Beyond Barcelona and the Balearics, Spain offers property-buying opportunities and perils in equal measure. MARK FAITHFULL tours the country in search of the right investment

Spain may be a favourite destination for northern Europe’s snowbirds, but with slowing property inflation, over-development and Marbella’s recent financial scandal, the country’s coasts of dreams might look suspiciously like an investment nightmare. Yet the nation’s expansive shoreline, rich architectural culture and relaxed lifestyle continue inexorably to draw holiday home buyers and expatriate settlers in equal measure.

About 600,000 EU citizens are permanent residents in Spain and roughly 1.7 million – mostly Germans and Britons – own a second home there, according to Live in Spain, an association of Spanish residential developers. An average of 600,000 new homes have been built each year since 2003 – triple the rate for the rest of Europe – and developers expect to sell another 150,000 holiday homes each year until 2010, with investment reaching €45bn.

Most of the new properties sit in the tourist-packed Costas – Brava, Blanco and del Sol – with bohemian Barcelona, the Balearic Islands and the hugely developed southern coastal strip from Málaga to Marbella among the country’s most popular destinations. Indeed, when Franco needed to pull foreign currency into Spain during the 1960s he specifically created the stretch of coastal resorts now known as the Costa del Sol.

The Andalucian region offers extraordinary diversity, however. Picasso’s birthplace of Málaga is remarkably untouched by tourism. Inland, Seville and Córdoba contain stunning architectural landmarks, as does Granada to the east (along with winter skiing in the Sierra Nevada). To the west is the windsurfing mecca of the Costa de la Luz, sherry capital Jerez de la Frontera and eco-destination Huelva on the Costa Tropical, plus the Pueblos Blancos.

The huge injection of northern Europeans comes at a price. While there are still bargains to be had in the mountains inland from the coast, costs have skyrocketed and coastal villa and apartment prices compare unfavourably with those found in many European resorts. There are signs that the super-heated property economy is waning, however; the average price per m2 of constructed property along the Costa del Sol grew 11.8% to €2,142/m2 last year, according to the Spanish Valuation Society. Resales are also slower, as short-term investors look to emerging destinations like Morocco, Turkey and even the Costa Verde, off Africa’s west coast.

For those scouring for better value, this year’s opening of the extended coastal motorway will dramatically improve travel time to up-and-coming Almería and Murcia to the east, boosting property prices.

Despite their small size, the popular Balearic Islands have an oversized reputation for everything from the hugely developed delights of Palma in Mallorca to the tripped-out club scene of Ibiza. The real personality of the four islands can be seen in ruggedly beautiful northern Mallorca, laid-back Menorca, and San Antonio’s old town, which was recently given UNESCO World Heritage status, in Ibiza.

Long established as a property favourite, the Balearics are an enclave for wealthy north European and Spanish buyers, and the cost of villas can run into the millions. Price growth has slowed, however, and after years of outperforming the mainland there are signs that property prices may be hit harder on the islands.

Elsewhere, Catalonia embodies Spain’s appeal with its vibrant and artistic main city, golden beaches and soaring mountains, and the rural idylls of its time-forgotten villages. Once down-at-heel, the port town of Barcelona was transformed by the 1992 Olympics, which unlocked its potential as Spain’s most cosmopolitan city.

Head north and the beach resorts of the Costa Brava rival the Costa Blanca and the Costa del Sol, with a rugged coast, hilly back country and some of Spain’s best diving sites. Further north and as Spain meets France, the Pyrenees offer stunning views over mountains and valleys.

Catalonia’s increasing popularity has seen house prices soar in the past decade, cooling to 8.2% last year compared to 30.2% in 2002. Barcelona is Spain’s most expensive at €4,865/m2, but longer-term investment potential is still strong. Lets of over 12 months have declined, but short-term lets have rocketed, fuelled by tourist and business demand. Of more concern than a price slowdown was last year’s news of a money-laundering meltdown in Marbella, wrapped up in real estate speculation, which rocked investor confidence. It led to the local government being disbanded, with an interim legislature put in place about halfway through its one-year term. The mess left up to 30,000 properties failing to comply with building regulations, with many properties built on green zones after the previous mayor, Jesús Gil y Gil, approved an illegal zoning plan at odds with the overall urban plan for the region. Ultimately, 5,000 properties are expected to fall outside a revised planning programme and will be demolished – last monthenterprising insurer First Title began offering demolition insurance to householders who had bought properties in recent years, while a new lobby group of home owners is making its voice heard.

Nonetheless, Spain continues to throw up property opportunities and it is worth remembering that Marbella’s discredited council is far from typical of Spanish local government. Take elegant Valencia, a city in renaissance with its port areas going through regeneration on the back of hosting this year’s Americas Cup, transforming this working area into one of smart homes, restaurants and hotels. Such an eclectic mix has made Valencia one of the fastest-growing regions in Spain, although insensitive developments are threatening its charm to such an extent that the European Union was moved to slam widespread planning abuses.

As in the rest of Spain, property price increases are slowing in the region – down to 9.4% last year, though remaining comparatively good value at €2,747/m2 – dampened by the ceaseless supply of new homes. Valencia itself and the coastal resorts of the Costa Blanca, notably Benidorm and Alicante, have all suffered from poor development standards, so investors must do their homework. More promisingly, to the north of Valencia is the Costa del Azahar, or Orange Blossom Coast. This area is popular with Germans, but the property market is dominated by local buyers and prices represent good value in a prosperous area.

Away from the coast, property in the Spanish capital Madrid rose just 5.2% last year, but as an important business centre Madrid remains a solid investment area for buy-to-lets. To the north is the Costa Verde, with regional capital Bilbao just one highlight of a small but fascinating area that combines wine region La Rioja, a beautiful coastline, a green interior and a corner of the Pyrenees. Costa Verde represents easily the best value for property in the Spanish Costas, although it comes without the guaranteed sunshine of the others. Price rises are outstripping the rest of Spain, however, albeit from a lower base.

Ultimately, the biggest concern for investors is Spain’s economic reliance on booming house prices and what happens if they stall completely. Certainly the huge gains of the last half-decade may have come to an end, but for those prepared to do their homework the rules for investing wisely are universally applicable. Choose well-located, locally desirable properties in upcoming areas, and use local professionals to scrutinise build quality. All that’s left to do then is sit back and enjoy the sunshine.