Spanish property prices fell just 3.7% over 12 months to the end of June, say the latest figures from the Ministry of Housing. The Ministry’s figures are so detached from reality they can usually be ignored, but this time I decided to delve, a bit deeper and found out that we can learn something from them, even if they are not the gospel truth.

Average national prices fell just 3.7% over 12 months, and just 0.9% between Q1 and Q2, say the figures, leaving the average price of Spanish property today at 1,849 €/m2.

As usual, there were considerable regional variations, as illustrated in the following table of selected regions (popular holiday-home regions highlighted in blue). Prices fell the most in holiday home regions like the Canaries (-7.2%) and Malaga / Costa del Sol (-5.8%).

I always slag off the Ministry of Housing figure’s for failing to capture the true extent of the bust. But if you compare latest prices with peak prices for selected regions, you can see that even these dodgy figures show falls of 18% in Malaga, 17% in Alicante (Costa Blanca) and Las Palmas, and 16% in Murcia. These are not insignificant falls, though in reality they are probably up to twice as big.

And if you turn the figures into an index with Q1 2000 as 100, you see that 1) prices are back to where they were around the start of 2006, four and a half years ago and 2) in real terms (after adjusting for inflation), prices are only 70% higher than there were a decade ago, and falling.

That said, you can also see that the big surge in prices took place in the 4 years leading up to 2006, so there are still plenty of capital gains on the table to give up, if the Ministry’s figures are to be believed.

Excluding social housing, there were a total of 33,632 house sales in March, up 8.2% compared to the same month last year. Good, but disappointing after February, when sales rose 16% over 12 months.

Year-on-year, the real estate market has grown for 3 consecutive months, suggesting a timid recovery in sales is underway. But month-on-month, sales fell 6% in March, down from 35,720 in February, We need a few more months to see if a clear trend towards growth is emerging.

And compared to March 2007, the market is still 50% smaller, so any talk of a recovery has to be understood in the context of a massive drop from peak-to-present.

And for the first time in more than a year, resales outnumbered sales of newly built homes, as they should do in a normal market.

There were 19,212 resales in March, compared to 18,349 new home sales. Resales have surged 26% over 12 months (but fell 2% compared to February), whilst sales of new homes fell 6.5% year-on-year (and by 14% month-on-month).

I have been warning for some time that new home sales might fall off a cliff once off-plan sales commitments made in happier times are completed. If new home sales keep falling, as I expect they will, it is unlikely that resales will increase enough to keep the overall market from shrinking again.

The buyers are also worried they may lose all their money – in some cases the bulk of their life’s savings – if the promoter goes bust like hundreds of other Spanish developers in recent times.

Off-plan buyers at Corvera Golf have paid deposits and stage payments of up to 200,000 Euros for homes costing between 190,000 and 550,000 Euros. Irwin Mitchell, the solicitor representing them, believe that more than 100 British clients could be affected by Calidona’s alleged financial troubles and failure to deliver on spec.

Breach of contract

Irwin Mitchell argue the promoter is in breach of contract for not having built luxury facilities that were promised at the time of sale, for example “a five star hotel, in-door swimming pool, spa, medical centre, equestrian centre, leisure facilities and tennis courts, as well as a commercial centre with bars, restaurant and shops.”

“The group claim that none of the five star leisure facilities have been built, and that they are now being chased for final payment and face the threat of being sued under Spanish law by the developers Corvera Golf and Country Club, SL, despite being informed that building licences are not even in place for some facilities,” explain Irwin Mitchell.

“And to add to their concerns, they also fear that the failure to build the facilities on this and on a previous site, Roda Golf, is a sign that the developers have run out of money and may go bust, taking the group’s hard-earned money with them.”

Solicitor Alex Radford, from Irwin Mitchell Abogados in Malaga – the Spanish arm of UK law firm Irwin Mitchell – said the issue was of increasing concern to a growing number of people who had committed hard-earned money in Corvera, and who travelled to the emergency meeting in Birmingham from across the country.

Radford said: “This is obviously a very worrying time for all of these people. Buying a property in Spain is a big decision. These people have worked hard to earn the money to buy these homes and saved for a very long time. To pay out this money was a decision they would not have taken lightly.

