Spanish Property: Profiting from Weak Sterling | Latest Spanish Property news from Kyero.com

Spanish Property: Profiting from Weak Sterling | Latest Spanish Property news from Kyero.com

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Sterling has had a wild ride this summer, hitting people with second homes on the Continent as well as holidaymakers.

The pound tumbled early last week after the Bank of England said the credit crunch may have damaged its long-term value. It later rallied when the minutes of the Bank’s monetary policy committee were more bullish on the economy than expected, but fell to end the week at €1.09, a near six-month low, after governor Mervyn King said a weak pound was good for exporters.

Consumers are being offered myriad ways to protect themselves from sterling’s volatility — from forward contracts that let you fix your exchange rate if you are buying property overseas, to currency mortgages that promise to cut your debt.

However, brokers are notoriously bad at calling the market, so do these schemes really work? Here, we offer advice:

WHAT’S THE OUTLOOK?

The pound has proved hugely volatile in the financial crisis. It had rallied almost 26% against the dollar this year — from a low of $1.35 in late January to $1.70 in early August.

Since then, however, it has slipped back, hitting $1.61 in early September and again last week. It ended the week even lower at $1.60. It remains almost 25% off a peak of $2.12 reached in November 2007.

The sterling/euro picture is similar. Since its low of €1.02, in late December, it had rallied almost 16% — hitting a €1.18 high in mid-June.

However, recovery has faltered. Having dropped to €1.09 on Friday, tourists changing currency at some airports received less than 98 cents to the pound, said Caxton FX, the currency broker.

Analysts at Royal Bank of Scotland and Caxton FX are among those predicting sterling has further to fall. Paul Robson, an FX strategist at RBS, believes it will hit parity with the euro within six months, while David Clements at Caxton thinks parity is likely as early as the end of next month. However, Clements thinks it will rally later this year to reach €1.15 and $1.69 by the end of 2009. “It might lose a bit more in coming weeks, but sterling is likely to regain some value into Christmas,” he said.

BRINGING BACK MONEY

Foreign Currency Direct, the broker, has seen a significant year-on-year increase in the number of Britons transferring their money back into sterling — a 29% increase in people bringing back euros from Spain and 26% from France.

Peter Ellis at Foreign Currency Direct said: “With the increased strength in the euro we have seen more and more Britons selling their properties and taking advantage of the currency shift. Even with falling house prices, many people have made money by the fall in the value of sterling.”

Clements said people looking to repatriate funds should do so in the next month before sterling starts to rally again.

FIXING YOUR EXCHANGE RATE

Brokers generally offer the option of fixing your exchange rate days, weeks or months before you need the cash — particularly useful if you are buying property abroad or need to repatriate large sums of money, but want some certainty on how much you will get for your cash.

In the past week alone, World First, the broker, has seen a 40% rise in people who need to exchange sterling locking into a fixed rate, after it lost 3% against the euro and dollar.

About 90% are taking out “spot contracts” where the physical transaction happens in two days. The other 10% are booking “forward contracts”, where the rate is fixed now but the physical transaction will take place on a date in the future.

“Until now, people buying property in Europe or funding euro mortgages have adopted a ‘hope for the best’ attitude. Now, people are panic-buying for fear that the situation may get worse,” said Jeremy Cook at World First.

He added that those looking to buy abroad should try to hold off on any purchase and wait for a sterling rally. If that is not possible, book a currency option.

Like a forward contract, these protect you from the rate going down but unlike a forward contract, you benefit if the rate goes up.

For example, last week you could have secured a “worst-case” rate of €1.08 to exchange sterling for euros on November 30 with World First. If the exchange rate is higher by then, you would receive 50% of the difference. So, say on November 30, sterling is trading at €1.20, you would get a rate of €1.14. However, if the pound had weakened to €1.05, you would be able to exchange at €1.08.

You can fix a rate for up to two years. Say you bought an off-plan Spanish property last spring. At that time brokers were advising locking into a forward contract at €1.24. Today, sterling stands about €1.09 — netting you a near £22,200 saving on a €200,000 property.

You would still have saved £8,200 if you exchanged contracts in June, when the pound hit €1.18.

TAKING OUT A CURRENCY MORTGAGE

Brokers are offering currency mortgages to those buying properties in Britain as a way of reducing their debts.

A private bank — which refused to be named — and 3D Currency Management have just launched a five-year mortgage that tracks Bank rate plus 2% and has a rate cap of 5.5%. At the same time, 3D moves the loan between different currencies to try to turn a profit and reduce the amount outstanding.

“It’s about using debt as an investment,” said James Lawrence at 3DCM. “Someone will professionally manage your debt to reduce it.”

Available to those who want to borrow at least £500,000 against property in Britain, it has an annual management fee of 0.5% plus an upfront arrangement fee of about 1% — so it doesn’t come cheap.

Bear in mind, too, that you might wind up owing more than you borrowed if the currency trades go against the managers. This risk is capped at 5% of the original debt.

Ian Hart at Timothy James & Partners, an adviser, said: “You can end up owing more in sterling terms if the manager gets it wrong, which is why we consider this an investment as much as a mortgage, but 3D has an excellent record. It’s reduced debt by 4.63% in the year to date and by an average annual 3.5% since it started managing debt in 2007.”

Say you had a £1m mortgage and the exchange rate was €1.10 to the pound, the manager may transfer your debt into euros, making it €1.1m. If the pound then strengthened to €1.15, he could transfer it back into sterling, meaning your debt would now be worth just £956,000 — £44,000 less. This effective “return” is tax free.

