gains from a Spanish property will have to be declared on a UK tax return. Any tax paid in Spain will be offset against Capital Gains Tax in Britain. The double taxation treaty between the UK and Spain means that UK residents will pay the UK rate (currently set at 40%) minus the Spanish rate - whether it is 35%, as now, or 15%. This means, in effect, that a UK taxpayer will get hit twice: with Capital Gains Tax in Spain, and then a further charge incurred back home.

The system as it stands now will change though. As well as the European Commission's intervention, Spain itself is determined to stamp out the endemic abuse of the present system with the thriving market in 'Black Money.' This is where the seller charges less than the property is worth, and the buyer makes up the difference with an undeclared cash payment - refuse to go along and you run the risk of losing your dream home in the sun. Reforms are intended to be in place by the beginning of 2007. For now, there are several exemptions and tax breaks available:

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