“Misled by the developers”

“Having done that, quite rightly, they expect to receive what they have paid for. They have been promised five star facilities to go with their homes, and they have been very badly let down indeed. Clearly they have been misled by the developers, and we want to get justice for them.

“These people want their money back or all the facilities they were promised to be built – it really is as simple as that. We believe the developers are in a breach of contract because of the lack of facilities that they said they would build when they first sold homes to our clients and a large number of other people who have also invested hard-earned money in a deal the developers haven’t honoured.”

What is the plusvalia tax in Spain?

The plusvalía is a local (municipal) tax charged by the town hall on properties when they are sold. It is calculated on the rateable value of property and the number of years that have passed since the property was last changed hands. The objective is to tax the increase in the value of the land on which the property stands, some of which is due to improvements to the area carried out by the local government and the community at large.

The base for this tax is the valor catastral (an administrative value that is usually lower than the market value, sometimes considerably so) of the property. The amount due in tax will depend on how long the seller has owned the property: the longer the period, the higher the amount of tax.

Who pays the plusvalia tax in Spain?

In theory the vendor, though the issue is open to negotiation. During the boom, when vendors had all the negotiating power, it was reasonably common for buyers to agree to pay it, especially in areas like Andalucia. Now that the boom has turned to bust, any vendor lucky enough to find a buyer is going to have to pay the plusvalía.

How do you pay the plusvalia tax in Spain?

You have 30 days from the date of sale to pay the plusvalia to the town hall.

If you are non-resident, the buyer may insist on withholding funds to pay the plusvalía on your behalf, as the new owner would become liable for the plusvalía in the event of non-payment (i.e. if a non- resident does a runner without paying).

For more information and forum discussions see the plusvalia tax guide at Spanish Property Insight

If the Spanish tax authorities consider a vendor non-resident in Spain for tax purposes, the buyer has to withhold 3% of the sale price to cover the vendor’s tax liabilities resulting from the sale. The taxman wants the money in case the vendor does a runner without paying his taxes, something that almost all non-resident vendors have done in the past.

Various terms in English and Spanish are used to identify this procedure. In Spanish it is known as the ‘retención (sobre la venta de inmuebles) a cuenta del impuesto de la renta de los no-residentes’, whilst in English it is referred to as the capital gains tax retention on property sales. Some people also talk about a withholding tax (no strictly true) or money withheld, deducted, or kept back on a property sale in Spain.

The tax in question is the vendor’s capital gains tax, which has to be declared in his or her annual income tax returns (known in Spain as La Renta), and is taxed at 18%. Non-residents used to be taxed on capital gains at 25% but this was reduced to 18% as of 01/01/08.

This retention does not cover the vendor’s ‘plusvalia’ tax liability, which is paid to the town hall and is a separate matter.

After the sale, the buyer has one month from the date of sale to pay the 3% retention to the local tax office using the form (modelo) 211. A copy of the submitted form should then be given to the vendor or his lawyer, so a refund can be claimed.

If the vendor believes he is owed a refund (that the tax liability is less than the 3% retention), he has 3 months to present form 212 requesting a refund. This step is done at the local tax office (delegación de hacienda).

If a refund is due, how long does it take? It depends upon the tax office; some are quicker than others. In theory it shouldn’t take more than a few months, though some people report it taking up to 16 months.

Be warned that if there are any minor errors in the documentation the tax authorities will jump on them as a reason to delay any refund. So make sure all the information in your 212 reclaim form is correct.

In an increasing number of cases, perhaps a majority of cases, the vendor’s tax liability is greater than the retention. What then? Depending upon the size of the liability, the Spanish taxman may try and come after you for it back home.

So, for example, if a British person living in London sells a holiday home in Spain for 200,000 Euros, the vendor will retain 6,000 Euros and pay it to the tax office. Say the vendor originally bought the home for 100,000 Euros, meaning a capital gain of 100,000 Euros, and a capital gains tax of something in the region of 18,000 Euros (there will be some relief for inflation). In this case the vendor will not be entitled to a refund, and may be pursued for 12,000 Euros back home by the Spanish taxman.

But if you don’t hear from them within 4 years you know you’re safe, as that is the legal deadline for the tax authorities to take action.

