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Spanish property has long been favored by second home owners from all reaches of the world. The Southern European country was the second most popular destination for international vacationers in 2006, behind France, according to the World Tourism Organization (WTO). But after the Spanish property market’s recent downswing, is Spain still the attractive vacation home locale it once was? For now, those interested in Spanish property investments may be better off waiting to see what the market does.

Spain is home to more than 40 million people and covers a total area of 504,782 square kilometers. The Mediterranean Sea flows alongside the country’s southern and eastern coasts, making these areas particularly desirable to holidaymakers and second home owners. Portugal is to the west, France to the north and the British territory of Gibraltar lies to the south. A short boat ride from Spain’s southern shores brings travelers to Morocco.

Similarly to the U.K., Spain is governed by a constitutional monarchy. The current monarch, King Juan Carlos I, has reigned since 1975. The President of the Government—similar to a prime minister—José Luis Rodríguez was reelected Mar. 9.

Spain is a member of the European Union (EU) and employs the Euro as its currency. (For more information on the Euro, see our previous article One Interest Rate, 13 Economies.)

Luxury condos and apartments stretch across the Spanish landscape
The property boom fueled Spain's economy, but now a large correction is due
About the Spanish property market

In the aftermath of the bursting of the property bubble, Spain’s property market is struggling. Spain’s construction industry fell by 3.9 percent between October and November 2007, the greatest drop in the Euro Zone, according to Eurostat. In second place, Portugal’s construction sector decreased by 2.8 percent, with Slovenia close behind at 2.6 percent. Germany and France were a distant fourth and fifth, with drops of 0.7 percent and 0.4 percent, respectively. The average drop for the entire Euro Zone was 0.8 percent.

At the height of the property boom, Spain became increasingly dependent upon the property market to fuel its economy. In 2005, 7,000 real estate agents were in operation on the Costa Blanca alone, according to The Daily Telegraph (U.K.). In 2006, Spain constructed more new homes than Germany, France and the U.K. combined, even though Spain has about one fifth of the total population of those countries. So when the bust inevitably reared its ugly head, the country was left with a long way to fall.

Mark Stucklin, head of SpanishPropertyInsight.com and writer of the “Spanish Property Doctor” column in The Sunday Times (U.K.), estimated that approximately 18 to 20 percent of Spain’s economy is dependent on the construction sector. In comparison, other European countries average 8 to 9 percent, he said. This means that a hefty correction is likely in order before Spain’s market can truly begin to heal.

“Spain’s economy has become too dependent on construction and now that’s going to have to adjust,” Stucklin said. “I can see it coming down to the EU average, which means knocking 10 percent off of Spain’s GDP.”

The adjustment of the construction sector could be responsible for recent job losses in the country. 53,000 Spaniards lost their jobs in February, bringing the country’s unemployment rate to 8.3 percent, according to Oscar Ricor, a lawyer with the firm Ricor Abogados in Spain. He also said that the country’s manufacturing sector is the weakest it has been in six years. “At the moment, from my professional point of view, a U.S. investor should be extremely cautious before making the important decision [to invest] in Spain, because the Spanish economy is worsening rapidly,” Ricor said in an e-mail interview.

The tourism industry, however, is still going strong. The number of international arrivals increased 4.8 percent from 2005 to 2006, and Spain’s tourism sector brought in over $51 billion U.S. in 2006, according to a WTO report.

Depending on where investors’ existing properties are located, it is possible that they could take advantage of Spain’s successful tourism industry and weather the slump by renting to international holidaymakers. “There are the coastal regions which are in great part driven by foreign buyers. And then you have the interior where it’s a more domestic market and immigrants and economic migrants abide,” Stucklin said. Although he said that both sections of the market are dead as far as purchasing goes, investors with property along the coasts may be able to find enough holiday renters to get them through these hard times.

Statue of a soldier overlooking sprawling Barcelona
Overlooking sprawling Barcelona
Purchasing Spanish property

The fate of the economy is still up in the air, and investors would be wise to wait and see where the market is heading before deciding to invest in Spain.

“Unless you specialize in distressed sales—and that means a lot of work constantly looking at the market and being ready to luck into a distressed sale—then now is not the time to buy. I don’t see anywhere in Spain offering good value yet from a financial returns point of view,” Stucklin said. “I would say you can quite easily sit out 2008 and not miss any great opportunity.”

However, those looking for a personal vacation property or planning to retire in Spain may still be interested in buying now, despite the sorry state of the market. These buyers will need to apply for an NIE number before taking any other steps in the process. NIE stands for “Número de identidad de extranjero,” which roughly translates to “foreigner identification number.” Foreigners need an NIE before they can purchase property, apply for a mortgage or open a Spanish bank account. Buyers can apply for an NIE through a trusted Spanish solicitor—multiple sources recommend against using a solicitor recommended by the estate agent with whom homebuyers are working. Stucklin said he strongly advises homebuyers to use a Spanish lawyer to ensure that all the proper taxes are paid.

Homebuyers must complete an especially thorough due diligence process on any Spanish property they intend to purchase. A large number of homes were constructed illegally during the boom, and such a home could be demolished by the government with little or no reimbursement to the owner.

The Daily Mail (U.K.) told the story of one British couple who lost their Spanish retirement home because the property had been built illegally. Six years ago, the couple purchased two and a half acres in a Spanish coastal village and spent £350,000 constructing their dream home. In January, a demolition team unexpectedly arrived at their door and gave them two hours to evacuate the premises. The local council had been convinced by corrupted builders to grant planning permission, but, according to the regional government of Andalucía, the home was constructed illegally.

“It is extremely dangerous to invest in Spain without having adequate and independent expert legal advice,” Ricor said. “Because many corrupted developers and estate agents are at the bridge of bankruptcy and subsequently seized by desperation, they don’t hesitate to swindle potential individual clients and corporate investors in order to sell properties.”

So if investors choose to purchase Spanish property, it is best to go into the process with both eyes open to the legal issues that could arise. A trustworthy lawyer and meticulous approach could prevent much unnecessary suffering further down the line.