Spain: Overview

RENTAL YIELDS

Last Updated: Jun 10, 2008

Yields consistently low in Spain

Renting out continue to be not quite profitable in Spain. Gross rental income on Madrid apartments still very poor at 3.65%, reaching only up to 4.02% for smaller apartments of 40 sq. m. Yields on apartments in Barcelona are slightly higher at 3.95% on the average, with a 40-sq. m apartment generating a yield of around 4.7%.

Apartment prices increased at €5,343 per sq. m on the average in Madrid. Barcelona apartments are less expensive at €5,195 per sq. m. Smaller units have lower per sq. m prices.

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TAXES AND COSTS

Last Updated: Nov 20, 2007

Taxes are high in Spain

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	24%	24%	24%
Click here to see a worked example
Source:			Disclaimer

Rental Income: All property owners are subject to a flat tax of 24% on gross rental income.

Property and Wealth: A special annual 3% tax is levied on the cadastral value of real estate owned by non-residents. Property owners are also liable to Net Wealth Tax and Real Estate Tax levied by the municipal government.

Capital Gains: Non-residents pay a flat rate of 18% on the capital gains tax.

Inheritance: Each beneficiary’s inheritance is taxed at progressive rates (7.65% - 34%) after certain tax-free amounts have been deducted.

Residents: Resident individuals are liable to tax on their worldwide income and assets but they are entitled to some allowances and tax credits.

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BUYING GUIDE

Last Updated: Mar 28, 2007

Total transaction costs are moderate in Spain

The total roundtrip transaction cost is around 10% to 14%. This includes the Property Transfer Tax (6% or 7% depending on the autonomous region) and the real estate agent’s commission, which is around 2.5% to 3%.

For new properties, VAT is imposed instead of transfer tax. VAT for vacant land is 16%, while VAT is 7% for new houses, plus stamp duty. It is advisable to buy land with a house under construction or finished to minimize tax liability.

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LANDLORD AND TENANT

Last Updated: May 25, 2006

Law and slow courts benefit tenants

Spain’s rental market is extremely pro-tenant.

Rent Control: The landlord and tenant have the contractual freedom to fix the rent and state the due date of payment. However, rent increases are tied to the Consumer Price Index and limited to once a year.

Tenant Security: The 1994 Urban Tenancy Act aimed to restore balance between the interest of landlords and tenants. It failed. Tenants are guaranteed tenure for five years. Courts are painfully slow in resolving cases of tenant eviction and compensation for rental arrears and damages.

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ECONOMIC GROWTH

Last Updated: Dec 05, 2008

Economic recession as construction falls

Spain is a modern industrial country with a GDP per capita of US$33,700 in 2007 and a population of 45 million. Spain joined the European Economic Community in 1986 and was one of the founder members of the European Monetary Union in 1999. In 2002, Spain achieved full monetary union with the EU and adopted the Euro.

After 3.5% GDP growth annually from 2003 to 2007, the economy has slowed dramatically in 2008 (1.3% GDP growth). It is expected to contract by as much as 1% in 2009.

The construction industry is a key driver of the Spanish economy. The drop in construction activity has already pushed up unemployment to 12.8% in Q3 2008, from 8.3% in 2007. Unemployment may rise as high as 15% in 2009, the highest rate since 1997.

Gross fixed capital formation, whose growth has already slowed to 5.3% in 2007, from 7% in 2005-2006, is projected to contract by -2% in 2008 and by as much as -9.2% in 2009.

The decline in economic activity, and higher unemployment, may well lead to a downward spiral, pulling house prices down further.

In response to the crisis, an €11 billion stimulus package was announced by the government in November 2008 to create 300,000 jobs. The package is on top of the previously announced economic relief measures, including a €40 billion package for mortgage relief, tax cuts and credit lines for new business.