Spain’s construction and property industries have been hit hard by the economic downturn, leaving many buyers in negative equity and the country in negative inflation for the first time on record. Powered by the property boom and strong tourism sector, the Spanish economy grew to be the fifth largest in Europe but after average returns on property investments reached 13.5 per cent, between 1988 to 2003 (Banco de España), property values plummeted and high unemployment (projected to reach 25.9 per cent this year) has been accompanied by falling returns and negative GDP at -3.3per cent. Experts don’t expect the market to recover until 2011 but according to Puebla Aida Developments (Padhomes), there is huge diversity in the Spanish property market and things are not as bleak as they might appear.

Anthony Smee is Chairman of Padhomes and an international entrepreneur. After significant success in the fast-paced world of UK media advertising he sold his Mayfair advertising agency in 2007 and flirted with the American market before purchasing a sizeable land bank in Puebla Aida ten years ago. Along with his business partner, Stephen Draper, Anthony has a knack for calling the market and before the financial crisis reared its ugly head, Padhomes pursued a construction strategy, building luxury lifestyle properties for high-net-worthindividuals, which has allowed the company to remain highly profitable in the midst of the market downturn. His vision is positive and even in a recession he remains confident the market slump in Southern Spain will give way to double growth figures along the coast within the next three years.

Q: Why did you target the Spanish property market?
A: During the last recession, a well-known British developer had financial difficulties so we saw the opportunity to purchase the company’s Spanish interest and took it, retaining their staff and securing a land bank with planning permission for seventy apartments and villas overlooking Mijas Golf in Malaga. We built an entire village in the Andalusian style – one that the Brits and Nordics love – and over the past twenty years have been involved with prestigious developments along the coast, including Mijas Golf, White Pearl Beach,Marbella, and Las Alamandas, Marbella.

Since the completion of Puebla Aida in 2003 we’ve focused our attention on building villas in excess of €900,000. The market has changed and we’ve revised our strategy accordingly, most recently completing a €3,500,000 luxury villa near Marbella. Contrary to media stories that concentrate on the severity of the downturn in Spain as a whole, there remains a market for properties such as this and ‘The Galleon’ is the ultimate discerning buyers’ home with all the pools, walk-in wardrobes, hydro-spa baths and finishes that affluent buyers demand.

Q: How does the property market in Marbella differ from that in the country as a whole?
A: Marbella has been in recession longer than the rest of Spain so it will be first to emerge. In Spain, location is everything and although property prices have declined by as much as 40 per cent across the country as a whole, that figure largely reflects the vast over-supply of modern tower blocks which were slung up. These must be absorbed into the market before any real recovery will be seen. However, in the last 30 years Spain has advanced immensely as a nation and the over-supply will be soaked up by young, increasingly independent people who are no longer content to remain in the parental home as was traditionally the case. The banks that own these properties will slash prices until the market absorbs them, they were not desperately expensive to build.

Prime locations along the south coast have seen less fluctuation in property prices and quality homes are now worth around 20 per cent less than they were at the height of the market. The Spaniards recognise that tourism is essential for economic growth so the Government is investing heavily in boosting the kerb appeal of areas like Marbella. New laws mean that a lot of ugly signage has been pulled down, advertisers flouting the laws are being prosecuted and infrastructure and road networks are being further developed. While the sale of blocks will crawl along, the market for villas will see good growth and continue to be purchased by Northern Europeans.

Q: What’s the profile of a typical foreign investor in the current market?
A: Recession or no recession, people buy in Spain for pleasure and our clients are high net worth individuals who are generally entrepreneurial people in their 50s. Our typical British buyers own properties in the UK, worth in the region of £2-£3million; their Spanish home simply facilitates a lifestyle choice. They don’t let the property but it’s kept as a fully functional holiday home. The market for villas continues to be fuelled by demand from affluent Brits, Belgians, Irish and Scandinavian buyers as well as Russians. It’s an exciting time and if minimal building occurs in the next three years I predict we’ll see a further surge in market values giving way to double growth figures by 2012. Summer is always quiet here and as temperatures reach 40 degrees buyers don’t typically emerge until the autumn. I’m confident the property market has bottomed out and will start moving in September and October, then gather pace in April 2010.

Q: Is foreign investment enough to boost Spain’s deteriorating economy or do you think the country has its own economic momentum?
A: Spain is a country that provides an attractive climate and easy access that is hard to match. These factors will always draw foreign investment and even if buyers sit it out during the downturn, the economy will eventually recover. The Spanish are determined to make it happen. Electronic communications here are excellent, the airport at Malaga is doubling its capacity to 9,000 passengers an hour and although smaller airline networks are cutting back in Alicante, the TGV out of Madrid takes less than 3 hours to reach Barcelona and 2.5 to Malaga.

The Spanish believe in themselves and in Europe. Since the death of Franco in 1975, Spain has become a dynamic global entity with strong trade links. The entire coast, from Barcelona to Gibraltar is geared towards construction and the country will commence the next stage of development as soon as market conditions allow. Significant global trading links mean by the year 2050, more people will speak Spanish than English and it’s noteworthy that Spanish banks are more highly regulated than in the UK so they are not as riskily geared as UK banks. Regulations that we’re only seeing now in the UK, were introduced here some 15 years ago.

Q: How have currency fluctuations affected buyers and agents?
A: Volatility on the current market has seen the value of sterling fluctuate by over 21per cent against the euro in the last 12 months. The current vacuum in the market is causing frustration but of course there are Brits who can afford to sell their Spanish property at a discount and still regain more in sterling than they originally invested as a result of the weaker pound.

Naturally there are Brits who are unable to make mortgage repayments, as a result of higher mortgage interest rates in the euro zone and a fall in the value of the pound, however many purchased their property a few years ago and have seen significant capital growth with real estate prices rising by as much as 201per cent between 1995 to 2007. Those who stretched their finances find they are unable to afford euro mortgage payments or even general living costs. At the peak of the bubble, mortgage debt grew to over €650,000bn and as nearly 100 per cent of mortgages were at a variable interest rate it left them hugely susceptible to market conditions. A couple of years ago you could convert £2,000 in sterling into €3,060. Now you’d be lucky to convert that to €2,280 so many who do have euro mortgages are facing a challenge.

Our properties are not targeted at this market sector but across the board the market for agents has collapsed. Agents fees here are typically five per cent but the days are long gone when buyers would purchase property they hadn’t seen or fly over for inspection visits so it’s a challenging time for agents. Having said that, the Russian market is still very strong and there are exhibitions in Petersburg targeting predominantly cash buyers searching for large villas.

The market as a whole will recover when the global financial crisis stabilises but there are geographical pockets where lending is less of an issue. For example, there’s currently a Danish bank that has no problems lending to Scandinavians. The mortgage products are available but the problem is the mass market developers are predominantly selling low quality products where the builder planned to ‘flip’ the first property and make money on the second. It’s a plan that has failed for many and resulted in the derelict building sites we’re currently seeing.

Q: What advice would you give investors?
A: As interest rates in the UK and Europe remain low in 2009 both markets will be stimulated. Investments in the Marbella region are on-going and despite the recession, growth is expected and construction on planned projects is still taking place – the luxury five star Vincci Selection hotel has recently opened in Marbella and the Mandarin Oriental is due to open in Benahavis next year. Investors who look to Spain for a lifestyle choice are being met with competitively priced upper-price range properties that are set to increase significantly in value within the next three years.