BLOG: Why in 2016 there is no better time to buy that European home in the sun

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Written by: Jason Porter
18/12/2015
European property markets have been sluggish and somewhat stagnant since the credit crunch of 2008, but 2015 has been the year things have started to turn around on the continent. 

Thanks to a variety of factors, 2016 could see a considerable jump in both the numbers of property completions and the values of residential property in mainland Europe. So, for those of you considering buying a home in the sun, is this the year for you to take the plunge?

Property values across the UK rose by 241% from 1996 to 2007. The economic collapse of 2008 meant values fell significantly, but the recovery of property values since this point has seen most areas of the UK recover the losses made.  In fact, London is now 35% above its 2007 peak, the South East 9.4% and East Anglia 5.7%.  Other desirable areas across the UK have also shown similar recoveries.

For those who have always looked longingly towards retiring abroad, 1996 to 2007 revealed a similar story on property values in Europe (eg. values in France rose by 150%, and Spain 197%), but that is where the similarity ends, and where a fantastic buying opportunity presents itself.

In Spain, prices have fallen 41.2% across the last seven years, and France just over 25%, without a recovery in values, as in the UK. Locally it’s worse, with some of the coastal regions favoured by UK expatriates having fallen by 60%.  As an example, the last few years on the Spanish coast has shown annual falls of 3.13% (2015), 7.16% (2014), 7.44% (2013), and 13.33% (2012).

But the belief now circulating the European property market is that things have hit rock-bottom, and buyer interest is increasing.  Estate Agents are noting renewed interest from foreign buyers, and it is only logical that prices should start rising as a result.  This is already visible in the Balearics and Canaries where values are showing small increases and, across Spain, transactions are up 17% year-on-year. The Golden Visa markets attracting Russian and Chinese buyers in particular are giving a boost to these local markets.

From a currency perspective, potential UK expatriates have never been in a better position; £1 currently buys you €1.40, compared with two years ago when your £1 would have only bought you €1.18, an 18% improvement.

A combination of property values and exchange rates mean UK expatriates could buy much bigger and better located properties than previously.

In addition, interest rates remain at an all-time low, and with the stability which now exists in the banking sector, there has been an increase in the number of mortgage products in the European market place and increased competition for market share.  In France, it is now common to see 20-year fixed mortgage arrangements at 2.55%, an attractive rate to tie into for two decades.

But, the real boost from a purely UK perspective could be in UK retiree migration, as a result of the new pension lumps sum legislation. Since 6 April 2015, UK retirees who decide to take their pension benefits are no longer restricted in taking just 25% of their pension fund as a lump sum; they can decide to take any amount as a lump sum, all the way up to the whole 100%. The first 25% will remain tax free, whilst the other 75% will be taxed according to the prevailing income tax rates in the year any lump sum is taken.

If you decide to retire overseas and take a lump sum from your pension scheme, this would normally be taxable according to the tax rules in your new location, and not the UK (though UK government pensions almost always remain taxable in the UK), according to most of the tax treaties the UK has with overseas jurisdictions.

The tax treatment abroad of taking a pension lump sum can vary considerably, but there are some countries who offer attractive “incentives” to woo new residents, like Portugal, Cyprus and Malta, whilst others have favourable tax legislation purely around pension lump sums, like France.

With a potential UK saving of 45%, it may be worthwhile considering delaying the payment of a pension lump sum until you are non-UK resident.

The combination of all these factors could prove pivotal to an increase in values of Mediterranean property, and a large increase in UK expatriates focusing on these retirement locations.

Jason Porter is a director at the expat wealth management and tax planning specialist Blevins Franks 

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