Spanish Silver Lining of Sliding Sterling
January 23rd, 2009
Thanks to recent dramatic changes in the Euro / Sterling exchange rate, British owners of Spanish property can realise a profit when they sell – even if they purchased at the height of the Spanish property market.
In September 2007 – the height of Spanish property prices – 1 Pound would have purchased 1.45 Euros. Today, it will buy 1.07 Euros – a drop of 26%. Whilst this is cause for concern to Brits who have not yet purchased property in the Eurozone, it allows existing property owners to price their properties competitively – if they intend to repatriate the proceeds of the sale to the UK.
Example 1: Mr. Smith purchased a Spanish property for €200,000 in 2007 – for which he exchanged £138,000. Due to personal circumstances, Mr. Smith is now a motivated seller, but property prices have fallen. He won’t even get viewings for the property unless it’s priced at €160,000 – a 20% reduction from when he purchased.
Eventually, Mr. Smith agrees to sell for €150,000 – netting him a significant loss of €50,000 in Spain. When used to buy Sterling, however, this equates to £138,000 at today’s exchange rate. Although Mr. Smith has made a paper loss in Euros, he has broken-even in Sterling.
Although over-simplified, this example neatly demonstrates that, thanks to Sterling’s 26% slide against the Euro, property owners can afford to discount their properties by 26% – without incurring a loss in Sterling.
Those who purchased before the height of the Spanish market, when Sterling was even stronger against the Euro, could fare better still.
Example 2: Mrs. Jones purchased property in Spain in mid 2001 for €200,000. At an exchange rate of 1.64, Mrs. Jones paid £122,000 in Sterling. At it’s peak in 2007, Mrs. Jone’s house was valued at €350,000 – although the market price today is hovering around €250,000. Again, due to personal circumstances, Mrs. Jones needs a quick sale and agrees to do so at €230,000 – a 35% reduction of it’s peak market valuation.
Whist a €30,000 profit in Euros over 8 years is not an impressive return on capital invested, things look better when converted back to Sterling. Today, €230,000 is worth £212,000 – meaning that Mrs. Jones has almost doubled her money in Sterling – enough to pay a hefty slice of Capital Gains Tax in the UK.
Even so, after a CGT liability of £18,000, Mrs. Jones will have realised a net profit of £72,000 – equivalent to a net interest rate of 7% on her invested capital.
Of course, buying and selling costs will eat in to her profit, but Spanish property owners looking for a quick sale, and wishing to take the proceeds to the UK, now have an ace up their sleeves. The sliding value of Sterling against the Euro means they can price their properties to sell – and minimise the impact of that price reduction.
Those in Mr. Smith’s situation may well be able to break-even in the UK, while those like Mrs. Jones can still make a healthy Sterling profit on their Spanish property investment.
Martin Dell, Kyero.com
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- Sterling's Silent Slide
