For years the slogan of the Spanish Tourist Board was “Spain Again”. In recent years it could well have been “The Pain in Spain”. Almost everyone will have read or seen somewhere in the media of the massive property price crash in Spain which has affected millions of Spanish people as well as the huge expatriate UK population.
For hundreds of thousands of people there has been a financial tragedy of unprecedented proportions which will affect future generations through the loss of family capital and, because of the unusual Spanish laws on debt, the debt itself. There are however, or there will be very shortly, real opportunities in Spain in property. This might sound unfeasible but do read on. Background is always important before any decisions are taken.
Spain was the last dictatorship in Europe the remnants of which lasted for years after the death of Franco in 1975. As the country emerged into democracy throughout the eighties, many of the structural faults of the old regime were never rectified and when credit began to flow in the nineties new factors emerged which made the current crisis inevitable.
The regions had demanded and got huge amounts of autonomy from Madrid which, in many aspects of commercial, political and social life, made them almost self governing. With only a fledgling democracy local political groups and families used the autonomy granted to run some areas as person fiefdoms . An example of this is Marbella. Famous for the rich and famous it was possibly the best example of what went wrong.
In June 1991 Jesus Gil y Gil a multi millionaire property developer got himself elected Mayor and ran the town for the next ten years. He had formed his own political party and used his vast wealth obtained from shoddy construction projects, one of his hotels collapsed in 1967 killing 58 people, as well as the wealth of South American drug barons and Russian oligarchs to buy votes.
Property deals were used to launder billions of Euros of dirty money and the Costa del Sol became a byword, or three, for open corruption in the granting of planning permissions. By the time the central government came in and arrested him and much of the town council as well as seizing whole marinas, shopping malls and apartment complexes much of the coast had been disfigured . Can’t imagine that happening in Eastbourne!
What happened in Marbella was now kicking off across the rest of Spain. The finance this time came through an old Spanish institution originally set up to assist poorer people in the 19th Century. Cajas, literally boxes, spread throughout Spain in the way that local building societies did throughout Britain in the same period but unlike the societies regulation was lax and stayed that way.
When the Spanish property boom got under way all of the institutions and players were in place for the disaster to unfold.
The two main parties PSOE , roughly Labour and the PP, the equivalent of the Conservatives were still fighting the Spanish Civil War and both ended up with councillors in prison all over the country for various forms of corruption.
Under the guise of local democracy huge power s had been passed down further and further until they reached the local Alcaldes, Mayors. Local building control officers and planning departments owed their jobs to him and nobody was going to rock the boat or kill the goose that was just about to lay.
Local Cajas were awash with money that they had raised on the open market with promises of above average returns and from the South American drug cartels and the Russian and other former Soviet Union mafias using Spain to launder billions of dollars.
A typical scheme would be something like the following.
- You come up with a plan to build a development of several hundred homes on a rustic site of non buildable land. The prospectus that you will put out stresses that there will be a change of use which you have put in to the local council. You set up a limited company, an SL, with the obligatory 3000 Euros in the bank and appoint a notary, solicitor, to do all the negotiating for you.
- You now cut a deal with the local Mayor who, if he already isn’t a relation or friend will be open to a little persuasion. He will nominate a middleman to take his cuts.
- You then use a local architect, preferably someone only just qualified who won’t raise any objections to what is going on. He produces a detailed set of drawings along with a plan for a primary school, shops and a new communications and submits it.
- With planning permission granted due to the Mayor being in on the deal you can now approach the bank. You over estimate the cost of the development by 50% as you claim you are using the best of materials and finishes and the bank coughs up what is in effect a 100% loan. The bank agrees and stage payments are agreed with 30% up front. You are now up and running.
- You now start to sell the properties off plan and for this you will need some hard selling British ex pat wheeler dealers of which there were no shortage up and down the Costas. Potential investors are wined and dined with the local Mayor, shown the site by the architect and put up in a nice local hotel, you can afford it as you have that 30% in advance.
- They sign contracts and pay deposits with you arranging mortgages through the bank with commissions for your good self naturally. With the buyers having got their mortgages the instalments of which are being paid you can now go back to the bank for more of the loan.
- It is now time to get some local builders on site moving earth, putting up flag poles and mixing some concrete, not too much, just enough. In fact you only do anything when you bring around more potential buyers.
- The crucial point in all of this is to know when to fold your tent and steal away in the night. It will depend on when the flow of buyers stop, the bank starts to enquire when you are going to do more work and solicitor’s letters start arriving from the people you have taken deposits off.
- Eventually it is time to allow the bank to repossess the land which they will try to sell off to another developer.
Variations of this scheme have been used time and time again over the last twenty years with hundreds of thousands of people losing everything. A tragedy for those who lost, but there is now a situation where the canny investor can pick up some real bargains. It is always difficult to know exactly when a boom has bottomed out but if the Spanish one hasn’t yet it isn’t far away from it.
Although we have outlined the fraudulent aspect of much of the boom most properties which are for sale are perfectly legal, well built and have had sixty or more per cent wiped off their value in the last five or so years. The trick is to know which ones are the bargains because, once again unlike the UK, even properties which are for sale can carry debts in the form of local taxes as well as gas water and electricity.
Using local estate agents and solicitors Mourne can guide you through the maze of laws and red tape that often ensnare the unwary. Fancy a detached villa with pool, four bedrooms all en suite, double garage and a couple of acres of mature gardens? We have just negotiated one for a client for a little over six hundred thousand Euros that six years ago was on the market for two million! Let us have your preferred areas and price range and through our proven local contact we can show you a selection.
A well selected house with an hour or so of the major airports is still an excellent investment for rental all year around as well as a holiday home for family and friends. Lots of bargains are waiting to be snapped up but as the sergeant said at the beginning of every edition of Hill Street Blues, “Let’s be careful out there”.