Property Investment International - Newsletters

PII Newsletter July 09 - Cheap quality prices

Dear Investor,

With summer well and truly upon us there are still many mixed signals coming out of many of the world’s property markets. Some of the talk of recovery is a little premature I feel. My view is that many markets around the world are starting to find a level of stability but there are neither signs that prices will rebound (or continue to fall much further) from this level. That means we’re in for a period of little real growth and an uncertain short term outlook. Thus, one should still be very selective about the properties purchased during this period until the future trends are clearer.

With this in mind, this month, we focus on property prices and why to avoid the heavily touted Below Market Value (BMV) deals.


CEE Property Prices

Official data says that Czech property prices fell 5.5% in Q2 2009, compared with the previous quarter. By most standards that is quite a drop in just a 3 month period. I expect prices to fall a slightly further in the short term but there are signs that a base appears to be forming.

Similar to prices in Prague the property prices in Bratislava have fallen around 15% or so (area dependent) in the last year and again probably have a little further to go in the short term before finding a base. Similarly to Prague, Bratislavan luxury properties have been the hardest hit.

Polish property prices have been falling for longer than their Czech and Slovak cousins, there has been a steady decline around 2 years now, with prices down in many cities over 25% from their peak. Prices are still edging downwards (0 to 2% per month depending on the city/location) but again a base appears to be forming. Poland could be the first of the former eastern block countries to show a property price recovery in 2010.

In Romania there is neither any official nor reliable data about property prices (and that’s part of the reason why banks are fearful to lend as they don’t know what the value is of a given property). Prices have crashed – anywhere from 30-50% depending on who you talk to.

Since joining the EU prices in Budapest have gone side-ways at best. In fact there has been, on average a 5%, year-on-year decline for the past 4 years – that is until 2009 when prices falls have accelerated to between 10-30% in some areas. As discussed in previous newsletters such prices falls are one of the many reasons why I haven’t recommended investing there for a long time. It makes you think though if finance (etc) conditions were to improve there has to be a point where Budapest would represent good value.

In the Baltics the prices falls have even out-stripped that of Romania – pick any large double digit number and you won’t go far wrong in estimating how much prices have fallen there.

Bulgarian property prices boomed from 2004 to 2007 (well the prices boomed but whether you could actually resell at the higher price is another matter). Though much of these gains for locals have been negated by high inflation. Since the second half of 2008 prices have started to fall – approx 5% in H2 08 and more in H1 09. Curiously I think markets such as Sofia will rebound relatively quickly and still opportunities exist there whereas markets such as the beach and ski resorts are in for at least another 5 years of trouble.

Ukraine is another market where prices boom almost uncontrollably (~50% per year for ~3 years) and got to a point where they could be more than double the price in Kiev or Odessa than in Prague or Warsaw. It just didn’t add up, and as such the painful unwinding process is still taking place and prices in such large cities are going to continue to tumble for some time to come (which is currently being compounded by uncomfortable economic woes).


Cheap deals – beware!

My inbox seems to be constantly full these days with property deals from around the globe offering huge discounts (usually 30-50%).

I have to ask myself why I’m not snapping them up immediately and why I can’t find deals with 50% discounts in Prague, Warsaw or in other good locations.

Usually the answer is that the deals just don’t stack up at all (not even close) and the only one making money out of them is the promoter (usually the fees gobble up most of the discount even it is a real discount).

When you get a property that has a 20% discount when the property is 30% over valued is it better than a property with just a 5% discount that is fairly valued? Of course not.

Usually owners of good investment properties can find buyers without discounting to a point where you can buy it with spare your change. Often the good deals are those by sellers under some pressure but at the same time know that they have a quality property which they don’t need to discount near to zero to find a buyer. It’s usually the low quality properties that have to be sold at “cheap” prices. I would argue its better to buy good properties in great locations that will do well long term with smaller discounts than buy a broken down property, which could have lots of problems, in an area with no hope of future growth.

So if you see deals with 50% off in boarded up towns in the US or on the coast of Spain there are usually pretty good reasons why such discounts exist. Try getting 50% off in New York or Madrid – perhaps theoretically possible but not something that will be being promoted to individual investors from abroad.

As always buyer beware – especially when it comes to heavily marketed BMV deals.


Quality fittings

Quite rightly investors want to save money on fittings (kitchens and furnishings) in their properties. However, the biggest mistake that investors make is that they buy a very nice quality property and then fit it out with a small cheap kitchen or low quality furnishings just to save a little money. In such cases it doesn’t matter how nice the property, or area around, is as the property will always look cheap and nasty.

We always advocate installing the appropriate level of fittings for the given standard of the property (whether it be high or low).

When the rental markets are tough properties fitted out cheaply suffer with lower rents and higher voids. Conversely a well fitted out unit will command above average rents and get let quickly – not to mention the benefits when you come to sell.

So yes save money where appropriate but don’t false economise when fitting out your property.


Despite the falling property prices around the world there is still a glimmer of hope in that stock markets around the world have rallied over recent months which may be a sign economic recovery is on the way. I wouldn’t recommend going on an all out property buying spree just yet but that horizon is moving closer at least. In the meantime I wish all a pleasant summer.

Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com