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There may be more pain than gain in Spanish property.

(Telegraph)

Jenny Knight explains why some Britons investing in holiday homes are facing problems when they want to sell

Second home buyers seeking a place in the sun have helped to send prices in Spanish hot spots soaring over the past five years.

Many have made a packet from newly-built flats in popular coastal areas where prices have been rising by between 10 per cent and 20 per cent a year.

But there are now signs that many of the latest batch of investors are about to get their fingers burned. Prices in some high-density areas are falling and second-home buyers are turning increasingly to the cheaper markets in eastern Europe.

Peter Robinson of Homes Overseas, says: "Our best guesstimate is that 65,000 Britons buy abroad each year. Two years ago, 55 per cent of those wanted to buy in Spain but, by the end of last year, this percentage dropped to 43 per cent, as people turned to Turkey, Croatia, Bulgaria, Slovenia and Cyprus."

Spain has more than one type of property market. Prices in inland areas remain fairly stable as they do not tend to attract British, German or Swedish buyers. In other areas, where the Spanish are competing with overseas buyers, prices can be on a par with London but, as yet, markets have been holding up well.

On the Costas, however, where up to 30,000 Brits buy each year - particularly on the Costa del Sol - things are looking grim. The worst hit are people who put down deposits before properties are built with the aim of selling at a profit when construction is complete, typically between 18 months and two years later.

To make the most money, these "off-plan" investors aim to sell before completion, thus avoiding extra fees typically worth 10 per cent of the sale price. "Lots of investors have bought two, three, four, five and even more flats off-plan, aiming to sell before completing," says Barbara Wood of The Property Finders agency.

"But there's an oversupply of two-bed, two-bath apartments and prices are already coming down. Now many people are servicing mortgages they never expected to have to take out.

"The worst-hit are those who remortgaged their UK property to raise the money for the deposit. We know owners who turned down offers last summer that were 20 per cent higher than they're now having to consider. I think most people will get out with their faces clean, but only just.

"People who try to let these properties face the extra expense of furnishings, plus intense competition in the oversupplied Costa del Sol rental market. Where they might previously have expected €1,000 (£690) a week for two two-bed, two-bath flats, a lot remained unlet last year at that price, even in the peak July and August market."

Robinson says: "So many new developments have been built in Spain and sold to off-plan speculators that the profits are no longer there. The system only works so long as there are still people to buy the flats. A lot of speculators are now desperate to offload unwanted properties."

Homes Overseas calculates that about 1 million Britons have properties in Spain, about half of whom live there permanently. According to the most recent statistics, the average amount British buyers are now looking to spend is £160,380, which will buy very little in the most sought-after areas.

"City centres like Barcelona or Parma, Majorca, are top destinations," says Wood. "They're rich in culture and properties are still being renovated. A one-bed flat in Barcelona costs about €250,000 (£178,000). You could get a beautifully refurbished two bedroom flat in a palace for that money in Seville, which is becoming increasingly popular with Spanish second home buyers."

Sadly, many Brits take much less care when buying abroad than at home, it seems. They do less research, swallow blandishments from developers and fail to check rental returns and resale values.

Higher-priced properties in more exclusive neighbourhoods have a better record for maintaining value in slumps, but this market starts at too steep a price for many secondhome hunters from Britain.

John Sherry of Knight Frank's Malaga office says: "My feeling is that investors have had a little bit of wool pulled over their eyes. They buy products off plan at €130,000 to €200,000, and expect the price to have risen by 20 per cent or so before completion in 18 months' time. But the market in that price range is becoming saturated.

"We see a lot of advertisements with private telephone numbers as investors try to sell their flats, while developers are offering the same properties off-plan in the fifth phase of the development. There is now such a huge number of these products around that those in a hurry to sell will have to accept lower prices."

Potential buyers are advised to steer clear of high density areas. Places like Torrevieja, south of Alicante, are particularly tricky, with a large number of houses already available for rent or sale, he says.

"Too many people park their brains at Luton Airport. They arrive and fall in love with the weather, the palm trees, the turquoise water and don't use common sense. A flat with small north-facing windows looking out on the road rather than the sea is likely to be difficult to sell or rent."

"Prices in bits of the Costa del Sol and the Costa Blanca may come down," says Xavier Wiggins of NewSkys.co.uk, a property search site. Developers may start cutting prices in the face of tougher competition, with more people negotiating on price.

“This will leave those who bought at higher prices in difficulties if they want to sell," he says. "It's no longer a good idea to buy off-plan and sell before completion, although there are still bargains if you're cautious and do some homework. People who are still keen to buy off plan should commit only to developments where the builder offers a buy-back guarantee at an increased price.

However, Wiggins adds: "Although prices may suffer in the short-term, my feeling is that Spain is a far safer bet in the long term than the cheaper markets emerging in countries such as Bulgaria and Croatia."

Like Wood, Robinson reckons that most Brits now frantically seeking buyers should still come out even. "Our impression is that Spain is recovering its popularity after a fall last year," he says. "It has the infrastructure and the ‘Little Britain' facilities that lots of people look for."

Prices in areas of other Western European countries popular with British homebuyers can also be more dependent on the international property market rather than from the indigenous population. Prices in areas favoured by foreigners can be more volatile because overseas buyers are more likely to take profits and sell than the full-time residents.

In South West France, for instance, buying activity in 2004 fell by 30 per cent. According to Knight Frank, second-home buyers make up about 40 per cent of the market in the Gascony region of France, while buyers from the UK and other northern European countries provide the majority of demand for the Tuscany region of Italy.

"Northern Europeans, predominantly British buyers, dominate the market," says Knight Frank. "Availability has risen over the year as there is a feeling that prices have peaked and that it's therefore a good time to sell. This has depressed prices."

However, Knight Frank insists that UK demand remains solid and, although German demand has fallen off, this has been balanced by increased demand from Italians buying second homes.

"What's new in France is that a lot of investors are now buying two properties rather than one," says Mike Boles, of Savills Private Finance. "But these tend to be for investment purposes rather than speculation, with buyers planning to hang on to the properties for the long-term. The French property market is mature and stable, although not as liquid as in the UK.
 

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By Mary Antonescu