TAKE an overhyped, overheated property hotspot on the Mediterranean, add a splash of corruption and whiff of corporate scandal, and a crisis point is soon reached. That crisis came in late April, when investors dumped shares of Spanish developers and builders, causing the Madrid bourse’s Ibex index to fall by almost 3 per cent in little over a week.

There were triggers for the panic selling. News of tighter planning controls, coupled with the revelation that profits at one Valencia developer, Astroc, had been inflated by the sale of assets to its own chairman, spooked investors. In one week Astroc had 65 per cent wiped off the value of its share price. Shares in other property firms fell by about a fifth in the latter half of April, and the rot spread to construction stocks.

The problems have deep roots. “The market in Spain changed about two years ago,” says Stuart Law, of Assetz, the property investment company. “Almost overnight investors realised that they were no longer able to buy properties off-plan and ‘flip’ them for significant profits as they had done in the past.” Partly the problem is oversupply. Spain last year built more homes than Germany, Italy and France combined. But demand has begun to wane and many developments stand empty – more than 100,000 vacant properties in Málaga alone.

A further problem is that thousands of these properties have been built without proper planning consents. “Permission to build homes was being given left, right and centre, often in return for bribes,” Law says. In addition, speculative investors, who had been driving up Spanish prices, are seeking cheaper properties and wider profit margins in emerging markets such as Bulgaria and Romania. “Investors found that there was no more headroom for prices in Spain,” he says. “To flip successfully, you have to be buying at a discount of around 20 per cent. That differential had disappeared.”

Britons who recently bought new-build property in the Costa hotspots have probably seen values fall, but Law insists that there is no need to panic, with most analysts expecting a soft landing for house prices rather than a crash. Spain remains a very attractive holiday-home destination, with a good quality of life and plenty of flights to and from the UK.

However, investors who bought on the basis of rental guarantees may hit problems, because the tourism authorities must license properties before they can be offered for rent, a fact often omitted in a sales pitch. “Many people are getting their fingers burnt by a handful of unscrupulous developers,” says Katy Katani, UK manager of Grupo Lar Sol, a Spanish property firm. Buyers must do their homework. She advises using an independent international lawyer with expertise in the Spanish market, reviewing the purchase contract, confirming guarantees and checking land registry, planning permission and the financial accounts of the developer. Law agrees: “Do your homework on prices, and don’t buy rubbish, buy quality.”

On this basis, Law argues, you should see a reasonable return. Assetz forecasts annual house price growth of 5 to 7 per cent for the next ten years. “Spain is not going to be a hotspot for capital growth but for rental income it remains one of the top destinations,” he says. And it’s a sign of his firm’s confidence that, having left the Spanish market two years ago, it is now reopening its Spanish division.

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