Tourism Property: European Hotspots
Copyright: David Lawson - published Property Week August 2005
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Mention Croatia or Bulgaria five years ago and people would reach into their pocket for war relief aid. Nowadays they are more likely to be seeking a mortgage. Buyers still swarm to the Mediterranean and balmier areas of France and Italy for holiday homes but as jet-to-let fever runs rampant, the hunt for untapped markets have become a key issue.
Half the property professionals looking for housing investments in central and eastern Europe put Croatia at the top of the list, according to a survey by Investec Private Bank. Bulgaria and Poland were not far behind. Many may be looking hungrily at new blocks of flats rising in city centres in a bid to reproduce the rewards seen from buy-to-let in the UK but a significant number are being drawn to coastal or mountain resorts as the holiday market booms. Private investors should avoid being sucked into the kind of frenzy that could leave many with severely burned fingers.
Croatia boasts dirt-cheap cottages which are ideal for TV programmes showing retired dinner ladies in search of a pension and holiday home. But their hopes rest on a rich flow of rents and booming prices. Otherwise they might as well go to a UK auction crammed with equally cheap terraced houses in Burnley or Blackburn showing income yields of 10%-plus. Prices in a country like Croatia are low for a reason. Mortgages are unavailable for foreigners and, with EU accession talks stalled, that looks like staying the case for some time. The legal system is a minefield with ownership often split between dozens of family members, making negotiations a nightmare.
Even after agreement, dense soviet-style bureaucracy can still mean deals take a year or more to complete. As in the early years of investment in Spain, Portugal and even France, the best solution for novice buyers would be a specialist that understands the complexities. Savills, for instance, has set up an alliance with Croatiansun, a Dubrovnik-based property consultancy headed by two Britons, while Property Secrets has both an online service and library of guides. They are in the business of selling, of course, but behind the ‘hot deals’ is a wealth of information on the perils as well as the potential of faraway places.
Bulgaria, for instance, seems a prime target for anyone itching to reinvest UK profits, with prices up 35% last year and villas around busy Black Sea resorts going for less than £100,000. But Property Secrets points out pitfalls such as the fact that big money is moving in so fast that supply of holiday homes – particularly hotel-led development – is set to explode. That may be irrelevant to anyone seeking a family getaway. In fact it will be a bonus, because roads and other services will improve. But if the figures depend on letting, finding tenants could start to prove difficult in the face of all that opposition and price rises could stall.
Investment is not restricted to beaches and ski resorts. Capital cities such as Prague and Warsaw are now firmly on the tourist trail. In fact, they can be a better bet because letting is backed by local tenant demand as economies rise to EC levels. Most western developers and professional investors are concentrating on these centres. Other former Soviet countries under scrutiny include the Baltic States. They are closer to the UK but the sun factor is less powerful in these northern countries and markets are still unproven.
Lithuania’s Vilnius offers huge potential, with yields up to 11% [compared with borrowing at 5%] and rapidly rising prices. But rents are softening and the market has yet to be established, so this is likely to be a long-term bet. It boils down to the same fundamentals as any property investment. All these markets offer potential high rewards but this may take several years to emerge and carries higher risk than more established countries. Ideally, investors should spread their money between safe and high-risk markets, says Property Secrets.
That means concentrating on strong cities such as Prague, allocating a smaller slice to exciting but secure growth markets such as Bratislava and punting 10-15% on a high growth/high risk city like Riga or a Black Sea resort. Up to half a portfolio should remain in the UK, where low returns are balanced by cast-iron security. Or buyers should reign in their ambitions and do the same as most UK travellers – aim for the familiar.
Spain and France may seem old hat and overpriced but they offer security and stability. Marbella is an old faithful beginning to face competition from inland locations, particularly for homes worth more than 500,000 Euro. But the market remains dominated by overseas buyers and a quarter of those handled by Knight Frank are investors, often buying off-plan. That provides the critical element of a resale market. Prices may not have the potential of a Riga or Dubrovnik, but they rose 10% last year and the much predicted nationwide slump has failed to happen again this year as rising incomes across Europe underpin demand for holiday and retirement lettings.
Mallorca shows similar resilience, says Knight Frank, and a development freeze has restricted supply. Most buyers are owner-occupiers but the letting market is underpinned by access via an international airport and one of the largest concentrations of golf courses in the world. These could take years to emerge in newer markets. There are risks even here, however, and Property Secrets says limited long-term rewards following a tripling of prices on parts of the Spanish coast make it worth investors looking elsewhere. Cyprus, for instance, is expected to see 50% price rises when it joins the Euro in 2007. The mountainous terrain restricts the amount of potential development. Developers predict supply could be used up within five years.
France may seem sucked dry but is so popular with travellers and retirees that prospects continue to emerge. Golf-related development is expanding in the south while there is still restorable property available for around 40,000 Euro in the Loire Valley. Property Secrets also points out that a new form of finance, equivalent to UK equity release, could have a big impact, while Knight Frank picks out a similar boost from the reduction in capital gains tax from 25% to 16%.
Italy – particularly Tuscany – is another old favourite that many not show the spectacular increases predicted in central Europe but is unlikely to see overdevelopment or changes of fashion. The key factor, as in so many long-term successes, is access to airports as well as scenery. Prices have recently edged down but this is mainly a drive for quality, so buying in the right place can be crucial. More ambitious investors will be looking beyond even the newer markets. Almost a fifth of overseas second homes are already outside Europe, according to Knight Frank. Dubai is coming up fast on the radar with massive development aimed at moving the balance from oil to tourism and finance.
Florida continues to attract buyers to property twice as good at well below the cost of European resorts, while Las Vegas is moving up the scale as it becomes the largest tourist centre in the world. Even Australia and Thailand have caught attention and the 20,000 fans who followed the New Zealand Lions tour are understood to have put a rocket under the investment market. They should think twice, however, and then think again. Low prices and breathtaking scenery are not the secret of good investment. Even last year’s price rises may be irrelevant. Legal barriers, currency variations, potential future supply, airport access and a host of other factors could mean they are far better aiming for a villa in Mallorca or even a terraced house in Burnley.