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PII Newsletter June 09 - Europe's basket cases

Dear Investor,

Since posting the data on the Prague market last month I’ve had a lot of feedback and a number of calls from worried investors (especially those about to complete on an off-plan unit). Therefore, I’ve included some updated data and further thoughts later in this newsletter on the Prague rental market.

I’ve continually got my eyes and ears open as to which markets will be best positioned for future growth and in which markets you may be able to pick up a real bargain. With this in mind we start this month looking at some markets in CEE that have been attracting attention for all the wrong reasons.

Time to look at the Europe’s basket cases?

When it comes to choosing which of Central and Eastern Europe’s property markets are in the most trouble three names immediately spring to mind: Hungary, Latvia and Romania.

Whilst I think the Czech Republic, Poland and Slovakia are far better situation for long term, steady growth, with better economies, easier mortgage financing and better rental markets the question that springs into my mind is just what would it take to make it worthwhile for an investor to buy into a market such as Hungary, Latvia or Romania?

What if you could buy in the centre of Budapest for just 500 euros/sqm or in Riga for half this? The answer would probably be “yes please” especially as the yields are likely to be high at such prices.

Given that a typical price in Prague, Warsaw or Bratislava is around the 2,000 euros/sqm mark at what price would it take to make an investment in Budapest, Riga or Bucharest add up?

Hungary

There has, for some time now, been political and economic instability in Hungary. The chances of this changing in the short term are not likely.

Property prices have continued to fall in Budapest and are likely to continue to do so. Many Hungarians have mortgage loans in foreign currencies (particularly Swiss Francs) and as the Hungarian Florin has weakened this has made many mortgage payments in Hungary that bit more difficult to meet.

Mortgages for foreign investors are still not great, 70% LTV is typical if you’re employed (at very high interest rates) otherwise you’ll struggle to get financing.

I see there being some interesting opportunities in Hungary if the economy and property prices stablise and financing improves. Currently it’s possible to get some healthy discounts and high yields, but not enough to tempt me yet.

To buy in Budapest I would be looking to pay a maximum of 1,000 euros/sqm and a get minimum of 10% yields.

Latvia

It has been well reported that the Latvian economy was in danger of going the same way as that of Iceland’s. It has been a classic story of boom and bust. With economic growth matching that of China, Latvia has been one of Europe’s tigers. However, such booms are very hard to sustain and the nation is now left saddled with debt it is unable to repay, a outflow of investment and a gloomy economic outlook.

The property market in Riga has crashed. Price falls of 50% are not untypical. Rental yields were already quite low (even 5 years ago). Banks have tightened their belts substantially making mortgage finance much more difficult than in the past. Many investors are hurting.

If we see a loosening of credit the market may again start to look interesting. It’s already possible to buy apartments in good locations in Riga for 1,000 euros/sqm. The prospect of being able to buy at prices substantially below this in a European capital city would certainly get my attention, though in the short term I think the property investment prospects will get worse before they get better.

Romania

Many investors have speculated on boom in property prices in Romania over the last 3 years or so with many companies predicting ongoing growth rates of 50% per annum and more. This of course was clearly unsustainable and was driven by developers continually putting up prices and investors continually buying at those prices making it a vicious circle that has come to a sorry end with crashing prices and many developers going out of business.

The situation has been compounded by a complete lack of mortgage finance for foreign investors – which is still the case today. Without the ability to get a mortgage many investors have had to either way away from a large deposit or send large amounts of cash to Romania to complete on a property that is worth substantially less than what they’ve paid for it.

Unless mortgage credit improves the market will be in trouble for some time to come.

If prices continue to fall well below the 1,000 euro/sqm mark (based on internal area) and the currency continues to slide then for brave investors with cash, external financing and a long term view it could be a great time to buy in Romania and take a bet on when financing will appear. This is however quite risky, but an interesting option nonetheless.


Unfortunately in all of the above market I don’t see the situation changing much in the short term, and thus I’d stay away for now. That said I think they’re worth keeping an eye on especially if property prices and their local currencies fall further and/or mortgage financing were to improve substantially.


Prague rental market

Many people have been shocked by the data I released last month about the large increase in supply on the Prague rental market. Below is a summarized and updated table showing the percentage increases through each part of the city.

Date	Praha	Praha 1	Praha 2	Praha 3	Praha 4	Praha 5	Praha 6	Praha 7	Praha 8	Praha 9	Praha 10
Supply increase since 10/03/09	26%	7%	35%	53%	38%	21%	18%	37%	18%	19%	32%

Interesting Prague 1 rental market supply has not increased that much, this is primarily due to the very low number of new build properties in Prague 1 and a smaller number of renovations taking place than in other parts of the city (much of Prague 1 is already renovated).

An example of just how much the rental market has been affected is with one of my own properties that last year I had rented at 17,000 CZK/mth + bills and this year was advertised at 12,000 CZK/mth and stood empty for 2 months.

Whether the supply can continue to increase is hard to predict but for sure some further increases are indeed possible. One thing is certain, in the short term I don’t see any reduction in supply taking place. Medium term I am much more positive and with the brighter spots on the horizon and many developers halting building works I see much of today’s oversupply being absorbed into the market and rents returning to a more satisfactory level.

This is a critical situation that I will continue to monitor for sure.


Prague sales market

Supply on the sales market has not notably changed over the last few months, though demand has continued to slowly drop.

Despite this prices have fallen around 15% on the cheaper end properties and around 25-30% on the higher end properties, which is not a pretty situation and something most Prague property agents will not tell you.

Many developers are not selling anything at the moment and are trying to put a brave face on an increasingly desperate situation. Most developers have not reduced prices but instead are often small incentives to purchase – unfortunately for them these techniques have not helped their sales. The only thing that will, in today’s market, is to drop their prices but most developers do not want to cause a panic in the market.

Unless something changes in the near future and property sales start to pick up again I think some developers are going to have to act before they go bust.


Development openings

I’ve had the fortune to recently attend some property development openings (some of the same developments that will be putting yet more supply onto the market). Notably these developments all had unsold units on completion, and it now seems quite common to still have 20-30 units still for sale when a development comes to completion. It will be interesting to see which developer cracks first and sell these units off cheaply.

I’ll post some pictures and comments on our blog in coming weeks.


Portfolio reviews

Reviewing investors portfolios and giving advice is one of the pleasures of my job and I’m happy to freely advise anyone who wishes. I’ve seen a number of companies providing such services (for a hefty fee of course) but I doubt many have the expertise to provide an accurate view – particularly in CEE.

Therefore, any investor who would like a free comprehensive review of their portfolio just get in touch.


It’s been an interesting first half to the year and the world economy generally seems more stable than it did six months ago. Hopefully the coming months will see conditions continue to improve. However, there remains a lot of uncertainty and my advice, as always, is to invest wisely and selectively, take advantage of heavily discounted deals in markets with excellent long term prospects and you can’t go too far wrong.

Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com