Property Investment International - Newsletters

April 2009 - resources, rentals, resales and stocks

Dear Investor,

Whilst our primary focus is property investment we are both open to and interested in other investment classes. My view is that at this stage in the economic cycle it would be foolish not to have at least part of one�s investment allocation in the stock market, which will undoubtedly rebound during 2009. My investing primarily focuses on industries in sectors such as commodities/resources, banking/finance and IT/technology, partly because this is where I have the most relative knowledge but also due to the interesting fundamentals to these businesses in today�s world. These are also key industries I look at when determining whether to invest in a certain property.

Commodities & demographics

In these times of economic uncertainty it can be difficult to know where to invest, especially to balance your risk and reward. At the moment it is too early to say how many western property markets will perform over the coming year or two. Many western governments are heavily laden with debt, unemployment is rising and their economies languishing in recession. There may be a quick rebound to this crisis or we could have another 10 years of problems, either way you need a crystal ball to see the future and I would recommend a cautious approach to such markets.

As I�ve written in previous newsletters I believe that the world is in for strong bout of inflation as we exit the global downturn. Not only are western governments are printing money, interest rates are very low, population growth continues and the economic development of populous countries such as India and China (and many more) with their huge emerging middle classes are starting to consume more and more are going to put ever greater demands on the world�s resources.

With this in mind I thought I�d take a quick look at some of the world�s property markets that could be the best positioned to benefit from such fundamentals as demand for basic resources and demographics.

Russia	Russia today is not the Russia of 10 years ago with its bank crisis and economic instability. Russia has huge natural resources. Although currently Russia is being hit hard by the global slowdown and property prices are falling fast, I think the Russia of the future will continue to develop and regain its prowess on the world stage. It has huge potential for economic development and will benefit greatly for the next upswing in demand for natural resources. It cannot be discounted. That said as a property investor the risks are large � shaky rule of law, corruption, poor mortgage financing etc.
Norway	Like many countries in Europe, Norway saw very large property price growth in the 3-4 years leading up to 2007/2008. Subsequently prices have been falling after such a boom (even before the crisis hit). Norway is well insulated from deep economic problems primarily due to their large oil reserves, but also fishing and timber. I imagine Norway will do well in future years � just a shame about the high taxes.
Brazil	Brazil has a lot of potential. Favourable demographics and a wealth of resources at its disposal � from forestry, to minerals and agriculture. Brazil will be an increasingly important player on the world stage and the potential for economic development is likely to translate into rising property prices. Although property prices are currently falling we believe this will turn around. Mortgages are very hard to come by as a foreigner. Do not by in holiday resorts on the coast.
Australia	Australian property prices were already at a peak before being hit hard by the commodities downturn. However, it is a dynamic economy with large quantities or minerals and will surely do well in the future. Cities such as Sydney have great demographics with large influxes of migrants. Always a good place to snap up a bargain at the right time.
Canada	Canada has not been directly affect by the subprime issues of its southerly neighbor. However, prices were at peak as we entered 2008 and have gradually started to fall over the last year. It is a strong country with a huge trading partner next door, not to mention large reserves of oil, minerals and a large agriculture, timber and fishing industries. Canada cannot be discounted as an investment location over the coming years.
China	Despite its recent slowdown China is not going away. Factories may have had to close down due to falling global demand but internal consumer demand is expected to rise considerably over the coming years, this combined with huge government spending will keeping China growing. China�s demographics are phenomenal. Property prices are currently falling and mortgages are hard to obtain. Short term supply is large but increasing demand will out strip this. China has huge potential but is not a place for the inexperienced or risk averse property investor.
India	India continues to undergo huge change. A rising population is putting increasing demands on housing. Economic development continues apace (but has a long way to go). Bureaucracy remains a problem. Speculation led to a mini bubble in cities such as Mumbai and prices fell thereafter. For most property investors, without family connections there, I would not recommend buying in India at this stage, though remains an interesting one to watch.
Turkey	Turkey has a large young population which aspires to betterment. Cities such as Istanbul are seeing huge increases in their populations. Many western companies are seeing a huge opportunity in Turkey whether it be in financial services products, media, IT etc. Turkey will continue to attract investment, develop its internal market and be a place I�m sure we�ll hear even more of in the coming years. That said property prices, eg in Istanbul, are not cheap. Mortgage products for foreigners have only recently been introduced and are immature. Turkey has potential but for now tread carefully when investing there.