Note: This issue only applies to vendors who are considered non-resident by the Spanish tax authorities, i.e. fiscal non-residents. To be considered a fiscal resident you have to get a certificate from the tax office (hacienda) certifying that you are a fiscal resident. You will get this if you have been doing tax returns (declaración de la renta) for several years. Do not make the mistake of thinking you are fiscally resident just because you have an NIE number, or once had a residency card (tarjeta de la residencia). A notary will only accept a certificate from the tax office.

For more information and forum discussions see the Spanish capital gains tax retention at Spanish Property Insight

Murcia-based Polaris World, the biggest holiday property developer in Spain, last night reached a deal with its banking creditors just before a deadline that would have forced the company to seek court protection from its creditors. The sticking point that held up an agreement was how the value Polaris World’s assets in Murcia such as land.

After 4 months of teetering on the brink of bankruptcy, Polaris World convinced 4 of its lenders – CAM, Bancaja, Banco Popular and Banco de Valencia – to buy finished homes, golf courses, land, and hotels, in return for 83 million Euros, giving the developer a much needed shot of liquidity that it hopes will tide it over until the market picks up.

The Spanish press reports that signs of economic recovery in the UK and Germany suggest that a recovery in holiday home sales will not be far behind.

This is the second time in less than a year that Polaris World has avoided bankruptcy proceedings. Las autumn it negotiated a 900 million Euros debt-for-land exchange with its banking creditors. As a result its creditors now have to work out what to do with 6 million square metres of land in Alhama, Murcia.

PW was founded in 2001 by local builders Pedro García Meroño and Facundo Armero. Armero sold out to Credit Suisse in 2006 for 500 million Euros. Meroño is now the largest shareholder, and José Luis Hernández is the company president.

PW has 7 golf developments in Murcia: Mar Menor Golf Resort, La Torre Golf Resort, El Valle Golf Resort, Hacienda Riquelme, Condado de Alhama, La Loma Golf Resort and Las Terrazas. At the top of the boom its turnover was more than 800 million Euros, with more than 2,000 employees (now down to 700 or less).

Setting aside the clients and contractors suffering as a result of the company’s financial problems, the big losers in this drama are the banks and cajas who lent the company money. All told they have agreed to swap more than a billion Euros of debt in return for assets of dubious value such as land in the Murcian back of beyond.

As a result, the average asking price of real estate in Spain finished March at 2,387€/m2, with wide variations between regions. The Basque Country has the most expensive property (3,482€/m2), followed by Madrid (€3,282/m2) and Catalonia (2,828€/m2). Regions at the other extreme, with the cheapest property, are Extremadura (1,437€/m2), Murcia (1,506€/m2) and Castilla-La Mancha (1,627€/m2).

Changes in resale asking prices are an important market indicator, as vendors tend to raise or drop their asking prices in response to demand. Nevertheless, they are not an accurate guide to transaction prices, as many vendors are still asking unrealistic prices.

Crisis not over

Asking prices have fallen by more in the past, but Idealista warn that “nobody with the slightest knowledge of the real estate market would dare to speak of stabilisation or suggest that prices might rise, much less a bounce back in prices or a return to the ‘boom’ that drove prices above any reasonable analysis.

“The factors the caused the real estate bubble to burst and that pointed towards price falls are still in place: over-supply, tightening credit conditions, and rising unemployment.”

Real estate prices rose on a quarterly basis in three regions: The Balearics (+0.5%), Asturias (+0.1%), and Cantabria (+0.1%). Prices fell in all other regions, the most in Navarre (-2.7%) and Castilla-La Mancha (-2.4%).

Cajas in Spain tend to be controlled by local politicians and their cronies. So forget the ‘efficient allocation of capital’, cajas in Spain are mainly about the pursuit of political goals and patronage. That is why they lent to real estate promoters in the boom with such alacrity; in the short term it meant more jobs, thus more votes for the incumbents (not to mention back scratching between developers and politicians). As a result the cajas are massively over-exposed to the Spanish property sector.

Now the chickens are coming home to roost. The loans are turning bad, whilst the real estate collateral is under water and sinking fast, so the cajas can’t liquidate to recoup their loans without a severe haircut.

At some point the cajas might have to start dumping real estate assets at whatever price they can get, just to scrape together some cash. Let’s hope not all at the same time, which would just drive prices down even further, in a classic downward spiral.

