Property Investment International - Newsletters

PII Newsletter Oct 09 - future of worldwide property & Prague rentals

Dear Investor,

This month we release some interesting data on the Prague property market and explore where in the world should one invest given these changing times. The world has seemingly escaped Armageddon but many risks remain, so its vitally important to choose the best investment strategies and the best locations in which to execute them (and even more important to know what to avoid).

Prague rental market

I’m sure there are a lot of investors currently with either empty apartments in Prague or have had to take a lower rent than expected (I include myself on this list).

Now this could be because your letting/management agent is lazy and not doing a very good job (I very much hope I’m not on that list!), which can often be the case, but even for the few good letting agents in Prague they’ve had to face a tidal wave of supply onto the rental market. Some new developments can easily have up to 50 units on the market at the same time, which inevitably leads to price cutting.

Over the last few years the Prague rental market has been very strong, with good yields and low voids. Towards the end of 2008 and early 2009 I started to notice the rental market getting steadily worse and I surmised that it was primarily due to the increase in supply particularly from a lot of new developments completing all at the same time (as opposed to the weakening economy). Thus since March 2009 I’ve been tracking the sales & rental market supply in Prague – see graph below (or attached):



The graph shows that even since March this year rental market supply has increased a massive 45% and the trend is still upwards. The higher end of the market has been hit the most. With the strong Czech crown vs Sterling and a poor rental it’s no wonder we’ve been so busy with resales in the Czech Republic as investors decide to sell up (despite my recommendations not to sell at the moment as the sales market is also weak – which makes it actually a good time to buy).

The good news is that I expect this trend to reserve (but it will take time) many developers have simply stopped building at the moment which will restrict the supply over time, many inexperienced investors are pulling the plug and getting out, and Czechs who have moved to a house outside of Prague and kept their city apartment tend to eventually sell up for one reason or another.

If you’re struggling to rent a property drop us a line to see how we can help.


Where are (will be) the best property investment markets in the world?

Before looking at specific markets, let’s first take a quick look at how the world is changing and thus try to predict what the future trends will be and conclude by which countries will benefit the most (lets follow the money trail).

Some world trends are for example: increasing population (6 to 9 billion expected soon), the rise of China & India as economic powers, huge increasing demand for natural resources (water, oil, food, minerals etc), declining availability of resources, weakening US dollar, increased globalization and rising inflation.

Quite simply the increasingly population and demand from developing nations consumers for a better lifestyle is already putting a huge strain on the worlds resources, yet availability is decreasing. This trend is unlikely to abate. The world demand for oil, gas, coal, water, rice, sugar, wood, fish, meat, raw metals (etc, you get the idea) is rising and those countries with these resources in abundance will do well.

Oil prices are, again, already over $80 /barrel. In many western countries importing oil is one of the largest expenses, and acts like a huge tax to the nation, thus when oil prices rise too much economies tend to have problems. Conversely for those that export oil rising prices bring huge prosperity (if well managed of course). Green energy is unlikely to come on stream quick enough to change this oil equation any time soon. So as property investors we should all keep an eye on the price of oil (and probably not invest in too many far flung places that are heavily dependent on oil to get to).

The rising cost of energy and commodities, not to mention the US & UK money printing machines, are ultimately going to feed through to higher inflation and interest rates. Such environments can lead to high property price growth but can also get out of control and ultimately be painful.

Rather than investing in property directly into developing nations (to take advantage of rising populations with rising wealth) where the regulations may not be secure, mortgage finance not developed, an uncertain rental market, higher costs, less property management companies and ultimately higher risk, I would suggest investing in countries that are likely to benefit from world demand for basic resources and where the conditions for a profitable property market are already relatively well developed.

With these points in mind some of my favourite countries in which to invest over the next few years would be Canada, Norway, Australia & Brazil (though I can’t discount the US and UK entirely).

Canada – a huge well educated country. Massive natural resources from oil, timber, grain etc. It is also adjacent to the worlds larger consumer and geographically well positioned to export to both Europe and Asia. Canada’s property market has fallen over the last year but did not have the same problems as in the US, prices are surprisingly good value and finance is widely available. Not only that but Canada has one of the best standards of living in the world (not without reason) and they speak English which makes it much easier for the foreign investor to communicate as opposed to having to learn Chinese (though about half of Vancouver is from Asian decent). Canada has to be near to number 1 on my list of investment locations over the coming decade.

Norway – has become rich on oil money (but also has strong timber and fish industries). As the price of oil continues to rise Norway will, like Canada, prosper. At the same time Central & Eastern Europe property prices boomed, much of Scandinavia did the same (if not better). Recently property prices have fallen, though not very much, and have already quickly come back to 2007 levels. Norway will do well medium term though with typical prices in Oslo at 8,000 euros/sqm (compared to 2,000 euros/sqm in CEE capitals) it’s a more difficult market to enter on any scale without considerable capital.

Australia – similar to Canada, Australia is a land full of resources that Asia is desperate for. Despite a small recent blip in property prices, this already wealthy nation is likely to continue to get more wealthy and along with it property prices will increase. Both Canada and Australia have rising populations (from immigration) and have to quite strict immigration policies to have a controlled inflow. The richer these nations get the more people will want to move there which again will put extra demands on housing. Both Australia and Norway have had to raise interest rates recently to dampen expected future inflation as their economies are ahead of the pack.

Brazil – another large country which is becoming a stronger voice in the world. It’s going to have its problems as it develops but it’s now moving in the right direction. Again huge resources, with oil and gas discoveries coming on stream over the next few years, makes it a very self-sufficient country with a large enough surplus to export widely. An increasing population and rising wealth is feeding through to the property market. Better mortgage finance is expected to become available sometime in 2010 for foreigners (which until now has been difficult to obtain). Rio de Janeiro will host the Olympic Games in 2016. Avoid all dodgy promoters of beach/resort properties in Brazil.

