January 2006

A view of the overseas property market

With thousands of property speculators heading across the world in search of the crock of gold named the emerging markets otherwise known as the next big thing or the investment hot spot, greed and pockets bulging with euro, going like lambs to the slaughter particularly to Eastern Europe and Turkey attracted by seemingly bargain prices and huge capital appreciation figures, the temptation is to think that making a solid return on an investment is a no brainier, articles and websites boasts of the 100% capital growth that can be achieved on investments over 12 months, for first time investors with small budgets looking for a step onto the property ladder, this looks like an opportunity almost too good to be true, the result is “the sheep factor” thousands of speculators and second home buyers flocking to Eastern Europe and Turkey to cash in on the investment opportunities they offer, but as the saying goes, “if it sounds too good to be true , well then, it is too good to be true”

Hottest investment hot spot around; It’s so hot right now that all of Eastern Europe seems to be for sale. There is just one thing wrong with this frantic property grab – as far as investors are concerned, this will turn out to be a big accident. The problem with Eastern Europe and Turkey – is that it falls into the new new thing category – everyone is looking for the next property market that will provide fabulous returns, as a result the reality sometimes gets trampled underfoot in the stampede. These regions are such cases. In Eastern Europe there are three separate property markets.

1. The coast.
2. The countryside
3. The cities (capitals)

The trouble is only one of these stacks up from an investment view point and a second could possibly make it in the long distant future. Sadly the coast areas do not stack up when you crunch the numbers, because it is the coast that is being pushed so hard by developers and agents, and it’s on the coast where many investors are buying apartments – let’s see why investing in costal off plan deals will be the big accident. Note invest;- If the property is for your own holidays well good luck don’t be put off, but as an investment, can’t see these developments working. The bottom line is that all small scale investors cannot sell or let their brand new off plan properties. (EXIT STRATEGY) There is simply no demand in the secondary market for these new builds. That’s because nobody wants to buy a property on the secondary market when they can buy a brand new one (and there are lots and lots to choose from) often at very attractive sounding discounts. (This also applies to some of the more traditional markets)

Alarm bells; - EXIT STRATEGY; - Who will rent it – Who will buy it

The fundamental reason these criteria are not met along the coast is that the kind of properties being invested in are not targeting the right kind of tourist. People who argue the rapid rise in tourist numbers in Eastern Europe (this is a fact) are only telling half the story – the huge number of new hotel beds being brought to the market and that occupancy of existing hotel beds is still incredibly low.

Estate agents love westerners, particularly the Irish and British suggesting if you don’t invest you are missing out on soaring rents and huge capital appreciation. In Reality the fear is that thousands of homes in the same area will depress rent and capital appreciation.

Take Bulgaria as an investment: - coast or ski resorts, there is no evidence that these properties can be sold or effectively let. Yes tourists numbers on the coast are increasing but the number of hotel beds are increasing much, much faster thus putting the tourist away from apartment rental, hence the rental prospects are poor and the exit strategy (most important point who will buy your newly built off plan apartment) is nonexistent. There appears to be no demand from the locals for second homes (in fact many haven’t bought their first homes yet) and Central Europeans tend to holiday in Western European areas. These Eastern European countries have a short summer season, compounding rental problems, meaning the investors are focusing on a declining holiday market and missing out on the growing winter rentals that are developing rapidly in warmer locations.

Historic capital growth figures are just that-history-there is nothing to support this trend except for the speculator/gambler, which are creating their own pyramid like cocoon. These pyramids are so pointed it is likely to bust the bubble which is expanding so fast it is in danger of getting pierced by the pyramids point. We may be rich in history but I doubt we want to be remembered as the people who caused the appreciation bubble to burst leading to a big accident. The 2 main activities (only activities) driving the economy, construction and financial services have a lot resting on their sholders.The SSIA - here lies a big danger for the saver who have SSIA saving schemes maturing next year, the large operators are gearing up to rid them of their money into some of these smoke screen deals, this could be the accident waiting to happen.

We have seen rapid growth in property prices in Ireland over the last 10 years or so which has affected our perception of value, this growth rate in fact should be causing alarm bells, the rate of asset inflation is simply not sustainable, it will stop and probably soon start to decline. For this long growth period, almost full employment and an over indulgence in affluence we owe a debt of gratitude to the Christian brothers the Catholic church and indeed Charlie Haughey who introduced free education and government policy respectively way back then, that has nurtured this boom, some day we may not thank them but instead we will blame everyone but ourselves when it goes wrong, but purchasing property abroad has no parallels to our domestic prices which in turn have no realistic parallel to value. Whatever country you choose to purchase property in, the value of that property is only the price value that the local resident can afford to pay, bearing in mind the monthly wage in some of these countries is €120 per month, so where is the value in buying an apartment or a house for €40,000 or €200,000 in a country where a local resident cannot afford to pay for even the cheapest one in several lifetimes. This investment is like buying a second hand car – maybe in 30 years it may have value as a classic. An investment must have value; let it be in Spain, Cyprus, Bulgaria, and Turkey or anywhere in the world.

Guarantee returns on investment:
This is a myth, remember the old saying “there is no such thing as a free lunch” you better believe it, anything you get you pay for. What is your return when this guarantee period is over??? However some of the lease back offers in Western Europe somewhat contradict this myth.

Selling agents:
Being involved in this business myself brings great personal distress, Having visited some of the holiday hot spots over the years I became well accustomed to the time share sellers and their pressure selling tactics now been used by some overseas property sellers. One amazing observation I have made is how shrewd and hardnosed people are at home, they mostly hate domestic estate agents but suddenly one from another country or dealing in another country becomes their best friend-amazing: a saying I heard recently will describes some agents “there is more loyalty among drug dealers than among estate agents”. When you do find the value property from one those incredibly sweet estate agents who is now your best friend: view the property but do not make your decision for at least one week, you will be under enormous pressure to sign contract and pay deposits but insist on the week to reflect on your investment, this or a better property will be waiting for you after a week.

Your investment aspirations may vary but your money is precious and could easily be a deposit on a jewel value property, remember an investment is what you make value is what you get.

TIPS
1. Never sign a contract you do not fully understand.
2. Get independent advice from expert solicitors and from financial advisers.
3. Obtain independent valuations and surveys.
4. Make sure your solicitor checks you are not inheriting debt.
5. Have a cooling off period of 7 to 14 days before signing contracts or putting down a Deposit.
6. Ensure any financial deal will return your deposit in the event you change your mind.
7. Have a mortgage deal in place before paying a deposit or signing any contracts.
8. Check all purchase and transaction costs.
9. Combine with friends to get a broader view about the merits of the purchase.
10. Set up standing orders for bills and taxes.

Remember get independent advice, you are only one customer of many, the agents, the solicitor, the banks and the developer deals with. You are only a small sheep in the big paddock, as the saying goes “they are all peeing in the one pot” enjoy your experience and be cautious. Thrust is a very important part of this business, don’t thrust, everyone wants your money; see the valve in the investment not through greedy eyes but through sound advice and a shrewd sense of reality.

A good investor is a shrewd investor. Who has the answers? Dig deep to reach the solid foundations, that is where to start to build your empire.

If you know what you are doing – property is a great investment – our aim is to ensure that you are informed and that you profit from our experience.

 

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