Property overseas

As recently as a decade ago, who would have thought of buying a flat in Tallinn, Sofia or Prague? A buy-to-let in Manchester or Leeds, perhaps, or maybe a holiday home in the Dordogne or Chiantishire, but that was about it. Few people had even been to Estonia, Bulgaria or the Czech Republic, let alone contemplated investing their hard-earned cash there.

That was then. These days, it seems, no self-respecting property portfolio is complete without an “emerging market” or two. Yet just as we are becoming used to these new exotic destinations, so making money in them is proving more difficult than it once was.

In the 20 years since they sent the Russians packing, the former communist countries of central and eastern Europe have provided everything the property investor could wish for: as their economies have been restructured along western lines, so incomes and house prices have risen — sometimes at annual rates in double digits — and local interest rates tumbled, fuelled by easy credit.

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In much of the region, though, the party is well and truly over, at least for the time being. Prices in Estonia and Latvia, for several years the poster boys of the region, have fallen sharply. Anyone who has bought a new build off-plan in Tallinn, the Estonian capital, in 2006 will find it worth 10%-15% less once it is completed this year.

The market also appears to be turning in Poland, after average rises of as much as 51.6% last year, reports Mamdom, an internet property portal. The prices of flats in Warsaw are falling and look set to do so through much of this year as the market struggles to absorb the number of new developments being completed. Krakow, that picturesque favourite of carousing British stag groups, is also looking overheated.

Yields everywhere in the region, not so long ago still in double digits, are down near or below the cost of borrowing — which has itself been pushed up by the credit crunch. The days when it was possible to mortgage yourself up to the hilt and still enjoy a positive cash-flow are long since past.

So is there anywhere left in the new Europe where it is still worth buying? Neil Lewis, founder of Crewe-based Property Secrets, which specialises in sourcing new-build property in central and eastern Europe, says the overall price trend remains upwards, but points out that most countries develop along a similar path: an initial phase of rapid growth, followed by months of stabilisation and then a second period of modest but sustainable rises again. “What you should bear in mind is that these are emerging markets, but emerging within a very safe political and therefore economic environment,” is his analysis.

Lewis’s tips? Sofia and Bucharest, capitals of Bulgaria and Romania respectively, are both still in the early stages of the first phase, he says; Prague, the Czech capital, and Bratislava, its Slovak counterpart, are already into the second phase but still solid investments.

There are countries he would avoid, however: Hungary, because of its overall poor economic performance, and the Baltic states, where prices simply went up too far too quickly.

Mark Giddings, 36, who works in operations for a Japanese investment bank in the City of London, is among those putting his money on the region: last February, sensing the long bull market in the stock market was coming to an end, he sold his shares and bought two properties off-plan in Sofia and one in the Romanian city of Brasov for a total of £180,000.

“I just felt there is more potential for capital growth in those markets,” says Giddings. “Both have recently joined the EU, there is lots of foreign investment going in and there is a young generation in their twenties and thirties who want to go out and work and earn money — and they want to live somewhere better than all those old communist buildings.” He admits, though, that he has “an appetite for risk”.

But why confine your search to Europe? Egypt and Morocco both offer low entry prices: you can pick up a studio in the Lotus Breeze development in Hurghada on Egypt’s Red Sea coast for as little as £14,500 and a one-bedder for £22,500 through Egypt Venture (www.egyptventure.co.uk) — although the sheer amount of construction underway in both countries could hit rental income and constrain capital growth.

Such oversupply has already cast a shadow over parts of the market in Dubai — prices increased rapidly earlier this decade, providing huge profits for speculators who bought and sold on their properties even before they were finished. Things are a lot calmer these days and the prices of flats in some developments are expected to fall back as more projects are completed. Rents, though, are strong and even rising in some cases. The smart money, meanwhile, is moving to neighbouring emirates such as Abu Dhabi or Ras al Khaimah trying to emulate Dubai’s success or slightly further afield to Oman and Qatar.

India, too, is finally coming onto the radar of British buyers keen to benefit from the country’s huge economic potential that looks set to transform it into a global superpower. Prices are still extremely low by international standards — David Stanley Redfern, for example, is selling two-bed, two-balcony 1,060sq ft flats in a newly established special economic zone at Rudrapur, in Uttarakhand in northeast India, starting at just £29,000 (0800 634 2377, www.davidstanleyredfern.com). Although people of Indian origin can buy freely, those without a connection to the country may need to set up a company and buy through that.

Not exotic enough? Then what about Mongolia, a country rich in copper, gold and oil, which is benefiting from the global commodity price boom? “The capital, Ulan Bator, has a unique property market, and one that should appeal to any sophisticated property investor,” says Emma Holifield, a marketing executive with Property Frontiers, which is selling flats in The Temple development there, with prices starting at about £85,000 for a 1,410sq ft two-bedder.

