The past four years have been an agonising time in the Spanish property market. In the aftermath of the massive overdevelopment that went on in the first half of the decade, there are now around 700,000 empty newly built homes on the market – 400,000 of them in coastal areas.

Since economic crisis hit Spain and the market imploded, prices have fallen on average by around 20 per cent, though in some heavily overbuilt areas they are down by more than 40 per cent. 

So the Spanish government’s recent decision to take a property roadshow around key northern European countries, in an attempt to reignite some overseas interest in the holiday home market, is an interesting initiative. 

The roadshow, led by development minister Jose Blanco and housing secretary Beatrix Corredor, started in May in the UK – an appropriate place to kick off, given that a third of foreign investors in Spain are British. France, Germany, Holland, Sweden and Russia were also on the roadshow agenda. 

The government’s message is loud and clear: prices have fallen and this is a good opportunity to get back into the market. ‘The Spanish real estate sector is beginning to see a reduction in residential housing stock and a consequent price alignment,’ said Blanco before the roadshow. 

But how valid is this message? One big hurdle for Blanco and his team to surmount is the fact that, during the building frenzy, thousands of British buyers were sold homes to which they subsequently found they had no legal rights, because of what Andalucia-based property search agent Barbara Wood describes as ‘industrial-scale council corruption’. Some have had their homes demolished; many others continue to live under threat of demolition. 

Meanwhile, action groups such as the Finca Parcs Action Group have sprung up to pressurise Spanish banks to return the deposits paid by buyers on offplan developments that were never completed in the aftermath of the credit crisis. 

The roadshow line is that these cases are very much the exception, representing less than 1 per cent of the holiday home market, and that the Spanish government intends to arrange compensation on a case-by-case basis. But campaigners say that, until these wrongs are put right across the board, the government is getting its priorities wrong and claims of greater transparency in the property purchase system are meaningless. 

In some places, including Marbella, the illegalities have been sorted out, says Wood. But some regional authorities are clearly more willing than others to take the bull by the horns and clean up their act as far as planning and development issues are concerned. 

So the market is in a very segmented state. The government roadshow aims to attract private buyers at the lower end of the mass coastal market, in areas such as Almeria, Murcia, parts of the Costa Blanca and parts of the Costa del Sol. But as Wood observes, that’s likely to be a difficult sell. 

‘There is still a huge overhang of hideous properties in horrific locations,’ she observes. ‘I’m not sure that the naïve holidaymakers who bought up all the total rubbish and illegally built stuff during the boom years are listening anymore – or that they have the wherewithal to enter the market if they are.’ 

Obstacles to recovery

Certainly, prices seem finally to have fallen far enough. Wood cites the example of Vera, a development in Almeria province. The units started life at €168,000 (£102,000). After the developer folded, a Spanish bank took them on and halved the price. But only now, with another 35 per cent off at around €55,000 (£33,000) are they selling. 

The big problem for the government in appealing to mass-market buyers is that the cheap finance that fuelled the boom is no longer on offer. Indeed, buyers often had no capital at all, but relied on equity from their main homes for the deposit and a mortgage from a Spanish bank to cover the balance. 

Moreover, says Charles Weston Baker, director at property consultancy Savills, that kind of recklessness – and indeed the thirst for second-home purchase in general – was driven by confidence in the UK market and rising prices at home, and that’s just not there at the moment. The ongoing weakness of sterling relative to the euro hasn’t helped matters. 

Sean Adams, international director at mortgage broker Savills Private Clients, says that although banks are now starting to lend again, they are cautiously offering a maximum 60 to 65 per cent loan to value. 

However, Adams continues, there are significant signs of change in the market. ‘After the previous two years of absolutely no activity, over the past six to nine months we’ve seen a lot more going on in the Costas,’ he reports. ‘At the lower end, mainly experienced property investors are piling in, buying units at 50 to 60 per cent off the 2007 prices.’ Both he and Weston Baker are also involved in negotiations with collective property funds looking to bulk-buy units in foreclosed developments. 

These experienced investors are focusing mainly on the Costa del Sol, which is perennially popular with British and northern European holidaymakers, and also to some extent on the relatively underdeveloped coast of Murcia. 

As Weston Baker stresses: ‘Spain remains the most visited and accessible holiday destination for Brits, and the rental market is still quite reasonable in many tourist areas.’ So their focus is very much on the holiday rental market and opportunities for attractive yields, rather than any expectation of short-term capital growth. 

‘Buyers are hoping for some capital appreciation in the medium to long term, but even the optimists are thinking in terms of five years, and the realists more like 10,’ Adams adds. 

Where are the locations that have attracted most interest? ‘People have gone back to the traditional centres of excellence, for example Sotogrande, which yields high rental returns and has excellent facilities,’ says Weston Baker. Marbella is seeing plenty of activity, and Wood says wealthy buyers are also starting to look again at country properties as a lifestyle alternative to the busy coast. 

Clearly there are several quite distinct sides to the Spanish holiday home market. But Wood believes neither the mass market nor the top end (see below) will pay attention to the government roadshow: ‘The first group because they don’t have any money, and the second because they’re not interested in what is on offer, and anyway they have been buying again quite happily for more than two years, picking up unbelievable deals in the best locations.’

The property investors who are buying cheaper properties, meanwhile, don’t need a politician to tell them what a bargain looks like. 

Quality homes begin to attract foreign buyers

Things are picking up at the quality end of the Spanish second-home market. ‘It was in total paralysis from the middle of 2008 for about nine months, but international buyers with cash started emerging in early 2009,’ says Barbara Wood. 

The difficulty restricting market activity since then has been a widespread reluctance among many sellers to consider lower offers. ‘In fact, many cash buyers were unable to make the purchases they looked for simply because not enough sellers were seeing sense and adjusting their prices,’ she adds. 

But the penny has finally dropped among wealthier sellers that the whole market has been fundamentally revalued, agrees Sean Adams. ‘People at the top end are now beginning to sell at a lot less: prices are typically down 20 to 25 per cent on a year ago.’ 

As a consequence, stock that has been sitting unsold and overpriced for the past two or three years is now shifting. ‘Some sellers still stick doggedly to their barmy pre-crash prices, but the only deals going through are those where we can show the buyer is saving 30 to 40 per cent on 2006 prices,’ Wood adds. 

She tells of a development called Alta Mira in Puerto Banus on the Costa del Sol. When the developer went to the wall, Banco Santander repossessed 26 high-spec apartments and put them on the market at 20 per cent below the developer’s price of around €900,000 (£551,000). Not a single one sold until earlier this year the bank finally knocked another 20 per cent off, bringing them down to around €500,000 (£306,000) – at which point all the flats were snapped up within two weeks. 

The message is also getting through to local agents, some of whom are now refusing to list properties if the seller insists on too high a price.