How is the Spanish property market looking going into 2020?
The property market in Spain is one of the hottest in the world. In 2018, 65,500 foreigners acquired a home in Spain. That is 1,259 per week non residents buying property here despite the uncertainty with the current Brexit instability. Despite this, 2018 was the 9th consecutive year of increased transactions. We look forward to the 2019 results, but 250 British people per working day buy property in Spain. From 1996 to 2007 the average house prices in Spain rose by 197% yet people kept buying, right up to the time of the global credit crisis
The recession hit badly in 2008. Property prices took a big hit but prices rose by 6% per year over the past 10 years since the bust.
Prices are in many areas ⅓ below the highs of 2008, and there is still some terrific value around. The figures are thanks to Tinsa, the trusted valuation company, and the INE, (Instituto Nacional De Estadistica).
Sales of property across Spain could reach 650,000 units this year* with increase nationally in the region of 7%. (*Tinsa).
How does an investor benefit from bare ownership?
Bare Ownership involves owners of property in Spain selling their homes for large discounts in exchange for a lifetime lease, or usufructo.
Sellers own the legal right to stay in the property rent-free until the end of their lives. Investors buy houses from elderly people in the knowledge that they may only live there for 10 or 15 years. The age expectancy in Spain is currently around 83.
We have a large pool of clients who bought property from my company up to 20 years ago. Their circumstances have changed. Their pension doesn’t go as far as it did. They can no longer work that part time job and maybe their medical costs are increasing. The best part for us is that they trust us. We can offer them a way to free up some cash, and they never need to leave their home.
Again though, the investor is a big winner. He or she gets a property with a discount, somewhere between 40-60%.
They sign the deeds now and they are the full owner of the property as soon as they hand over the money.
The investor doesn’t pay income tax as they are not receiving rental return.
They do not deal with property management companies, they have little or no maintenance to pay. They don’t suffer from an empty property or a tenant refusing to pay the rent. Simply they get the keys in their hand when the usufructo owner passes away.
Some guarantees that our Equity release investors will enjoy.
Are you looking to invest in a bricks and mortar deal in Spain without the obvious stress and strain that goes along with it?
Here at SpanishEquityRelease.Solutions we must ensure that our clients are happy with their investment. The includes yield, tax implications, protection for the client etc.
Here are some questions our investors have asked us.
- Is this investment product registered with any Spanish state agency?
All property purchases are done through the notary and included in the Spanish land registry. You will be the real owner of the properties you purchase.
- Who are the key people in the investment fund?
Ian Comaskey, www.spanishsolutions.net is the head of the investment fund. Ian has, in a previous business incarnation, worked as an estate agent in Spain for over 15 years. His company Comaskey Properties was one of the success stories in the sector since 2002, selling literally thousands of properties to a broad spectrum of buyers over the years.
Market research conducted by Ian’s company clearly shows the existence of a ready made but, as yet, untapped market for the roll out of Usufructo. The possibility of circa 1,000 vendors in the first year of the investment cycle is easily envisaged.
Our barrister, Pedro Molina Lopez (associate number 1156) and Lourdes Lopez Oller (1156) are part of Molina solicitors firm in Punta Prima and appear on the list of recommended lawyers from the British consulate.
Our investors will largely be represented by Garrigues, in Alicante. https://www.garrigues.com/en_GB
Clients can use their own legal representation too of course, but we know that our legal team knows bare ownership, investing, tax and the law in Spain.
Here is a selection of the awards won by Garrigues in 2019 alone.
- INNOVATION IN LEGAL EXPERTISE: CREATING A NEW STANDARD FT European Innovative Lawyers Awards 2019
- GOLD AWARD FOR BEST LATIN AMERICAN LAW FIRM Leaders League 2019
- BEST ENERGY LAW FIRM
- BEST REAL ESTATE LAW FIRM
- MOST INNOVATIVE PROJECT: GARRIGUES WORK APP
- BEST YOUNG LAWYER
- BEST TRANSACTION: SALE OF A 20% HOLDING IN GAS NATURAL TO CVC IV Edición de los Premios Jurídicos de Expansión 2019
- TRANSATLANTIC INDEPENDENT LAW FIRM OF THE YEAR Transatlantic Legal Awards – The American Lawyer
- GARRIGUES TAX FIRM OF THE YEAR IN SPAIN AND PORTUGAL International Tax Review 2019
- FIRMA DE PERÚ MÁS INNOVADORA
- FIRMA DEL AÑO EN MERCADO DE CAPITALES PARA LA REGIÓN DE LOS ANDES International Financial Law Review (IFLR) 2019
- BANKING AND FINANCE DEAL OF THE YEAR: METRO DE BOGOTÁ Latin Lawyer’s Deals of the Year Awards 2019
- MEJOR DESPACHO EN DERECHO TRIBUTARIO DE ESPAÑA Chambers Spain Awards
- LATIN AMERICAN LOCAL LEGAL ADVISER OF THE YEAR IJGlobal Awards 2019
- BEST STRATEGY IMPLEMENTATION’: GARRIGUES INNOVATION THINK TANK Managing Partners’ Forum Awards 2019
- ANDES: PROJECT FINANCE DEAL OF THE YEAR: CONCESIÓN TRANSVERSAL DEL SISGA Bonds & Loans Latin America Deals of the Year 2019
- IP LAW FIRM OF THE YEAR: PORTUGAL Global IP Awards
- LAW FIRM OF THE YEAR: ANDES LatinFinance Deals of the Year Awards
- LEVERAGED FINANCE DEAL OF THE YEAR: INRETAIL (PERU) Bonds & Loans Latin America Deals of the Year
- Why is this investment suitable for me?
