The Andorra Brand Observatory this time focuses on a highly topical issue and at the same time of vital importance for the economic and social development of the country: foreign investment.
The liberalization of foreign investment and economic diversification were the major challenges in 2012, and it was not easy for Andorra to become internationally known with this new strategy, when until then we were known and, in fact, based our economy on tourism, trade, and banking. It was about reacting to an unprecedented crisis, facing a change in the economic cycle, trying to find the mechanisms that would allow us to attract quality talent and foreign investment, and that, together with traditional but redefined sectors, would allow us to build a new model of economic prosperity.
After eleven years of experience, I dare say that we have achieved it halfway. No one doubts that, quantitatively speaking, the result is positive and today foreign investment represents 18% of our GDP. But qualitatively, I sincerely believe that we have partly failed, and we must ask ourselves, why?
Before this, we must recognize the efforts of those institutions that at those initial moments of the new opening stage and to this day, have done everything possible to promote the attraction of talent, investment, and quality tourism. We cannot forget the cross-cutting initiative of the Andorra Has a Future project, the work carried out by the CEA through external promotion action and the construction and promotion of the Andorra Brand, or the good work carried out by the Chamber of Commerce, Industry and Services and also from Andorra Tourism, Andorra Business, Andorra Digital, and Andorra Research + Innovation. However, despite everything, we have not achieved a differential advance in terms of economic diversification. This does not mean that we have not progressed, but not enough thinking about those sectors that really should have positioned us differently from what we observe today.
Perhaps we should have had a more defined strategy from the beginning, with much more specific objectives. In fact, the country brand project aimed to enhance the Andorra Brand 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 was positive for the country and we have allowed everything that has arrived, good and bad, favorable and harmful to our economy and society. And it is clear, the most astute, both from within and from outside, positioned themselves and activated the reaction to the opening. In part, in the form of attracting those who sought the tax differential, and not always bearers of socially usable talent, but rather the opposite, especially in the most striking cases (some digital influencers and derivatives). Additionally, the real estate promotion sector was activated, mainly high-end homes, paralyzed for a long time, which has attracted some international investors, not so many, and above all, speculative investors, the same as always, those who had been investing for decades taking advantage of opacity and that have caused so many problems today due to the difficulty of putting those old investments on the market. We must also not 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 is now called “multipliers” of the country’s economy (as Andorra Business qualifies them) and that many of them are prominent responsible for the indiscriminate arrival of characters loaded with money and lacking that differential and proactive talent that can contribute nothing to the qualitative growth of our society. Precisely these are the ones who have most harmed the rental housing market in the country, since their high purchasing power and the lack of supply against the increase in demand, have caused an unprecedented rental real estate bubble in Andorra.
Before the bubble burst on its own, 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 to anticipate the harmful effects that could result from the lack of reaction.
Finally, a legislative initiative has been promoted to curb speculative foreign real estate investment. Such a strategy has been divided into two phases, the first with a moratorium of about 3 months where foreign investment authorizations in real estate are suspended and while a new legal text is being prepared in this regard, and a second in which this new regulation would come into force aimed at discouraging certain speculative external real estate investments and which aims to tax such investments with a tax or tribute of at least 10%, which in turn would be complemented by a tax treatment that would tax to a greater extent those subsequent transmissions executed in a short period of time and that denoted a clearly speculative spirit.
Let us remember, however, that partly due to the fight against inflation and the consequent increase in interest rates, and partly also due to legislative changes in immigration matters, increasing 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 due to the market situation and the new measure we pointed out, will surely drop when demand drops, and, on the other hand, rental prices have dropped due to more supply and less demand for self-employed residents. Perhaps we could conclude that the measure comes a little late and that the market had already given clear signs of deceleration months ago. In this sense, I have come to think that the 3-month moratorium could be unnecessary, since with the market in decline there should be no fear of the call effect.
But I changed my mind today when I learned that there was a lot of movement since news of the moratorium was heard, and that in a hurry, there were a lot of operations by foreign investors closing hastily to avoid the effects of the aforementioned moratorium. Incredible but true!
Two final reflections. The first is that we must be very careful about how the new tax on foreign real estate investment can affect the country’s economy. It is necessary for the legislator to know how to weigh very well between what is the fight against speculative investment that clearly harms the housing market and the fiscal measures that are applied to it, both in the form of a new tax, which will have to see its deductibility and complementarity with IGI and ITP, and the subsequent taxation of capital gains. Depending on how it is applied, the strategy will be so dissuasive that the investment will stop completely and the collection for such a concept will be testimonial and will not contribute anything to the affordable housing construction projects to which it was intended to be allocated, without underestimating the paralysis of the construction sector that it can cause.
The second reflection and the last, for the moment, is that, as the legislative reform projected by the Government also raises, it is necessary to redefine the treatment given to foreign investment in the country in general. On the one hand, there is qualified foreign real estate investment in the form of large infrastructures today non-existent in the health, education, research, new technologies sectors, and so many others, that we must seek, attract and promote. On the other hand, beyond the limitations established by the new regulations, what is needed is strategy. Any new promotional model to attract qualified foreign investment must be accompanied by a new way of giving international visibility to the offer created involving all agents. In this sense, a special mention for the “multipliers”, who must be invested with the appropriate professional recognition, combating the current intrusion, totally generalized, and providing them with the appropriate means so that they can really become true ambassadors of the country, and not as until now when everything goes, and of course, this is how it has gone.
We have a new opportunity to redefine how we want foreign investment to influence the economy and society of the Andorra of the future. Let’s not waste it!