Property investing in Spain; how the market has changed and how FX rate changes will affect your costs

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Whether you are making an international transfer for a one off property purchase, or making regular overseas payments on a mortgage and for maintenance and property upkeep, foreign exchange transfers are key to maximising the value of your currency and saving you a great deal of money. Traditionally banks have been the way people have chosen to transfer money internationally but these institutions are now losing ground to FX brokers and money transfer businesses who can offer better foreign exchange rates, smaller transaction costs and transparent fees.

The timing of an international transaction is crucial to executing at the best market rate of exchange can make a big difference. When choosing an FX broker or money service provider, fees and exchange rates needs to be compared simultaneously. In a volatile currency market, like sterling post-Brexit, minute-by-minute fluctuation in value is common and a few decimal point changes can make a big difference and save a lot of money, or increase cost.

For example, for an overseas transaction worth €200,000, a difference of 2% and 4 % on the fee levied can equate to a saving of €8,000 euro alone. Where banks have tended to charge these type of higher and often hidden fees, money service providers can secure better rates. However, there are still different rates between each provider and as outlined above these differences can translate into significant differences in saving. Choosing the best money service provider requires applying many criteria; speed, security, ease of use and access to name a few but it is the cost and rate of transfer which is the crucial factor. The transfer fee that is applied and the exchange rate offered. In real terms, once all of the charges have been applied, how much of the currency that I need can I buy with the currency that I have?


Forward thinking


Another way to assess a money transfer provider or FX broker is their currency strategy. Once you have decided to purchase a property abroad, in this case in Spain, you are obliged to deliver a certain amount of euros at a given time and are in the process exposed to the whims of the currency markets. Once the purchase date has been agreed upon, a good provider can advise how to mitigate against future loss via a currency forward contract to “fix” a rate for the future should the pound fall further in value. These forward contracts enable you to apply a favourable exchange rate to a future purchase, vital post-Brexit with fluctuating and unpredictable sterling movement. The buyer knows the exact value of their currency in advance, allows the purchase to proceed despite any dramatic market movements and enables more accurate cash flow management. Price comparison of the rates offered by each provider will uncover the real cost of FX transactions and eliminate any unnecessary additional fees.


The “B” word


It is no surprise that the unexpected result of the referendum in June 2016 has had a drastic effect on sterling and consequently for British expats in Spain and for those looking to buy in Spain. The value of sterling fell to a 31 year low against the dollar after the referendum and 11% against the euro. While it may have clawed back some of its value, it is still a quarter of where it was. A pound would have purchased 1.40 euros within the last two years; post-Brexit, and as of today, it remains at 1.12- a loss of almost a quarter. Amidst doubt in the government’s leadership and poor progress in Brexit negotiations, uncertainty remains, and sterling is likely to remain volatile with some analysts even predicting GBP/€ parity early next year. A week is a long time in politics and even longer for currency markets and only time will tell but the reality is for Brits who are looking for a place in the sun buying a house in Spain is now 10% more expensive post-Brexit; a property worth €300,000 would have cost £229,000 but will now cost £254,000 and a small villa worth €250,000 euro will now cost £20,000 more now than it did June 2016.

 

Has the sun set for Brits buying abroad?


With Brexit uncertainty weighing on sterling’s value, as well as the unknown outcomes from the Brexit negotiations, where does this leave British expats residing in Spain and those hoping to buy a home there? There can be no denying the ‘Brexit effect’ has reduced British demand for property in Spain, particularly in the €200,000-€400,000 cash buyer price range. Post-June 2016, UK buyers made up 19% of all purchases by non-Spanish, compared with 38% in 2008 when British purchase was at its peak. In the first quarter of 2017, a Report from Spain’s Association of Land and Commercial Registrars revealed that British demand for second homes in Spain had dwindled by as much as 30% on the previous year’s pre-Referendum levels.

With around 300,000 Brits choosing Spain as their main residence and 600,000 owning second homes mainly in the Costas, sales to UK buyers fell from 2,800 to 2,000 and it is in these coastal areas that the effect has been most strongly felt. Demand is still strong at the higher end of the market and areas such as Marbella and Ibiza are less affected as wealthier buyers are able to hedge against the weak pound with lower interest rates. While expat fears may be allayed regarding residents’ rights, healthcare and pensions, it is the value of sterling that will continue to be the driver for property purchases in Spain, particularly in the €200-€400 price range and many investors may adopt a more long term view and potentially consider an apartment rather than a villa as their place in the sun.


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