If you are buying property abroad, funding a euro or dollar mortgage from a sterling income means you transfer only what you need to cover the mortgage and not the full purchase price. If or when rates improve, you can then transfer more.

However, Caroline Burke at largemortgageloans.com, the broker, warned that many banks would now lend in a foreign currency only to those who have income or assets in the same denomination.

Alternatively, most private banks allow borrowers to take most of the mortgage in sterling but switch a proportion into the currency of the country you are buying in to reduce the currency risk.

“Some of our clients have also decided to take a staggered approach — switching smaller portions of their loan into currency over, say, six months, so they do not switch the whole lot over at a single exchange rate,” said Burke.

COTTAGE INDUSTRY

Health service consultant Graham Sale, 56, and his American wife Mary, 48, a doctor, have transferred US dollars into sterling in tranches to buy a £580,000 Devon cottage for their retirement.

They bought their new home a week ago but started exchanging money through Foreign Currency Direct, a broker, late last year.

In total, they have exchanged $419,305 for £268,415 — at a range of rates from 1.5078 in early December to 1.7038 earlier this month . Had they done a single transfer in December, they would have received £278,091 — £9,676 more. However, had they waited until earlier this month they would have received just £246,100 — £22,315 less.

La Sella Golf Opportunity

Now only 225.000 Euros. Detached villa reduced by 44.000 Euros - now a great opportunity to purchase a two bedroom villa located within the La Sella Golf Resort, close to Denia.

Built in 1999 and in inmaculate condition, this villa has been converted into a two bedroom (originally three) to provide comfortable living space. From the lounge, access is given to the terrace and the garden with lush lawns and a 8 x 4m pool. The views to the golf course and the natural park Montgó are fantastic. A covered parking place is also included beside the entrance to the plot.

La Sella Golf Resort is a well established golfing resort located close to the coastal towns of Javea and Denia. The first nine holes of the golf course were inaugurated in 1990 and extended to 18 holes in 1992. At present work is being carried out to add a further 9 holes and is expected to be completed in summer 2009 when La Sella Golf Resort can boast in having the first 27 hole golf course on the Costa Blanca.

The resort offers a wide range of top-quality services and this really became a reality when in 2003 the international 5 star Denia Marriott hotel and the luxury Spa La Sella were inaugurated.

Today La Sella Golf Resort & Spa is a green oasis combining unrivalled tranquility and wellbeing and located in the heart of a nature reserve.

Contact me at barry@ultimatehomes-spain.com for further details/viewing.

Sales increase in Second Quarter

During the second quarter of 2009, 112,886 properties were purchased in Spain, which represents an INCREASE of 7.8% with respect to the previous first quarter of the year, according to data released by the Ministerio de Vivienda last week. Of course, being positive news, it has largely gone unnoticed, or commentators have decided to focus on the fact that sales are still down compared to the second quarter of 2008.

My feeling it is about time that everybody started feeling a bit more positive about our business. Even the Spanish President, Zapatero knows that Spain will not recover without the real-estate market pushing ahead so we may some "breaks" in the near future.

The Vuelta de España arrives in Alicante

Return to reality real estate

Two interesting points worth raising as to what has been happening this summer in the housing market are one; the spectacular rise in stock market prices of listed property companies during the month of August, and two; more investment vehicles are being created to invest in the property market now, as many feel that prices may have bottomed.

The stock-market rally has seen several listed real estate firms, led by Reyal Urbis, benefit from increases of up to 250 percent in their respective stock market price. This situation has been repeated throughout the rest of Europe too.

Regarding the future of property investment, three world leaders in the industry, Sam Zell, Hines and Gerald Ronson, have recently created investment vehicles to seize the opportunities that this market currently offers, as they perceive that prices will not go much lower. Add to this the many investment institutions, especially those with private capital, and a significant number of American traded REITs which have increased liquidity available, via capital increases, to address what many consider a new wave of purchases within this segment.

The main problem of the Spanish residential property market, though there is clear evidence of a rebound in home sales and a slowdown in falling prices. Coupled with historical lows of the Euribor rate, this should be sufficient cause for the market to be encouraged, but the selective credit restrictions applied by the banks, exclusive for their own interests, to promote sales of the homes they bought in exchange for debt or contract, mitigate greatly the effect of these monetary conditions as favorable. It has hard too not to forget that unemployment continues to increase and improved employment prospects are some way off right now.

Many commentators, once bullish of the property market rises, now aim to become harbingers of an alleged recovery, contributing with their audacity and ignorance, to create more confusion in the market.

What remains to say is that nobody knows or can predict the future but we continue to uncover well-priced property in great locations, and there are still buyers around, whether from Holland, Norway, the UK or even the local Spanish market, looking around, making offers and buying homes in this stunning region of Spain.

Sharp improvement in housing affordability as property prices come down

The cost of property relative to income, known as housing affordability, has improved sharply this year as Spanish property prices have tumbled with the housing crisis. The percentage of annual gross income that Spanish families have to spend on financing the purchase of a home (taking into account tax deductions) has fallen from 40.3% in June last year to 31% now, according to new figures from the Bank of Spain.

The housing affordability ratio deteriorated from 20% in September 1999 to 43% in September 2008. As a rule of thumb experts recommend that families spend no more than 33% of income financing the cost of buying their home. Taking into account the recent improvement, the housing affordability ratio is now back to where it was in September 2006.

As a result, a typical Spanish family buying in the second quarter of the year had to spend 6.8 years of gross income to buy a home of 94m2.

Of course the housing affordability ratio is only improving for those people in Spain who still have a job. More than 4 million Spaniards are now unemployed, making it difficult for them to afford housing whatever it costs.
(Spanish Property Insight)