Ecovis Spain - Real Estate: A good opportunity for foreign investors
The market for real estate in coastal locations in Spain is again growing significantly
The market for real estate in coastal locations in Spain is again growing significantly after the big crisis in recent years. Until approximately 2008, the Spanish real estate market had been “suffering” one of the greatest price bubbles in a world which was full of them at the time, with significant yearly increases in pricing. Then, as bubbles tend to do, the market imploded. Coastal residences were one of the segments most affected, as they were not a first necessity for many buyers who tended to concentrate on paying the credit for their first residence and to sell off the recently acquired second residences. Prices plummeted by over 50% in many locations, a lot of promotions were abandoned as real estate firms started going bankrupt and the market for this kind of property suffered a very serious set-back. The problem was not only one of price, but also of lack of demand. Properties simply remained on the market for months or years, without a buyer, even at very low prices.
Good reasons to invest in Spanish real estate now
Since the worst years of the crisis, many things have changed, increasing the pressure on the demand for coastal residences.
First, the Spanish economy is growing again. This year GDP will grow by approximately 3% or even more, one of the highest growth rates among the bigger countries of the European Union. This has increased the possibility of a short term hike in the prices in real estate. To date, however, this has not yet fully materialised as Spanish investors, especially in real estate, are still licking their wounds after the debacle of recent years.
Second, due to the many crises in the Mediterranean region, which are general knowledge (political problems in Turkey, Greek implosion, Egyptian regime, instability in Tunisia, etc.), Spain appears to be one of the most stable countries in the region. As the Mediterranean region has traditionally been a destination for Central and Northern European tourists due to its climate conditions and the tourist infrastructure, this has allowed the Spanish tourism industry to grow at record rates. There has been an unprecedented rise in the number of tourists coming to Spain, with increases close to 10% in terms of arrivals, nights spent, income spent and all the other statistics provided by the tourism industry. Spain now ranks third in the world as regards the number of visitors, fighting for second place. Add to this a healthy interior market, as, for example, the biggest metropolitan area in the country, Madrid, with its millions of inhabitants, has no coast. As tourism grows, so of course does the demand for accommodation.
Third, the economic conditions for investors in real estate remain very favourable. Prices have not yet risen significantly so there are still bargains to be had. The prices in metropolitan areas are starting to see noticeable increases, but this is not yet the case in most sun and beach markets. Many banks still hold a very significant portfolio of properties acquired during the crisis as promoters and private owners were not able to pay back the loans they used to build or buy properties. In order to increase their solvency they are selling these properties at considerable discounts. Many private owners who had taken on a loan for their second residence in these areas and are having problems with paying their monthly instalments to the bank are selling off their properties. So there is still a lot on offer on the market but no great demand yet, with the logical pressure on the pricing of the real estate.
These are the three main reasons for the good prospects in the Spanish real estate market, especially for foreign firms and investors. There are of course other reasons, too. We should mention the fact that the Spanish government has issued some rules that make it attractive for investors from outside the European Economic Area to buy real estate in Spain in order to be able to obtain what is known as a Golden Visa. An investment of 500,000 euros grants an investor the right to status as a resident in Spain and therefore, due to European regulations, to gain access to the whole union. Also, an increase in the cooperative economy, with platforms such as Airbnb, has made it much easier for owners to rent out their properties, increasing the profitability of real estate ownership significantly.
Of course, this does not mean that everything is perfect at this moment. Any savvy investor will know (and if he gets his counsel from an Ecovis member he is by definition savvy), there is no such thing as a risk-free investment.
The biggest risk for an investor in Spain is of a regulatory nature. Spain is divided into 17 autonomous regions, each of which has regulatory power on matters relating to tourism, zoning and licensing.
In the recent past, some of these regions have started to introduce hurdles to the free rental of tourist apartments. Some of the regions have asked for any owner of a tourist apartment to apply for a licence to be able to rent apartments to tourists for short-term stays. Some regions are trying to impose sanctions on Airbnb for not fulfilling the requirements of tourism operators. Some regions are generally trying to restrict mass tourism due to concerns about the environment, deterioration of urban life, etc.
These restrictions, which are becoming more common not only in Spain but all over Europe in countries, regions and cities with high volumes of tourism, constitute the biggest short and medium term uncertainty for possible investors in coastal real estate.
It is of course not likely that the limitations to the biggest Spanish industry will be very stringent, but there will most certainly be more bureaucracy for investors who want their property not for their own use but for rental profits, and perhaps more costs (there is talk of environmental taxes, etc.).
WHAT TO DO ONCE AN INVESTMENT HAS BEEN DECIDED UPON AND A SUITABLE PROPERTY HAS BEEN FOUND
We are going to divide this section into two parts. First we are going to discuss the legal steps to be taken in order to acquire the property and secondly to explain the taxation rules that an owner of a property must pay not only upon acquisition, but also during the term of ownership.