So thanks to reckless and politically-driven lending during the boom, the fate of the cajas is inextricably bound up with the property market. That means there may be a lot more distressed property in the pipeline, depending on how the cajas weather the storm.

If the figures are good, Muñoz has reason to be positive. A report from Marbella’s tax office shows there were 2,499 real estate sales in the first 3 months of this year, a rise of more than 200% compared to the same period last year. Look a bit further back and it appears the first quarter of this year was the best by far in the last 4 years.

Year – Sales in first quarter
2010 – 2,499
2009 – 820
2008 – 1,263
2007 – 1,602
2006 – 1,224

If correct, the figures show the market has improved by 100% compared even to the first quarter of 2006, before the ‘Malaya’ corruption scandal exploded, when the market was still relatively buoyant, just starting to come off the boil.

Does that make sense? Some argue it might be the increase in VAT in July bringing sales forward, but I doubt it. So have Marbella real estate prices dropped, and confidence returned enough to give the market such a big push? Well, I hope so, but I have to say it took me by surprise. I’d heard that there was some improvement, but nothing like this. It makes me wonder.

Ángeles Muñoz, on the other hand, has no doubts. As you would expect she is using the figures to vindicate her policies, saying that Marbella will be “first out of the crisis,” in a message aimed at local and international investors.

Marbella’s new town-plan is also helping. It comes into effect this month, legalises 16,000 properties, and enables owners to “sell, mortgage, swap or use as an asset,” homes that have been frozen out of the market for years, says Muñoz.

“First you have the residential units that have been completed and are empty but close to major cities,” explains Stephen Newman, chairman of property services group Aguirre Newman in Madrid. “With these, it’s simply a question of patience and price adjustment and within 18 months to three years most of that stock will have been absorbed.

“Then you have the second category of residential units that have been completed in what are probably absurd locations – these properties represent a major headache for the banks which are forced to take them on.”

The article doesn’t say it, but many of the properties in “absurd locations” were built as holiday homes. For example golf projects in the middle of nowhere in Murcia, or those enormous blocks of flats you see on the wrong side of the motorway on the Costa del Sol.

Land is the third category, with “sharply differing value according to zoning classification, location and state of readiness for development,” says the article.

No joke. What many people don’t know is that, during the boom, the real game in Spain was land, not all those off-plan flats that ordinary punters invested in. Fortunes were made gambling with land, and many corrupt politicians stuffed their pockets in the process. But now the boom has turned to dust, land values in many areas have collapsed, and the banks are left holding the baby. Prime building land in places like Madrid, Barcelona, and the best coastal spots, still has a market, but much of the land bank is simply worthless.

On the subject of land, the government is throwing the banks a lifeline this week by extending the period developers and banks can hold land before it reverts to a rural classification. Thanks to the new rule, introduced this week by executive decree, then can now hold land for 3 years more without developing it, and without it being reclassified as rural land. That gives banks a total of 6 years before they are forced to take the hit and value land as rural rather than urbanisable.

Back to the glut and what will become of it, another expert makes the same point that the market needs to be segmented. “There is a tendency to think that there is a big problem of oversupply,” says Frédéric Mangeant, head of Knight Frank in Madrid. “This is true, but not in all zones and all categories.” He also told the FT that “developers have begun dusting off plans for small upscale housing estates on the capital’s periphery,” suggesting that the residential constructions sector is starting to see some green shoots.

Second home market bouncing back?

The article also claims that foreign demand for holiday homes is coming back to life. “On Spain’s overbuilt Mediterranean coast, heavy price reductions have also started to revive interest among Britons and other northern Europeans looking for holiday homes or second residences.”

Is this true? Well, I can see that the market is not dead in some segments and areas. But make no mistake, the mass market is still in deep trouble. I’m working on some detailed sector research so I’ll be able to tell you more in a few months’ time.

The article also reports that “Second-hand homes in sought-after areas around the country have also resisted sharp price corrections,” according to property agents. That depends how you define “sharp price corrections”. I consider an average of 25% peak-to-present in popular areas pretty sharp. To the best of my knowledge, prime holiday home prices have fallen by at least that much since the peak. I’m talking about transaction prices, not asking prices.