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Emerging versus Established Property Investment Markets


5th May 2005 | back to article listings BACK    print this article PRINT

The number of Britons owning a property abroad is expected to double by 2008, as more of us recognise the value of a holiday home overseas as a serious investment. Encouraged by the recent expansion of the EU, many buyers are looking further afield towards immature markets such as Bulgaria and Croatia, in search of investments that will offer higher yields and the potential for vast capital gain. But what are the risks?

There is no denying that low property prices in such countries are irresistible to many investors, who are looking for a quick fix to their retirement savings through increases in property values. An abundance of beaches and world-renowned ski resorts combined with a low cost of living, makes Bulgaria an attractive choice - properties prices are amongst the lowest in Europe, with studio apartments in the Black Sea resort of Sunny Beach costing typically as little as £30,000. But despite promising returns, investors must be wise to the risks of buying in an emerging economy.

Most of the apparently ‘bargain’ deals citing properties for under €30,000 will be located in the more rural areas, which are unlikely to enjoy such high growth rates. The ski destinations such as Borovets could well offer the stronger rental incomes in coming years compared to potentially over-developed areas like Sunny Beach.

Price increases can be measured by the rapidly increasing selling prices from agents but there is no established resale market yet, indicating that investors would be wise to choose a long-term investment strategy rather than hoping for instant returns. With the vast numbers of cheap properties being built, there seems there may be an oversupply situation developing in some areas which will not become apparent until investors try to sell at completion.

Rental Demand
There is a genuine demand in Bulgaria and Croatia for quality rental properties but written contracts with holiday companies are vital as a means of ensuring a guaranteed yield. Many developers are claiming they have ten-year contracts with big tour operators that allow them to offer ten-year rent guarantees of 8% income, but this so-called guarantee is sometimes offered from a shell company that could fold if rentals do not materialise.

For reliability and stability of investment income, more mature markets such as Spain and France are far more preferable and still stack up brilliantly against the competition. Capital growth in Spain is high and still forecast to grow at 10% a year for the next 5 years at least.  Off-plan purchases at discounted rates still offer the best opportunity to maximise profits. Year-round sunshine and the extensive development in recent years of world class golf courses, makes 30- 35 weeks annual rental a realistic goal, with potential gross yields of 10 % plus.

Investing in France is relatively easy – no language skills are necessarily required, obtaining finance is generally straightforward and the legal process is now a well-guided path. Prices are still rising strongly and there is a good lettings market, with 60 million tourists visiting each year combined with the fact that high numbers of French let their homes rather than buy, increasing demand. The French leaseback scheme on new-build property offers buyers the opportunity to secure a guaranteed rental income for a minimum of nine years, and leaves them with a property to enjoy into retirement.
 
Cyprus is another excellent choice and a top destination for Brits. An EU member since 2004 and preparing to join the Euro in 2007, Cyprus is on the verge of a significant economic and political change. Investors would currently be looking at prices in the region of £250,000 for a three-bedroom detached villa with a private pool, which are expected to rise in value by 50 plus once the effects of the Euro kick in and mortgage rates drop to eurozone rates. Advantageous tax rates make Cyprus attractive for retirees too, who would enjoy a flat rate of income tax set at only 5%.

It is certainly the case that emerging Eastern European markets have a lot to offer to patient investors who are not dazzled by promises of 100% capital gains within twelve months. Long-term strategies focused on properties in sensible locations are likely to be rewarded, rather than those looking for a ‘quick-fix’ to a pension shortfall. In the short-term more traditional markets such as France and Spain are much safer bets, with their popularity as holiday destinations showing no signs of waning, and competition creating opportunities for deals to be made. Strong rental markets mean most investors will only need to rent out their properties for between 7 and 20 weeks a year to cover mortgage costs depending upon the country and the property – anything more will be a bonus – and they can relax in the knowledge they are unlikely to fall victim to any sudden price falls.

Until there is some similar kind of benchmark by which to measure price increases in emerging markets, potential investors should act with caution and do careful research on the long term potential of the market.


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