This investment is not for everyone. Are you buying a place in Spain to come here for holidays every summer? Are you moving to Spain and looking for a cheap house? Do you need a rental return to justify spending this sort of money? If so, we can help you of course, but bare ownership is not for you.
Bare Ownership investing is for people who understand the real estate business, ideally already owning investment property in Spain and or abroad. This is not a short term investment, as on average it takes 13 years for the major appreciation to be realised and the usufructo to expire.
- Describe your typical client.
Generally, our investors are in it for the medium to long term. It is true that the usufructo owner can pass away very early in the process. It is envisaged that the initial investment would remain “locked in” to the investment fund for a minimum period of 5 years. This will allow the portfolio/Fund to acquire properties and for some investments to crystallise. Given that the average age of the target cohort will be 65, the investment cycle will be structured over 5, 10 and 15 years with corresponding rates of return on the initial investment.
- How will this investment make money? Specifically, what must happen for this investment to increase in value?
Two things need to happen, Spain needs to continue to be one of the most visited countries in the world. The owner needs to pass away or no longer be able to live in the property. You can sell your portfolio at any time, of course the longer you wait the more money you earn.
- What are the fees to purchase, maintain, and sell this investment vehicle? How can I reduce or avoid some of the fees that I’ll pay? After the fees are paid, how much does this investment have to appreciate in order for me to earn money?
In addition to the initial capital outlay in acquiring properties, stamp duty is payable at the inward stage of the investment (approx 10%) and capital gains tax (CGT) at the outward stage of the investment. These taxes cannot be avoided by the use of offshore structures or other tax planning measures. CGT will be charged at the rate at that particular time. It is levied at an average of 20% currently. This gain is worked out only after maintenance, commissions, maintenance, legal and taxation advisors fees, notary costs, bank interest etc has been deducted.
- How long has the Spanish Equity Release. Solutions company been in business? Is the company management experienced? Have management been successful in Spain in the past?
Ian Comaskey started to trade in Spain in 2002. In the first year of business, they sold 100 properties, and over the next 15 years sold 525,000,000 million euro to investors from Ireland, the UK, China, Russia and Europe.
- Where can I get more information about this type of investment?
The nature of the investment is based on the Spanish legal doctrine of Usufructo which is the equivalent of a life-rent interest for the occupants of the property. The concept of Usufructo is a very common right of property in Spain (derechos reales) and is governed by the Spanish Civil Code. (See Article 467). The Usufructo operates to provide an individual (Usufructario) with the right to occupy a property for the rest of their lives. In effect, the previous owners enjoy the fruits of ownership without having legal title. The Usufructario who benefits from the Usufructo is not the owner of the property and therefore the use and enjoyment of the property only lasts for as long as the Usufructario is alive. When the vendor sells to the investor he becomes a “ nudo proprietario“ or naked owner and is entitled to grant a Usufructo to the previous owners who may “ use and reap the proceeds from another’s property with the obligation to preserve its form and substance”.
- Do SpanishEquityRelease.Solutions assess the seller, and why?
Given the fact that the success of the investment fund relies entirely on the eventual demise of the vendor, the cohort will be carefully assessed for factors such as age, health, lifestyle, social habits and general well-being. This assessment will be carried out at the pre-contract stage by a physician qualified to practice medicine in Spain.
- Where can I get an independent evaluation of this portfolio?
Of course you are very welcome to ask an estate agent to value the property you may be buying. Our valuations are accurate and we are happy to put this is writing and have it added to the contract for your peace of mind.
- What specific risks are associated with this type of fund or investment?
In 2008 the world wide credit crunch caused 66% to be wiped off the value of the Spanish property market. Less than half of this loss have been recouped meaning we do not see it likely that a drop in the value of real estate in Spain is around the corner. However our investors are buying with discounts of up to 40%. The market would need to slip back to values not seen since the 90’s for the value of a property bought now to drop below this amount. Not one expert we know of has predicted such a drop.
Here are some predictions from trusted investors.
- What type of security does the fund hold?