Legal steps for the acquisition of a property
a) Preventive measures
As with any big investment, it is necessary to be vigilant as to the conditions of the property being acquired. This means that information about the object must be obtained from the property register, by requesting what is called a “nota simple” or informative note about the property. This note will show whether the seller is the real owner of the real estate and if there is any lien or encumbrance and in general the status of the property. These informative notes can be obtained online.
If the new owner plans on doing work on the property, especially if they want to modify older buildings or elevate the height of the property or build a swimming pool, it is also advisable to review the local zoning requirements, as it is very possible that there may be a prohibition clause about adding to the construction volume or some limitations based on the historical value of a building.
As is normal in this kind of operation, it is common in Spain to sign a pre-contract for the property prior to definitive acquisition. This is done in order to find the necessary financing, to study the building better, etc.
It is possible to sign a call option for the property although this is not the most frequent form of contract in these cases. The option will normally be remunerated, meaning that the buyer will pay part of the price to the seller (normally deducted from the final price afterwards, although not always) and in return acquire the right to decide at a fixed date or period if he or she wants to sign the final acquisition. It is important that the option be exercised in a timely matter, as the buyer may lose the money paid for the option if he or she exercises it too late.
The most common way of reserving a property in Spain, however, is through an earnest-money contract or “contrato de arras” (“arras” being an old word for deposit). In this contract, in addition to regulating the sale of the property, a deposit is made (normally around 10% of the final price) to guarantee that both parties will appear to sign the final sales contract in the time agreed. If the buyer does not sign the contract, the seller will retain the advanced deposit as an indemnity. If it is the seller who does not sign, he or she will have to pay double the amount of the deposit back to the buyer.
It is most convenient to settle as many conditions of the final sale in both the case of the call option and of the earnest-money contract to avoid any controversy arising in the negotiation of the final contract. Bear in mind that if the negotiations fail, the seller already has part of the price in his or her pocket and a recovery of this amount may be problematic or involve the buyer pursuing litigation in a foreign country.
c) Sales contract
There are no special requirements for a sales contract in Spanish law. Of course the parties can agree on all the conditions they need, but generally speaking if the contract specifies the object (the property) and the price, the contract will be valid.
From a purely legal point of view it does not matter significantly if the buyer, i.e. the foreign investor, is a natural person or a company. We will see in the next part that it will matter very much from a taxation point of view, but the contract itself will not be much different.
d) Notarial deed and property register
In order for the contract to be fully valid and enforceable, it has to be documented in a notarial deed. The function of the notary is to confirm the identities of the parties and the object to be sold (obtaining an informative note online from the property register at the date of signature) and to confirm that it is the free will of the party to proceed with the sale. He or she will also obtain confirmation from the tax authorities that the property is identical with the property as listed in the cadastral register (“catastro”), that all past property taxes have been paid and, if the property is part of a condominium, that the seller has paid all dues.
Under Spanish law, unless otherwise stated in the notarial deed, not only is the property transmitted upon signature of the notarial deed, but also possession (legally speaking, of course, the buyer will still need the key).
In order to be able to sign a notarial deed and due to Spanish rules against money-laundering, the buyer will need a Spanish ID (“Número de Identificación de Extranjería” or NIE) which can easily be obtained from any police station (directly or by granting power of attorney to any member of our office). This also applies to foreign companies. Companies also have to sign a declaration stating who the natural person is who directly or indirectly owns more than 25% of the shares. Investors from tax-havens are subject to some additional rules.
Once the notarial deed has been signed and the corresponding taxes have been paid (more on that in the next part), the notarial deed will be presented to the property register. The notary can present the notarial deed online provisionally to guarantee that the seller cannot sign another transfer deed, but in the end the original deed has to be presented at the register in the region where the property is located. There are hundreds of registers in Spain as each major village has one and cities have more than one (Madrid has over 50), but the information as to the competent register appears in the informative note that was obtained if the buyer took the preventive measure stated in point a) or in the notarial deed if he or she bought the property without looking (but then he or she was not counseled by a Ecovis member, so who cares?).
Once the register confirms that the notarial deed was correct, it will register the transfer. The sale will then be fully valid and enforceable against any third party. Any challenge to the property of the new owner will be very difficult as the contents of the property register are protected very forcefully by law. For example, if a person presents a notarial deed with a prior date to the new acquisition, he or she would have to prove that the new owner had knowledge of the existence of said deed and therefore acted in bad faith or the registered owner will have priority over the buyer who did not register his deed.
Foreign notary: If both parties are from a foreign country, is it possible to sign before a notary in a country other than Spain? Theoretically it is possible to do so, as Spanish law allows the form of the document to be regulated by the country of origin of the document.
