Property Development in Spain

A large part of the economy of Spain is based on construction and property development. In the past, it has proved very profitable. Is it still a great opportunity or is the market over-cooked? Should you get involved? If so, how - and how can you do so safely?

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This guide covers…

This guide covers the process of property development in Spain. It covers both large-scale and small-scale development but concentrated on smaller projects.

It describes, in particular, the process of property development in the area of Andalusia/Andalucía – which contains the Costa del Sol. See a map here. Please note that certain aspects of the law in Spain vary from one “autonomous community” (comunidad autónomalightbulb image - click here for more information on this subject to another.

Introduction

Property development has two related meanings.

It can be the process of building new property – homes, hotels, factories etc. It can be the development of land into property – in which case it can either be previously undeveloped land (green field sites) or land that has previously been used for some other purpose.

It can also be the re-development of existing buildings. Making changes to your home or other property can also count as a  type of property development. For example, adding a garage or an extra bedroom or a pool.

For general advice and treatment of the issues involved in where and how to develop, see our Guide to International Property Development.

Video guide to property development in Spain

You can get a quick overview of real estate development in Spain by watching this video interview (below) with Spanish lawyer Miguel Manzanares. Learn more by scrolling down and reading the detailed guide he has written with us.

Types of property development

Large-scale property development

By large-scale property development, we mean projects that comprise more than, say, 50 finished units. This is not a legal definition but a practical one.

Small-scale property development

Small-scale property development is usually either building an individual property on an individual plot of land or it is building a small group of properties on a single plot of land. For example, demolishing a large old house and building five smaller houses or apartments on the site.

Alterations to property you already own

This type of property development is very common but, of course, it is completely different in nature from the two types mentioned above.

Property developers

Property developers range from massive international companies to private individuals.

In a guide of this length we cannot cover all of the combinations of developer and project size – and so we will tend to focus on smaller developments and smaller developers as we believe this will be more relevant to most of our readers.

Large-scale property development in Spain

The process

Whatever the size of the development, the process of developing a larger project tends to be similar – although, depending on the type and size of the project, individual parts of the process will carry more or less weight.

Identifying an opportunity

Property development opportunities abound around the world but in order to identify one that is going to suit your requirements you will first need to know about what is available in the marketplace.

Generally, this means having a detailed knowledge of the country and area concerned – in this case, Spain and more specifically the Costa del Sol. For someone who does not have that knowledge, lots of proposed development opportunities can be superficially attractive but doomed to failure as they are beset by lots of hidden (and expensive) problems.

This does not mean that you cannot execute a property development project in a country or an area that is new to you. Plenty of successful development companies have expanded into new areas. However, what it does mean is that you will have to be even more cautious than usual when selecting a development project and spend a lot more time and money on the process of due diligence before you commit to it.

Few developers will make money out of their first development in a new country!

Despite the fact that you can develop in unknown locations, most people would agree that it is easier and usually more profitable to stick to areas that you know. This applies both to geographic areas and also to areas of activity – sticking to, for example, residential development or hotels or wherever your area of expertise lies.

Preliminary feasibility study

Once you have a potential project that your instinct and experience tell you is viable, you will need to carry out a preliminary feasibility study.

The extent of this and what is included in it will vary enormously from one developer to another. Some very successful developers rely solely on their instinct before embarking on a full due diligence exercise. Others have a quite sophisticated process involving architects, financial planners and the like even at this very early stage.

The most important thing about a preliminary feasibility study is that you need to establish that there is a market for the project, that you can keep your costs under control and that the margins on it are substantial. Usually, the potential profit identified in your preliminary feasibility study is rapidly eroded as you get into full due diligence and so you need to make sure that the numbers look exciting enough to make it worth going any further.

Expression of intent

Assuming your preliminary feasibility study looks positive, you will need to reach an agreement in principle with the person who is selling the land or project. This agreement will always be subject to satisfactory due diligence.

Despite the fact that this is a very weak agreement (because there will be so many get out clauses that it is almost always possible to cancel), the agreement is still important as it reflects a moral and sometimes legal obligation to proceed with the project and not to deal with others whilst the investigations are continuing.

Of course, any agreement of this kind is only as good as the person you’re dealing with and so, before entering into even this type of expression of intent, you should make sure that you are happy doing business with the other party involved.

Preliminary expressions of intent are often prepared by the parties themselves rather than by lawyers. This may be fine if both parties are experienced but you should always use the services of a lawyer to produce even this basic document if you are relatively inexperienced and/or you are dealing with a country whose legal system is not familiar to you. If you do not, the danger is that something that you think of as a mere preliminary expression of interest may turn out to be legally binding upon you.

Due diligence

Due diligence is the process of making sure that what you have been told or believe to be the case is actually true. It is incredibly important.