What many of these markets have in common is that they are currently seeing large falls in their domestic property prices and are not without their various risks. For me the more developing countries such as China, India, Brazil & Russia are just too high risk and uncertain in the short term and not worth the considerable hassle for the individual investor [Aside: I would rather have a sold 10% growth at 80% finance with low costs and hassle than a more uncertain and less sustainable 30% growth at 50% LTV finance with higher costs and uncertainty]. A much safer bet, in the above list, would be Canada or Australia with Turkey being an interesting bet for those based in Europe.

Prague rental market update

As mentioned last month I have some concerns about the supply of rental apartments on the market in Prague so have started to collect data to prove my theory. I will release the full data next month but my initial findings show that, in Prague, sales supply is relatively static and rental supply is (still) increasing.

Official data is showing Czech property prices have fallen 3% since the start of this year due to falling demand. I suspect rental prices have fallen considerably more than this, particularly at the higher end of the market. Though the market is certainly not in any dire straits at this stage.

Resales and Mortgage Takeover services

Our quick sale service has been quite successful recently selling a number of apartments before completion, two of which were in less than a week. We are finding an ever increasing number of investors wishing to sell their properties and thus we�ve been working hard to deliver them results.

We�re also launching a new service for those who are struggling to pay their mortgages and are having trouble selling their property. We effectively take over the mortgage and clear any liability with the bank so that the owner is not pursued for their debts on their other assets.

In both cases if anyone is interested let me know.

Stock markets

As I mentioned in last month�s newsletter I thought we could be in for a sucker rally (in both the stock and property markets). Over approx the last 6-8 weeks global stock markets have rallied around 25%. I chose to sell into this rally and take profits. Though as this rally has continued I felt a nervousness that the markets may prove me wrong and continue heading north. In the last week a small sell-off has again begun � I will see how far this goes, before buying again.

Up until about 6 months ago I have, luckily, not had much invested in the stock market for the last 3 years. For the last 6 months, when I�ve had time, I�ve treated the market as more of a trading opportunity and tried to take advantage of the volatility and sentimental pricing.

However, now I feel we could be approaching a time when it could be a good idea to commit an increased volume of funds to the stock market, and take a longer term view, as we can�t be far away from a bottom forming, and the upside could be substantial and far better than many property markets will perform in the short term � though this is probably not a view you�d expect to read in a property newsletter.

For many property markets, such as the UK, I am still cautious and believe there is no need for panic buying.

In both the stock and property markets I am still concerned about the affects of rising unemployment and the potential for a lasting recession. Cautious investing is the order of the day until the picture becomes clearer.

Puzzle

The first puzzle a couple of months ago was a bit easy. So have a go at this one if you like �

Using the numerals 1,7,7,7,7 (a "1" and four "7"s) create the number 100.
As well as the five numerals you can use the usual mathematical operations (+, -, x, �).
For example: (7+1) � (7+7) = 112 would be close, but not quite right, because it is not 100.

Spring movements

Spring is now upon truly upon us and it has seen lots of changes for us in Prague.

We�ve done a number of mundane things such as changing our phone contracts to more excitingly a flurry of partnership agreements, as well as new staff joining us and being on TV.

We�ve also finally agreed a lease contract for new office space. We�ve just moved into a new office directly above Andel metro & bus station in Prague. We�ve not moved far � just down the street from Ostrovskeho 17 to Ostrovskeho 3. This helps me calms one of my obsessions about efficiency, the 5 minutes each way each employee will save going to and from a viewing or meeting will add up substantially over the weeks and hopefully make our operation even more effective.

Awards

We�ve recently been �nominated� for a couple of overseas property awards for our property services in the Czech Republic � the only catch is that we have to pay to enter the competition and even more if we win (more than a 5 figure sum!), not to mention that the panel have no real knowledge of our business. This to me is just another corrupt marketing ploy and which is why I have no respect for many of the pseudo awards overseas property companies win.

Hopefully next month I won�t be writing about more than just the effects of the world�s economic cold.

Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com