Property Investors' Guide to Europe
Copyright: David Lawson - first published Property Week August 2005
Overseas second home ownership grew by nearly 95% between 1993-2003 according to international agent Knight Frank. And growth could remain in double digits for the next five years.This kind of surge was entirely predictable. Every time property prices soar in the UK, the ripples spread rapidly outwards as home owners use surplus equity to find a place in the sun. An estimated 329,000 households owned at least one second home in 1994, almost 30% of them outside the country, according to the Knight Frank International Property Review. By 2003 this had risen by 51% to 497,000, of which 36% owned properties abroad. The number of households involved doubled from 91,000 to 177,000.
Buyers tended to focus on places they know from the package holiday boom such as Spain, France and Portugal, plus centres such as Tuscany and the Dordogne which have been fashionable among upper middle classes since the 19th century. This time around the net has widened. The collapse of the Iron Curtain and widening European Community have brought in former soviet states while better travel, greater access to finance and sheer ambition have added countries as far away as New Zealand.
Eastern and central Europe are currently grabbing most headlines. A poll of visitors to the recent Homebuyer Show showed almost 40% of respondents were aiming to invest in countries such as Bulgaria, Slovakia, Poland and Croatia. This has much to do with the transition of ‘buy-to-let’ into ‘fly-to-let’ as the UK market overheats and a torrent of TV shows and exhibitions reveals the deep well of cheap homes in these emerging markets.
Tower blocks in Riga and Budapest play a big role but the sun remains a powerful attraction. Almost a fifth said they were looking for ‘beach destinations’. Similar numbers intend to use any purchase as a holiday home for themselves and another 20% are aiming to offset costs with holiday letting. The twin surge of a race to the sun and investment returns has triggered new development in many traditional holiday locations, especially in the coastal areas of the sunbelt countries in Europe, the Caribbean, Florida, Australia and South Africa.
And the ripples will build for the rest of the decade. A combination of factors such as the trend to earlier retirement, better work/life balance and easier access to finance will increase second-home demand. Few insiders believe the UK market will collapse, so home-grown property will remain in short supply. Pinpointing which countries developers and investors should target, Knight Frank says buyers have a consistent set of priorities:
Preferred locations are traditionally Spain and France. An estimated 40% of the market in Gascony is second home buyers. Italy and Portugal are also popular. Second homes account for the majority of demand in Tuscany, with purchasers mainly from the UK. Florida has been a favourite since the pioneering Laker Airways cheap flights era and remains popular because of remarkably low prices for quality property. Other non-European countries such as South Africa, Canada and Australia account for nearly one fifth of overseas second homes owned by UK households, says Knight Frank. India, Morocco, Dubai, New Zealand and even Vietnam have joined the list regularly on show at property exhibitions in the UK.
Most excitement, however, is being generated about central Europe as borders disappear, revealing quaint villages stuffed with cheap homes in Croatia, Bulgaria, Hungary, Poland and the Czech Republic. The trouble with excitement is that it can blow away reason. A legend emerged during the last diaspora back in the Eighties that airlines provided passengers with special airport storage lockers to leave their brains when they jetted to the sun. They were then free to hand over deposits on half-built villas and dodgy timeshares from someone they met in a Spanish bar.
One of the sharpest analysts of foreign markets, Neil Lewis of online advisors Propertysecrets.com, confessed in a Property Week column about how many investors still get the so-called ‘sun markets’ wrong because they overlook some of the fundamentals of investment. Both Croatia and Cyprus, for instance offer some spectacular potential investments. But mortgage availability in the central European state is ‘practically zero’. That means paying cash – which many buyers do by liberating equity from UK property – or borrowing over here.
As any experienced investor knows, borrowing is the key to premium returns. Cash could yield good profits but nothing like those produced by ‘gearing’. And borrowing in sterling leaves investors open to the vagaries of currency movements. Firstly, a bargain could be far more expensive if the pound falls in the period before the deal is signed but more importantly it could eat away profits over the long term. Property on a Cyprus beach might appear less attractive but be better value because mortgages are available to foreigners. The island is also in the EU, with all the controls and safeguards that could be expected. Croatia is aiming for entry but until that happens there are greater risks.
Knowing your customers is another key to successful property investment. Cyprus and south-east Spain are primarily retiree markets, while countries such as Croatia and Bulgaria are holiday destinations. Don’t get the two mixed up, says Lewis. Retirees stay longer and like to be near the sea. They go mainly for modern developments. Holidaymakers have more catholic tastes but are more susceptible to the competition. Developers are hooking into this market with hotel-based schemes around the Baltic states, just as they did when demand soared along the western Mediterranean.
Even within the EU, legal and financial differences should be factored into investment decisions alongside the stunning view, quaint cobbles and bargain-basement price. Disputes over title rumbled on long after Spain and Portugal joined, because too few UK buyers used local lawyers who know the intricacies of their legal systems. The key is to avoid using those special lockers at airports and approach every investment the same as in the UK. Big property investors such as pension funds and insurance companies have invaded Europe in a series of waves over the decades and most scuttled back with their tails between their legs. This only began to turn around when they brought in experts who know local markets. Private investors have been too keen in the past to invest on gut feelings. With advisers such as Property Secrets now easily accessible, it should be possible to avoid ending up with a pain in that gut.
Prices and Transaction Costs
Source: Knight Frank International Residential Property Review 2004/5
Average price annual Transaction costs as % of purchase price Annual Rent
(€‘000’s) rise (fall) % Yield %
Apart Villa Apart Villa Transfer Agent’s Legal Apt Villa
Tax Fee Costs
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London 2,300 4,600 7.6 5.2 4 by vendor 0.25-0.5 5.1 5.50
Florence 750 5,000 10 0 10 0-3 1-2 4 4
Monaco 2,750 n/a 10 n/a 9 3* -* 3 n/a
Moscow 2,500 5,000 30 40 13** 2-4 1-2* 12 6
Paris 1,500 3,500 10 10 6.5 4 - * 4 4
Barbados 700 1,600 5 5 *** by vendor 1.5-2 3 5
Cote d’Azur 875 1,500 flat 0 6.5-8 5 -* 4-5 4-5
Croatia 300 900 20 35 5 3 1 20 20
Mallorca 500 1,500 5 10 7 5 2-3 4-5 5
Marbella 400 1,750 10 10 7 5 2-3 4-5 5
SW France 250 600 fla < 5 6.5-8 5 -* 4 3
Tuscany 500 2,500 0 (10) 10 0-3 1-2 5 5
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* included in transfer tax
** income tax if held less than 5yrs
*** foreigners exempt
Key Assumptions: