Marca Andorra Observatory: Curbing speculative foreign investment

The Marca Andorra Observatory focuses this time on a topic of great actuality and at the same time of vital importance for the economic and social development of the country: foreign investment.

Liberalization of foreign investment and economic diversification were the major challenges since 2012, and it was not easy for Andorra to make itself known internationally with this new strategy, when until then we had been known and in fact based our economy on tourism, commerce and banking. It was about reacting to an unprecedented crisis, to a change in the economic cycle, looking to find the mechanisms that would allow us to attract talent and foreign quality investing, and that together with the traditional but redefined sectors, would allow us to build a new model of prosperity economic.

After eleven years of experience, I dare to say that we have succeeded halfway. Nobody doubts that quantitatively speaking, the result is positive, and by now foreign investment has become 18% of our GDP. But qualitatively, I honestly believe that partly we have screwed up, and you have to ask yourself why?

Previously, however, we must recognize the efforts of those institutions that, in those initial moments of the new opening stage and until today, have done everything what’s in their power to promote the attraction of talent, investment and quality tourism. We cannot forget the transversal initiative of the Andorra Té Futur project, the work done by the CEA through the external promotion action and the construction and promotion of the Marca Andorra, or the important work done by the Chamber of Commerce, Industry and Services and also by Andorra Tourism, Andorra Business, Andorra Digital and Andorra Research + Innovation. But despite everything, we have not achieved a differential step forward with regard to economic diversification. This does not mean that we have not progressed, but not enough in terms of those sectors that would have really required us to position ourselves differently from what we see today.

A more defined strategy might have been needed from the beginning, with much more specific objectives. In fact, the country brand project aimed to highlight the Marca Andorra in order to give visibility to the offer of our new economic and social model. But it is clear that we had no experience in opening up to the world and that, after these first 11 years, we have not been able to select what we wanted and what was positive for the country, and we have allowed everything to come. So, good and bad, favorable and harmful for our economy and for our society has arrived. And of course, the smartest ones, both inside and outside the country, positioned themselves and activated the reaction to the opening. Partly, in the form of attracting those who were looking for the differential taxation, and not always are carriers of any socially exploitable talent, but rather the opposite, especially in those more striking cases (some digital influencers and derivatives). Additionally, the real estate development sector, mainly of high-end housing, which has been idle for a long time, is being activated, which has attracted some international investors, not so many either, and above all, speculative investors, the same as always, those who decades ago were already investing by taking advantage of the opacity and which have generated so many problems today due to the difficulty of putting those old investments on the market. Nor can we forget the arrival of professionals from neighboring countries attracted by the opportunity to advise these newcomers and who, together with those already in the country, have become what are now called “multipliers” of the economy of the country (this is how Andorra Business describes them) and that many of them are prominently responsible for the indiscriminate arrival of people loaded with money and lacking that differential and pro-active talent that nothing can contribute to the qualitative growth of our society. These are precisely the ones that have caused the most damage to the rental housing market in the country, because their high purchasing power and the lack of supply in the face of the increase in demand have caused an unprecedented rental property bubble in Andorra.

But before the bubble burst by itself, our country and its rulers, with the support of most institutions and political parties, have decided to voluntarily burst the bubble in a controlled manner in order to anticipate the harmful effects that could derive from the lack of reaction.

Finally, a legislative initiative has been promoted in order to curb foreign real estate investment of a speculative type. This strategy has been divided into two phases, a first with a moratorium of about 3 months when authorizations for foreign investment in real estate are suspended, meanwhile a new legal text is being drawn up in this regard, and a second, in which it would enter force this new regulation intended to dissuade certain foreign speculative real estate investments. It will aim to tax such investments with a rate or tax of at least 10%, which at the same time would be complemented with a fiscal treatment that taxes to a greater extent those subsequent transmissions executed in a short term and that denotes a clearly speculative spirit.

We remember, however, that, partly due to the fight against inflation and the consequent increase in interest rates, and also partly due to the legislative changes in immigration matters, meaning the increase in the bond for self-employed residents to €50,000, the real estate market has relaxed, and the real estate bubble has stopped inflating. On the one hand, there is less demand for real estate, although it is not yet noticeable in prices, which, both because of the market situation and because of the new measure we were targeting earlier, will surely fall when demand falls, and on the other hand, rental prices have fallen due to increase in supply and less demand from self-employed residents. Perhaps we could conclude that the action was taken a bit late and that the market had already given clear signs of slowing down months ago. In this sense, I have come to think that the 3-month moratorium could be unnecessary, because with the market in retreat there should be no fear of the effect. But I have changed my mind just today when I’ve learned that there was a lot of movement since news of the moratorium came out, and that in response, there were a lot of foreign investors’ operations hastily closing down to avoid the effects of the aforementioned moratorium. Unbelievable but true!

Two final thoughts. The first is that it is necessary to take into account how the new tax on foreign real estate investment can affect the country’s economy. The legislator should be able to weigh up very well what means the fight against speculative investment that clearly damages the housing market, and the fiscal measures that are applied to it, both in the form of a new tax, for which it will be necessary to see its deductibility and complementarity with IGI and ITP, and the subsequent taxation of capital increases. Depending on how it is applied, the strategy could be so dissuasive that the investment will stop altogether and the collection for this concept will be testimonial and will not contribute anything to the affordable housing construction projects that it was intended to be used for, without disparaging the shutdown of the construction sector that can be caused.

The second and last reflection, for the time being, is that, just as the legislative reform projected by the Government also proposes, it is necessary to redefine the treatment given to foreign investment in the country in general. On the one hand, there is foreign quality investment in real estate in the form of large infrastructures that do not exist today in the sectors of health, education, research, new technologies and many others, which must be sought out, attracted and impulsed. On the other hand, beyond the limitations established by the new regulations, what is needed now is a strategy. Any new promotional model to attract foreign quality investment must be accompanied by a new way of giving international visibility to the offer, created by involving all agents. In this sense, a special mention for the “multipliers”, who must be supported with the appropriate professional recognition, combating the current intrusion, which is completely generalized, and provided with the appropriate means for what they can really do as true ambassadors of the country, and not like it was until now.

We have a new opportunity to redefine how we want foreign investment to influence the economy and society of Andorra in the future. Let’s not waste it!