US & UK – two of the strongest economies in the world are currently have a few problems. It seems the rest of the world is trying to sell the dollar and pound. Both country’s have more than their fair share of nation debt and economic problems, they are far from out of the woods yet but somehow I think you really can’t discount their future potential despite the problems – time will tell. What I can discount is some of the terrible property investments that seem to be touted by property companies. I seem to be on many such newsletters with the latest discount deal – but how many of them do you see in excellent locations like London or New York with high yields and high discounts? Personally I can’t remember any, though I can remember a lot in desperate parts of Florida, Detroit, Ohio and the like. Even if the supposed figures of say 20% yields turn out to be true and still wouldn’t touch them. I’ve seen some better deals coming out of the UK but often with very dubious valuations and in some questionable areas. If buying in the UK always buy with a good yield and protect your downside (eg choose a good area and leave a margin in case the rent were to fall).

While we’re on the subject of world markets below is a short snapshot review of other world markets:

Mediterranean countries (eg Spain, Portugal, Italy, Greece) - these are perhaps some of the worst places to invest in the western world. Forget them and, if you own property there, sell up if/while you can.

Africa – see last month’s newsletter for more details. Overall I’m not a big fan as there are many other places in the world with high returns for lower risk.

Middle East – I’m quite happy to leave investing there to others, there is something I just don’t understand about these locations as long term investment locations – perhaps it’s the falling oil supplies, lack of an open society, potential for war etc.

Central & Eastern Europe – I still believe the Czech Republic and Poland will do well over the medium term (Slovakia in 3rd place). Some of the more basket case locations are beginning to look more attractive. For example, I’m starting to turn from “cold” to “luke warm” in Hungary, Romania and Bulgaria (but not yet Latvia). Rental yields are now quite high in Budapest which is attractive, though the current economic situation (and currency) and mortgage financing (high rates, low LTV) is not pretty, so I’m staying out for now. Romania is still a mess with falling prices and no sign of mortgages coming. I think there’ll be some big changes next year are banks force developers to do something about the hundreds (thousands?) of investors who have not completed on their properties yet – this is a market I’m watching closely.

South & Central America – if for some reason you don’t like Brazil then I would suggest Chile and Argentina which are moving in a similar direction to Brazil. In Central America Panama is a clear winner (finance, billions being spent on the canal etc), despite being heavily affected by the financial crisis and the typical north American feeling poorer.

Asia – many parts of Asia are already booming again and I’m a big fan of east Asia with rising populations, strong FDI inflows, relatively well managed economies and hard working people. It’s still hard to invest in many of these countries, eg China. Singapore is very stable and with a strong property market (which has bounced back quickly), there is talk of the government wanting to double the size of the population there, which would be interesting. Many countries in the region have potential, I’ll be in this part of the world again around Christmas and will give more detailed views subsequently.

Get in touch for a more detailed discussion on world property markets as there is simply not space in this, already long, newsletter.


Hotels

A number of people have asked me more about the hotel investments that I alluded to in last month’s newsletter that I’ve been looking at. This is not normally (and probably still not) an area of my expertise, however, the basic premise is as follows: you can build and then operate a hotel/resort in some parts of Africa at African prices, yet if you choose the right locations (eg close to certain national parks, beaches etc) then you can charge almost European prices for food & accommodation. This simple equation results in high margins. Of course nothing is that straightforward and you have a host of other things to think about when investing such locations, but if you can mitigate these then such an investment could be very profitable.

Compare this to, for example, the Prague hotel market. Whilst Prague is a huge draw for tourists and tourist numbers have increased year-on-year until recently, the number of hotel beds have been increasing at a higher rate. Prague now has more beds than many of the other Central & Eastern European capitals combined. This year alone in Prague there will be, by the end of the year, 10 more high end 4-5 star hotels completed (mainly by large chains), which will only compound the problem. Even before this many hotels had empty beds (or even closed whole floors) and with the world economic crisis tourist numbers have crashed. It’s no surprise then that revenue per room has fallen 45% since last year in Prague and small hotel operators are struggling. You can buy some quite cheap hotels at the moment in Prague, but I’m in no panic to buy just yet.


Investments

We currently have two investment opportunities available in the Czech Republic.

  1. Metro Residence - heavily discounted high quality development next to a metro station in Prague.
      a. Metro Residence
  2. Odeon – very cheap prices down to around construction cost in the centre of Most.
      a. Odeon



Stock market investments

It’s now been approximately one year since I started to put money back into the stock market, and it’s been a very exciting year. The first 6 months of which were very volatile and nerve racking but ultimately very profitable. Since then the market has seen a large steady uplift, which has been very reassuring and makes it easier to sleep at night – luckily yes those stocks were cheap and it wasn’t just my delusion.

The FTSE is now back above 5,000 and the DOW around 10,000. I’d love to know what will happen from here, but I can’t predict the future. Stocks certainly aren’t as cheap as they were (ie they are more risky) and there are signs economies are coming out of recession, but there remains a lot of risks – many of which human nature will probably overcome, before the next crash. My advice remains the same, do your homework, be cautious but when the numbers add up and you’ve covered your downside then take action!

I still believe property is one of the world’s best long term investments but I was actively investing in the stock market before I bought my first property and will continue to do so when the timing and prices are right.


Despite the dark winter nights now approaching I think the worlds investment environment is looking up and this winter will be a great time to pick up some good deals. Good luck.

Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com