The nature of the due diligence required in any particular project will vary but it’s likely to include (at least) the following headings:

  • The local market
  • Is there a demand for the proposed product?
  • What are likely sales prices?
  • Does the land have good legal title?
  • Are there any restrictions on what you will be able to do on the land?
  • Does the land have (or can you obtain) permission to build what you want to build?
  • Will all the services that you require – water, electricity, roads etc – be available?
  • Is the professional support you need (architects, project engineers, etc) available in the area and/or will you be able to use the professionals you have previously worked with to deliver this project?
  • What will be the costs of construction?
  • Where is the finance going to come from?
  • How will you be able to sell the project?
  • How well does the legal system work and will you be protected if anything goes wrong?
  • How will you sell the units you are building – and at what cost?

In Spain, there are some special issues that require particularly careful attention like complex building permission, finance and restrictions on use of professionals.

Who carries out due diligence?

The ultimate responsibility for carrying out the due diligence on any project rests with the person or company who is going to be the developer of the project.

Having said that, it is usual for a large portion of the due diligence – in some cases all of it – to be contracted out to various professionals. If you are working in a place where you are unfamiliar with the legal and administrative system (especially if you don’t speak the language fluently) it is essential to seek professional help in this way.

The main person putting together the due diligence pack is likely to be your lawyer but they will, as necessary and directed by you, liaise with and call in the services of people such as accountants, hotel consultants, architects, project engineers, banks and other specialists.

Selecting partners

Assuming your due diligence is sufficiently encouraging for you to want to proceed with the project, you will need to select architects, engineers, builders etc.

It is usual for a potential developer to meet various companies with the necessary qualifications and decide which they would prefer to work with. These people are used to discussing possible projects in this way. They will usually be happy to spend quite a lot of time in these meetings (particularly for larger projects) and in doing some preliminary general work in relation to the project, in order to satisfy you that you could work with them and that they are capable people.

The choice of partners is, of course, critical. When choosing the people you want to work with, make sure that you check out their reputations. It may well be that this is an area where your lawyer will be able to help by using his local knowledge and connections.

Contracts for property development in Spain

You will need a lot of different contracts for a large real estate development project. These will include:

  • A contract for the sale of the land
  • A contract with an architect
  • A contract with a project engineer
  • A contract with a builder or builders and other contractors
  • Contracts for finance
  • A contract with your sales agent
  • A contract with your individual buyers

It is absolutely essential that all of these contracts are prepared by your lawyers.

In order to prepare them, they will need to understand your wishes very clearly. Expect this process to take some time.

Once they have prepared the contracts – particularly the contracts with your individual buyers – you may want to take their words and convert them into your house style. If you do this, you need to get the lawyers to approve the final version.

Sales

Sales are, of course, essential to any project and you will usually want to test the water at as early a stage as possible to make sure that your offer appeals to the buyers you’re aiming it at – and that your pricing is right.

A key factor in making sales is choosing the right estate agents.

Whilst it is permitted for developers to sell their own properties – for example, from an office on-site – most developers in Spain will use the services of estate agents.

Small-scale developments in Spain

Pretty much the same process applies in the case of large developments but there are two great differences.

The first is that the process of due diligence cannot take nearly as long or be nearly as costly if you are only building (say) five units. As a result, it cannot involve as many professionals.

In many cases, the due diligence report will be prepared by your lawyer and your accountant with the only outside sources of information being costings from your chosen builder and information from your chosen estate agent.

Despite the fact that due diligence has to be more limited, you should not think that this means you do not need to do due diligence on a smaller development. It is still essential.

In general terms, it is a good idea for a new developer to start their career in international development with a small development. They will learn a lot of lessons by doing so and they will generally find that their later, bigger developments will proceed more smoothly and more profitably if they take this path.

Alterations to your own existing property in Spain

In Spain, the rules regarding development to your existing property are a little complicated as it depends mostly on the Municipality Master Planning Legislation. Therefore, in every municipality the requirements are different.

In theory, any extension to your property – however small the extension might be – is treated as development of that property and it requires permission from the municipality. This applies whether you want to add an extra bedroom or you want to build a pool or a terrace.

In most cases, it is fairly simple to obtain permission to build an extension, provided that no part of the extension is closer than a certain number of meters to the edge of your property, and provided that no more than a certain percentage of the surface area of your land is built upon. These rules vary from area to area.

It is more complicated if you want to alter an apartment. This requires both the consent of the municipality and of the Association of Owners (comunidad de propietarios) in the apartment block.

Of course, almost none of the points relating to large-scale  or even small-scale – development apply in the case of alterations to your existing property. The main exception is if you are intending to carry out the alterations with a view to selling the property.

Conclusion

After a decade, during which there has been little development activity, development is again (2018) starting on the Costa del Sol and there appear to be good development opportunities for both large-scale and small-scale developers.

The Government of Spain and its various municipalities are determined that developing only happens under strict controls and so they have used the last ten years to tighten up their procedures in order to make sure that development carried out is of good quality and structured in a way that is legally safe for the people buying property in it. You should therefore expect to pay much closer attention to the regulations than used to be the case.

Further Information

Please contact the author if you would like any further information. See the sidebar for their contact details.

You may also want to read:

Building and refurbishing property in Spain: a handy guide from Spanish Property Insight (a very useful website, have a browse) geared towards very small-scale developers or renovators.

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