Is buying a property abroad a good investment?
Buying a property in the UK to rent out has been a good investment in recent years for many people who have taken the plunge. One of the main reasons for the popularity of the buy-to-let market has been that investors have been looking for an alternative to putting money into the falling stockmarket or their poorly performing pensions. For many, ‘bricks and mortar’ has seemed a much safer investment.
However, there is currently a considerable debate about the future strength and direction of UK property prices and therefore whether this is a good time to buy your first or, in many cases, a further investment property. This has led an increasing number of investors, encouraged by television programmes such as A place in the sun and No going back, to consider buying a property abroad. Spain, in particular, is currently a popular place to buy a home because of its proximity to the UK, reliable climate, general familiarity and the growing number of flights being introduced from local regional UK airports.
On the continent, property prices are considerably lower than in the UK and still have potential for a good return on investments. European interest rates are also low, especially in the euro zone, making local mortgages particularly attractive.
How much does a typical property cost?
In Spain, prices for a reasonable property in good condition start from as low as £80,000-£100,000. There is a wide variety of property available and on average investors spend around £150,000.
Because most buyers are looking to earn extra cash by letting out their homes during the holiday season, different types of investors are buying in areas that will appeal to different types of tourist. House hunters are buying in places as varied as a simple one-bedroom apartment in a buzzing coastal resort through to a luxury villa on an exclusive development.
What investment return could a buyer expect?
While there are obviously no guarantees, the Spanish property market has seen growth of between 10% and 20% in recent years, sometimes climbing to 40% growth for so called ‘off-plan’ developments
Buying ‘off-plan’ at a new development is becoming increasingly popular. This is where a borrower agrees to buy a property before it has been built, paying an initial registration fee. This is followed by a private sale of agreement within approximately one month when the purchaser is required to pay a deposit of between 10% and 40% depending upon the development. Thereafter, it may be necessary to make monthly or quarterly payments with the balance being paid on completion.
The gap between purchase and completion gives the buyer the flexibility with their finances. At completion a borrower can take out a local mortgage and continue as normal. However, people who have bought purely as an investment often sell their property to avoid paying capital gains tax.
What are the major differences between buying a property in Spain and the UK?
In Spain, the deposit required to secure a property is usually higher, up to 40% for ‘off plan’ developments and 25% for resale properties. As a result, many UK buyers often re-mortgage their UK homes to finance the higher deposits they need, providing advisers with an opportunity to earn additional income by helping them arrange their new loan.
Spanish mortgages tend to have shorter repayment periods of between five and 15 years, so a purchaser should bear this in mind when considering taking out a local loan. As with a UK mortgage, the borrower must be able to prove sufficient income or funds as the amount a Spanish bank will lend depends upon a borrower’s status and the value of the property. The associated costs of buying a property in Spain are slightly more expensive, at around 10% of the sale price and this is to cover items such as deeds, VAT and legal fees.
The legal system in Spain is also very different and it pays to use experienced English speaking lawyers. There are a number who have offices in both the UK and Spain, which helps to improve communications. Lawyers will advise on issues such as surveys, which are not normally carried out, and inheritance laws, which are different.
What fees can an intermediary earn?
Intermediaries are uniquely placed to understand their client’s financial circumstances and can play an important role in providing advice on the various options.
In return for their endeavours intermediaries whose clients purchase a property in Spain should expect to earn commission on a property sale of up to 1.25% of the sale price for new properties and up to 1% of the final price for re-sale properties. In addition, procuration fees on Spanish mortgages are usually around 0.3% of the loan and there should be opportunities to earn extra commission through arranging buildings and contents insurance.
Where can my client find out more information?
Historically, buying a property abroad has been fraught with difficulties and the newspapers were once full of horror stories involving tales of high-pressure timeshare salesmen, property not being up to a good standard and foreign red tape.
Fortunately, most of these problems are a thing of the past and a number of specialist companies have been established to help making purchasing a property much easier. SPAIN (Spanish Property and Investment Network) has been set up by CETA, the UK’s largest general insurance network to provide a one-stop-shop of services to help people buy a property, whether as a dream home or simply as a sound investment. SPAIN’s services are primarily available through financial advisers, mortgage and insurance brokers as investors need good advice from well connected intermediaries to make purchasing a property as easy as possible.