However, in practice, we would certainly not recommend doing it this way as the property register will examine it closely to see if all the material requirements laid down in Spanish law are contained in the notarial deed. It is very difficult for a foreign notary to include all the necessary information about the object in a notarial deed that does not follow the Spanish format. Most of the information that we have referred to in the above paragraphs (taxation information, informative note, etc.) which is part of the content of a notarial deed will not be available and the parties will have to grant exemption specifically, etc.
As it is possible for the parties to designate a representative in Spain through a simple power of attorney, most operations are performed before a Spanish notary.
It is very common in Spain for the property to be mortgaged if an investor acquires a coastal residence from a private owner. Prior to the financial crisis, banks were very generous with mortgage terms, interest rates were low and the market seemed to be limitless. Private investors therefore assumed mortgages in order to buy a second residence (many of them even having a mortgage already for their first residence). As mortgages in Spain tended to be very long-term, from 15 to 30 years, most of them are still being paid off (and the difficulty of paying the monthly rates is the reason many owners sell at low prices).
The investor can adopt one of two positions: either he or she will opt to keep the mortgage in order to finance the acquisition or he or she has enough financial power (or better conditions with another source of financing) and wants to buy the property mortgage-free.
If the investor wants to keep the mortgage, he or she will be able to assume the mortgage contract if the bank, after studying his or her financial standing, accepts. The banks do accept this substitution fairly regularly, as the prime guarantee for any credit is the property itself.
Should the bank agree with the substitution, a second notarial deed will be signed directly to include the bank. This notarial deed will also be registered at the property register.
If the investor does not need or want the mortgage, part of the final price will be reserved to pay the pending mortgage. A representative of the bank will also appear before the notary to receive the pending amount and give the buyer a certificate stating that the mortgage has been paid up. He or she will however not be a party to the notarial deed. It will then be the obligation of the seller to take all necessary steps to cancel the mortgage at the property register.
If you have followed all these steps, you are the proud owner of a property in Spain looking over a beautiful beach, mountain or both.
Well, not so fast. First you have to consider the tax collector, which is the subject of our next and final section.
TAX IN RELATION TO REAL ESTATE INVESTMENT
Tax regulations in relation to real estate operations depend on various scenarios with respect to the situation of the buyer and the seller (physical or legal person with or without a company structure), the location of the property, the purpose for which the property will be used (investment or owner’s use), and the status of the property at a particular time (be it the time of purchase, the period of ownership, or the time of sale). As mentioned earlier, this article focuses on the acquisition of a residence from its owner in the second residence market.
The first issue to bear in mind concerns indirect taxes: VAT, or the Canary Islands General Indirect Tax (IGIC – Impuesto General Indirecto de Canarias) for property located in the Canary Islands; and tax on property transfer and stamp duty (ITPAJD – Impuesto de Trasmisiones Patrimoniales y Actos Jurídicos Documentados).
In this respect:
a) If the SELLER IS NOT A BUSINESS PERSON:
The buyer must pay the tax authorities the PROPERTY TRANSFER TAX (ITP) which varies between 6% and 10% of the purchase price, depending on the region.
b) If the SELLER IS A BUSINESS PERSON and the property is a new building:
The buyer must pay VAT to the seller, at 10% if the property is new completed housing, or 21% if the property is a plot of land, a warehouse, a place of business, or an office.
c) If the SELLER IS A BUSINESS PERSON and the property is a second-hand building (housing or place of business etc.), the transaction is not subject to VAT, but to ITP, so, as stated in point a), the tax will vary between 6% and 10 % on the purchase price.
Where VAT applies, the buyer must also pay stamp duty (AJD) of between 0.3% and 2% of the value of the property depending on the autonomous community and various other factors. It must not be forgotten that, in the case of mortgages, this type of tax will also apply.
It is worth being aware of a few other issues regarding taxes applied to owning property, including non-residents income tax (IRNR – Impuesto sobre la Renta de no Residentes) at a rate of 24% (19% for citizens of the European Union) of 1.1% of the land register value of the property; or the special tax rate of 3% of 1.1% of the land register of the value of the property for entities which are residents of tax havens. This applies to owners who use the property themselves. If the property is rented to third parties, the tax will apply with respect to income received minus certain related costs.
Of the relevant direct taxes, there is also a tax on assets for large estates, where there are big differences between regions, varying from 0% to 3.75%.
As for taxes charged by local authorities, there is the property tax (IBI – Impuesto sobre Bienes Inmuebles), which varies according to location between 0.4% and 1.3% of the land register value of the property.
Further questions? Please contact Christian Koch Ecovis Spain
ECOVIS AG Steuerberatungsgesellschaft
Ecovis is a leading global consulting firm with its origins in Continental Europe. It has over 4,500 people operating in over 60 countries. Its consulting focus and core competencies lie in the areas of tax consultation, accounting, auditing and legal advice.
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In its consulting work Ecovis concentrates mainly on mid-sized firms. Both nationally and internationally, its one-stop-shop concept ensures all-round support in legal, fiscal, managerial and administrative issues.
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