Investment Potential of Pre-Construction Projects in Tenerife

As a result of the moratorium (temporary ban) on new building projects in Tenerife, there are a limited number of projects in the South of Tenerife; however this will have the effect of causing prices to increase as demand will outstrip supply. Consequently, for people investing now, there are very substantial gains to be made.

Basically the way it works is that building companies sell at the early stages of the project, apartments or houses at prices that represent a significant discount from the normal price, and take deposits of between 10% and 20% of the selling price, which is fixed for the duration of the contract. The purpose of this is to minimize the amount of bank lending needed by the building company to finance the project. For residents in particular this can be very lucrative as the building companies offer bank mortgages of 80% of the price, so rarely take more than 20% during the course of the contract.

However the big benefit needs to be explained arithmetically.

Taking a theoretical, but typical scenario, say at the beginning of a two year project a property is for sale for 150,000 euros and the builder asks for 10% initial payment, then a second payment in 12 months. So for 12 months you have invested 15,000 euros, and the next 12 months another 15,000 euros, so your average annual investment is 22,500 euros. However the property as its being built should increase in value by at least 10% per year on the total value of the property so by the time the buyer takes title to the property, it has increased in value by over 30,000 euros. In short a return of 31,500 euros, for an average investment of 22,500 over two years. A gain of the order of 70% pa. So what’s the downside? – well the only way you could lose is if property values dropped, but with the aforementioned moratorium on building, there is not one property professional here who is predicting anything other than continued steady increases. The example given above uses a very conservative annual increase in value of 10%, (ask anyone who owns property in Tenerife how much it has risen in value in the last ten years.) And don’t forget, as soon as the building company sells a percentage of the properties, they will increase the prices by 5 % or  10%.  So why not follow the top ten tips, and invest your way into property ownership and profit.

Top Ten Tips

1. Always try to get in at the beginning of the project when you can select the best properties at the lowest prices. If you come in halfway through, obviously the properties that remain will be the least desirable and will probably have incurred at least two price increases from the beginning of the project.

2. Always make sure the area you are looking at is among the most popular areas locally. The most sought after areas locally include, Fañabe, San Eugenio Alto, Torviscos Alto, Palm Mar, and in the area of the Bahia del Duque Hotel

3. Always ask to see the contract in English, not just the one page reservation agreement, but the full contract.

4. Use a reputable estate agent. Most building companies will pay a commission to the agent, so you get him working for you for free.

5.   Remember, when you pay the reservation deposit (usually 5,000 to 10,000 euros) this is non-returnable.

6. If you read the contract and don’t understand it, use the services of a lawyer.

7. If your property has views, but has land in front, make sure you find out if permission to build on that land has been given. Your estate agent or lawyer can check this at the town hall.

8. If you want to make the final payment by mortgage, make sure your circumstances will enable you to get the mortgage. If you are unable to complete, you will probably forfeit your deposits.

9. Remember, one day you will want to sell it, so keep in mind what will appeal to most buyers, position, views, and size (2 bedrooms will appeal to more buyers than 1 bedroom or studio)

10. Don’t be afraid to ask questions, the seller owes it to you to provide full explanations and you owe it to yourself to know exactly what you are doing.

Better than a Pension

A recent article in the Sunday Express in Tenerife underlined what property professionals in Tenerife have been saying for years, that instead of a conventional pension, buying property is a solid investment, not subject to the vagaries of the stock market. Headlined “Better than a Pension” it pointed out that while annuity rates have almost halved in value over the last ten years, property values have shot through the roof, and as Estate Agents and Developers in Tenerife will tell you, where better to invest than here?

Recent rises in the value of the pound, taking the official rate through the psychological 1.50 barrier, has meant that the value for money of property in Tenerife is even greater than before, and without the boom / bust potential of the UK economy, you can be sure that you are never buying a the top of the market.

As many people have discovered, the “buy to let” market here in Tenerife is extremely buoyant, with thousands of young and not so young couples and families coming here to enjoy the superior quality of life. As an investment, you would expect to receive a rent (for long term lease) of around 5% to 6% of the price you would pay for a property here, so an apartment costing, say, 150,000€ (£100,000) should rent for around 800€ to 850€ ( £530 to £560) per  month minimum. This is around double what most people are earning with conventional investments, but the beauty is that the capital value of the property would also rise, traditionally by over 10% per year but often considerably in excess of that.