The security of the fund is in the very property itself. You will have a set of deeds listing you as the owner of the property. The only lien on the property is the fact that you have an usufructuario with a right to live there.
- What happens is the occupant become unwell?
Given the nature of the legal construct of the Usufructo, the Usufructario may only enjoy the fruits of the Usufructo for as long as they occupy the property. Therefore, in the event that the Usufructario is no longer able to enjoy the fruits of the Usufructo by reason of physical or mental impairment and requires to move to say hospital, a nursing home or similar facility, then the Usufructo terminates. Typically, this will be after a suitable period of time after which it can be shown that the Usufructo will not be able to return to the property.
In this event, the entire property reverts to the investor free of any encumbrance and can be sold on the open market or leased out. If sold, the free proceeds can be used to purchase other properties, reinvested in the investment fund or the investor can elect to take a return.
- What ongoing fees are charged? How much will the fund charge me if I sell shares?
We charge 2% pa management fee. Typical fees in Spain for more active management are 10-15%. We have no daily work to do as we don’t have turnover of tenants, normal maintenance issues etc to take care of.
When you sell the property portfolio, we charge a % of the profit. This charge is generally 5%, excluding normal real estate charges paid to a third party company.
Example, you buy a bare ownership property for 50,000 and a current value of 95,000 euro. On maturity of the investment, the property is selling for 150,000 euro. We charge you a fee of 5%. The selling agent you choose will charge you additionally for the service of securing you a buyer, however usually these costs can be absorbed by the buyer, not you. We will negotiate this on your behalf when the time comes.
How do I calculate the value of an usufructo for tax reasons?
Knowing the value of the usufructo will help you to find out how much tax you’ll pay when buying the property.
Usufructo value is calculated like this:
We use the number 89 as a base then reduce the owners age.
So, in the case of a 69 year old owner, it works like this;
89-69 =20. We turn that into a %.
The property is valued at 200,000 so 20% of the value of the property is 40,000 euro.
The buyer pays taxes on the figure of 200,000 minus the usufructo value, so they base their taxes on 160,000 euro.
Is the fund portable? Can I move my assets to another firm?
Not really. We trust our own property management team, or legal and tax experts. It is possible to buy Bare Ownership property in Spain from another agent, or allow another agent to manage it but we are reluctant to allow either our sellers or buyers to try something new. What we use is a tried and tested method and we cannot see any reason why a client would not want to continue working with us.
What is CGT payable on exactly?
We recommend that all investors speak to our taxation experts, Garrigues, Alicante.
However, as a rule of thumb, if the acquisition value is 60% of current market value and in say, 5 years, the property is sold at full market value, the CGT is payable on the difference between actual acquisition value and eventual selling price.
Regardless of the value, if you buy a bare ownership property for 100,000 euro and later sell it for 400,000 you pay cgt on 300,000 euro less expenses, legal fees, some maintenance, insurance, repairs etc. Of course in this case, you will have made a good return. Capital gains tax in 2019 is between 19-24%.
How frequently do I get statements of progress? Will I understand what the statement tells me?
Let’s say that you buy a property portfolio worth 1,000,000 euro consisting of ten Spanish properties. Every year we will send you a statement telling you of any movements in the market, any change to the circumstances of the usufructo owner, any requests from the usufructuario etc.
Do you inspect the properties yearly?
The properties will be subject to an annual inspection in order to monitor the fabric of the building and the general overall condition. Whilst the investor as owner will remain liable for repairs to the fabric of the premises, the occupants will be responsible for minor repairs, appliance replacement, décor and the payment of all local taxes, charges and utilities. The occupants are obliged to take care of the property and not to cause any damage to the property.
Why should i consider euro cost averaging?
Through the investment strategy known as euro cost averaging, you can protect yourself from fluctuations in the Spanish property market. Let’s say you buy two properties/ month over a 24 month period, by following a consistent pattern of adding new money to your investment, you greatly reduce any risk. The making of regular investments with more or less the same amount of money each time will buy more of an investment (ie more property) when its price is low and less property when its price is high. This is true especially in a volatile market, and although we think the market here is rock solid, perhaps it is worth considering for you personal circumstances.
What’s the most attractive aspect for investors?
The really attractive aspect to me is that the investment life cycles can stretch from between 5-25 years but with a bit of paid for actuarial advice, the actual ROCE can be predicted with a high degree of accuracy.
To give potential investors the joint comfort of a relatively certain ROCE amount and within a reasonably predictable time frame has to be a winner. The cherry on the top is the level of that return which dwarfs anything available from the equities or gilts markets and has the added benefit of the investment asset is tangible.
Barring wild swings in adverse property prices, the investment is essentially low risk but high return.
It is true that a big issue for any investor or lender is the illiquid nature of the asset which cannot be sold until an uncertain date in the future. However, with proper and accurate vendor profiling the risk can be managed and reduced here.