“With half the population of the city living in the traditional mountain tents known as gers and the other half in old buildings with bad insulation, demand for good quality accommodation for locals is vast,” she says, going on to claim that rental yields are still as high as 13%, thanks to a supply squeeze in the middle market.

And there is the Far East. Claire Brown, founder of Claire Brown Realty, which sells across the region, says those in search of a pure investment should bypass already well-established markets such as Thailand or Malaysia and make for Phnom Penh, the Cambodian capital. “It’s like Bangkok or Kuala Lumpur eight or so years ago,” she says, and if you think her claim that “there is a rising middle class of Cambodians who want funky high end loft-style living” is substantial enough to base an investment decision on, about £50,000 will buy a flat in a refurbished French colonial building with the prospect of 9% gross yield a year — “and there are waiting lists of people to rent them,” adds Brown.

She also tips Manila, capital of the Philippines, where prices start as low as £35,000. Prices in both cities are rising strongly, driven by economic growth and demand from the locals.

If that seems a step too far, the Caribbean is also emerging as a destination for investors. Thanks to the year-round sunshine and popularity of the region with both American and European holidaymakers, resort-style developments, typically clustered around a hotel, are the islands’ up and coming investment product — and currently offer better yields than holiday properties in France or Spain where the climate makes the rental season much shorter.

Marco Bonini, managing director of Caribbean selling agents Prestigious Properties recommends Providenciales island, part of Turks and Caicos. “It’s a British protectorate and everything is based on UK law,” he says. “It’s a tax haven, there is no income or inheritance tax, it is politically stable, there is zero crime and everything is priced in American dollars.” Bonini bought into the Alexandra Resort and Spa on Grace Bay when the scheme was announced in 2004, paying £133,750 for a studio and £169,600 for a one-bed flat. They have since been valued at £185,000 and £285,000 respectively, and have been yielding him 6% a year.

Bonini expects prices in both to continue upward and, for those with slightly more to invest, recommends Canoan island in the Grenadines; Pirates of the Caribbean was filmed nearby. “About £470,000 will get you a one bed,” he says of the product he is marketing in the UK, justifying the claim with the explanation that it will have scarcity value, “because there is just no land to build on and the authorities are very careful about granting planning permission.”

Back on the mainland, central and south America also have their charms. Panama, in the grip of a property building frenzy, offers good growth prospects and high rental yields. And with its currency pegged one to one to the American dollar, property has been getting cheaper in sterling terms.

The northeastern coast of Brazil is also proving attractive to investors looking for holiday property — along more than 1,000 miles of coast from Salvador to Fortaleza, fishing hamlets are being swallowed up by gated resorts with private pools, golf courses and spas. Here, too, the sheer scale of what is going on necessarily provokes fears of overdevelopment — although the emergence of an increasingly affluent Brazilian middle class means there is not too great a dependence on British and other foreign buyers.

So is there anywhere left? Although one of the world’s wealthiest countries, New Zealand, too, is proving an attractive emerging market for some British buyers, not least because of the tax regime: there is no stamp duty, land tax, property purchase tax or capital gains tax.

Property New Zealand, for example, is selling the Harrogate Apartments development in the Auckland suburb of Flat Bush, priced at £115,000 for a one-bed 646sq ft flat. Unusually, they come with a 15-year lease from Housing New Zealand, a government agency, which not only gives you the security of a steady yield of just over 5% but also saves you the hassle of finding a tenant 12,000 miles from home.

Peter Conradi’s book, Fly to Let, is published by Cadogan Guides, £12.99.www.flytoletguide.com

Exchange rates

THE ups and downs of international currency can make or break an overseas property investment. Say, for example, that you bought a flat in Spain two years ago, committing to a fixed euro mortgage with monthly repayments of ¤1,000. In March 2006, with ¤1.46 to £1, your first payment would have cost you £681. Now, with £1 buying only around ¤1.30, you’ll have to find £764 a month. Though of course rental income in euros will also have increased in value against sterling.

Or you might have paid outright for a 2m rand house in Cape Town, South Africa — which would have cost you about £185,000 in March 2006. Today, a 2m rand property will cost only £129,000, as the rand has fallen from 10.8 to 15.5 to £1. So even with the Cape’s recent price inflation, your purchase, should you wish sell it today, will barely make back the original outlay.

One way to minimise the impact of exchange-rate movements is to find a specialist broker to give you a “forward contract” on a fixed exchange rate for a fixed period, which can usually be for up to two years. This way you will know exactly how much sterling you will have to find for that period, though you could lose out if the real exchange rate goes against you.

Shop around for the best rates, which are unlikely to come from high street banks — and also look out for the cheapest transfer charges and other fees. If you could accurately predict the world’s currency movements you would be too rich to be reading this, but make sure you factor them into your investment risk assessment.