Alternatively, you could let to holidaymakers, where the rental income would be more than double the values stated above. This is a marginally more complicated than letting long term, but can enhance your returns if you do not mind a little extra work.

However if you don’t want to rent, but just to enjoy life, then Tenerife offers one of the best climates in the world. In April this year, you could have thrown snowballs in the mountains, then one hour later enjoyed sunbathing on the beach! There are other island paradises around the world, but rarely part of a country which is financially strong like Spain, where you know that your investment will not be endangered by a volatile economy. 

So what happens in future if you want to sell? The same Sunday Express article illustrated research by Birmingham Midshires which found that in the UK, 12% of people surveyed, plan to sell up or rent their UK properties to fund a new lifestyle in the sun. As any Estate Agent here in Tenerife will tell you, there is no end of people, usually middle aged, who aspire to living in this beautiful climate, with year round sunshine, and without the excruciating summer heat of mainland Spain, Portugal, Cyprus or Greece. Tenerife is a cosmopolitan, multi-national island, particularly in the South, where English is spoken extensively, yet less than 4 hours away from the UK and recent improvements in flight availability has had the combined effect of lowering prices and providing flights from virtually every airport in the UK. Despite recent stock market related problems in the UK, many people are retiring earlier, and finding themselves with equity in their UK properties which can easily be released, or with lump sums from their pension, and with new found confidence in living in a “foreign” country, the ongoing sellability of property is guaranteed. An article published recently in the Sunday Mirror’s “Homes and Holidays” magazine stated that 12.6 million British people had visited Spain and its islands last year, and that 70,000 Brits bought a home here in 2003. It estimated that as many as 100,000 British people would buy in 2004 so there is no shortage of buyers for quality property.

Any downside? None really, the key to the popularity of Tenerife is the weather and that’s unlikely to change but to maximise your investment, follow the undernoted buying tips, profit from your investment, and enjoy your life!

As always, location is the key. Avoid out of town areas. Quaint Spanish towns may sound nice but demand for property there is limited. Stick to the major areas favoured by the British Buyer, Golf del Sur, Los Cristianos, and Las Americas, particularly in San Eugenio, Torviscas, Fanabe and the del Duque areas. A new area, adjacent to Las Americas, called La Caleta is also proving very popular, as is Palm Mar, along the coast from Los Cristianos.

Take advice from a proper Estate Agent, one with S.L. after their name. As in Britain, there is little regulation of Estate Agents in Tenerife, but at least if they are S.L.’s, they are proper limited companies. Estate Agents are paid commission by the sellers so their advice comes free.

Be aware that you have to pay tax of 5% (for new properties) and 6% (for resale properties) so make sure you account for that when looking at properties. Also there are some smaller fees and tax’s to pay so budgeting another 2% or 3% would be prudent.

Set yourself a budget, and stick to it.

If you want a mortgage, banks here offer a very competitive rates, usually lower that in the UK, but will normally only lend 80% of the property value to residents and 60% to non residents.

With some notable exceptions, the build quality of newer properties is better that ones built 15 or 20 years ago, so find out when the property you are viewing was built, the more recent the better.

If you want to maximise your investment, consider buying pre-construction. This generally involves buying at the beginning of a project, which usually takes around 2 years to complete. You will normally pay around 20% initially, then another 20% one year later, with the balance of 60% on completion (less for residents). However in return for this, you would expect to pay around 20% less than the market price of the property, and remember even during the course of construction, your property will increase in value.

When you are viewing properties, especially if you are thinking of letting, have a look around the area. Things like schools, access to motorways, cinemas etc may not be important to you but they could be attractive to other people.

If you can come to view properties during the less busy times, you will find the Estate Agent will have more time to take you round and discuss things more fully for you, avoid busy bank holiday weeks, Christmas, and Easter. And take your time. If an Estate Agent tries to rush you, find another one, there are plenty of good agents in Tenerife.

Insist on seeing a copy in English of any contract you are being asked to sign, if you don’t understand it, don’t sign it.

Alan Nicolson Sur Properties S.L.

(“Better than a Pension” was Publisher as the lead article in “The Paper” in Tenerife on 6th May 2004)