Property Investment International - Newsletters
PII Newsletter Nov 09 - Buglarian office, currency, VAT & scams
Dear Investor,
I’ve been travelling even more extensively than normal recently visiting many property markets trying to determine which markets represent the best place to get a low risk high return deal – a subject that is permanently on my mind – more updates on this before the end of the year. As this newsletter is being sent this month from Bulgaria its seems appropriate to start with a quick look at the Bulgarian property market and what PII is up to there.
PII office in Bulgaria
We’re very proud to announce that we’ve recently opened a full time office in Sofia, Bulgaria, to look after our growing number of investors properties there. Previously we had used Bulgarian partners in Sofia but the arrangement didn’t work as satisfactorily as we’d hoped. Now we have much better control over the levels of service that we strive to deliver.
We’re very lucky to have a great team in place and we can now offer the same full range of services as we do in other locations (such as the Czech Republic and Slovakia). Our services include fit-out, kitchens, furnishings, full hands-off property management, lettings and resales. We are focusing exclusively on the Sofia property market and have no intention to operate in the ski or beach resort locations.
It’s well known that the Bulgarian ski and coastal resorts are heavily oversupplied and are going to be a mess for some time to come, but the capital Sofia also is now suffering from severe overbuilding. Prices have been through a boom and bust cycle spurred on by massive speculation and now many parts of the city have developments built in the last 2-3 years standing completely empty. There are literally thousands of apartments across the city standing empty and many developers are going bust (a similar situation is taking place in Romania). It’s not surprising that banks are not willing to lend and hence finance has now become very difficult even for Bulgarians.
A phrase I’m hearing a lot in Bulgaria is “to buy a property in Bulgaria is to own it for life”. It’s a big commitment in many ways when buying a property in Bulgaria – and I know the feeling only too well.
Personally it’s been an interesting journey for me, having bought my first property in Bulgaria in 2003 and to watch first-hand how the market has developed (or not depending on your perspective). Despite the short term difficulties I’m more optimistic about the future of the Bulgarian property market.
Due to the problems its now possible to buy property in Bulgaria at incredible prices that cannot go much lower. Bulgaria has some of the lowest taxes in Europe (e.g. 10% corporation tax, 5% on dividends & 10% income tax) and the new Bulgarian government is committed to change and turning the country around. The EU has given their vote of confidence and released 4bn euros of much needed funding to Bulgaria. It’s going to take a lot of time and money to make the necessary improvements the country needs but at least now it finally seems to be moving in the right direction.
If anyone is interested in any of our services in Bulgaria then just get in touch.
Currency trends
Currency exchange rates are just one of the many factors international property investors need to take into account when making investment decisions. It is an often forgotten factor yet one that can have a huge impact on your investment returns.
For anyone who had invested 100,000 GBP in the Czech Republic say 3 years ago when the GBP vs CZK rate was around 45 and were to sell today when the rate is just under 29, even if the property did not increase in value that same property would be worth an incredible 155,000 GBP (i.e. a 55% increase!). Factor in some property price growth into the equation and you can easily see what a big effect currency exchange rates can have in just a short space of time.
The point is if you can find a property market where the currency is relatively weak, but has the fundamentals to strengthen and with the right conditions for property price growth then you’re in a win-win situation. Luckily it’s possible to find such markets and property price growth and currency appreciation can often come hand in hand. Such conditions were present if you’d invested in the Czech Republic a few years ago using pounds sterling, which is easy to see with hindsight but the question is where are such conditions present today?
Everyone is talking at the moment about the demise of the US dollar (and the UK pound), however, when everyone down the pub is talking about how to short the dollar I wouldn’t be surprised to see some retracement and some people getting caught out. Despite some of the problems the US and UK face I would not totally discount them. I tend to agree over the long term the trend of the dollar and pound is downwards especially with the lax policies of the current governments and this is one of the reasons I’m nervous about moving too much money back to the UK to invest in some property deals as I could find the money is just not worth as much in the world as it once was (this has already been happening to the dollar and pound over the last few decades).
Short term currency fluctuations are very hard to predict even for so called currency experts. However, if you look at how the world is developing economically and the balance of trade it’s possible to make some medium term predictions (bets) of how currencies may perform.
Along with my arguments in previous newsletters about global trends and demand for commodities I would argue a country such as Brazil has the near perfect conditions for both an appreciating currency and property market.
This subject of currency movements and global economic trends is one we’ll revise in future newsletters as is key to understanding where in the world to invest.
Dubai
I couldn’t help making a topical mention of Dubai as a great example of a boom property market with shaky fundamentals that in the end has come to an end. The basic laws of this planet say that when you get 30-50% price growth its rarely sustainable (or indeed real) and nearly always ends painfully especially when its combined with such speculative investing and massive overbuilding.
Even 5 years ago it was plain to see that Dubai was a speculative market built on debt. As human greed is one the strongest of emotions such market speculation and subsequent bust is unlikely to go away. Will people ever learn?
Recent similar examples could include Romania, Bulgaria and Latvia in the sorry list of markets that have gone bust, yet at the same time these very same markets could be where the best opportunities are to buy distressed assets. I expect 2010 will be a very interesting time for such markets.
Scams
In these harder economic times there seems to have been a rise in spurious ways of extracting more money out of clients by some companies.
One of them is to threaten people with the need to change their address on their EU card in the Czech Republic. This includes telling people you’ll be in trouble with the foreign police and sending fake invoices for unpaid bills for the use of their current address … however all you have to do is pay a fee and it will all be sorted. In my opinion I see little reason why anyone urgently needs to change their registered Czech address. First of all you don’t need an EU card to buy property in Czech Republic anymore (though some banks still require it for a mortgage), secondly the EU cards don’t have any end date and for practical purposes you can use a different address for all your correspondence anyway.
The second is less of a scam but more of a rip-off. Some companies charge very high fees just for using their address for correspondence. As part of our property management service we let all clients use our address for free and will deal with any correspondence you get.
It also seems that some property investors in the Czech Republic have been recommended to register for VAT and thus be able to claim back the VAT on a new property purchase. In the short term you save some money, however, over time you are faced with increased costs (such as accountancy) and you have to charge VAT on the rent so in effect you’ll receive 20% less rent. Not only that but when you come to sell you’ll have to charge VAT on the property sale, so again you ended up receiving less money back! Overall it’s the government and the company charging you the fees who win (unless of course you’ve been able to invest the reclaimed VAT at a higher rate to offset your increased costs). Most people who have followed this course of action seem not to have had the implications fully explained to them. In my opinion this is a bad idea for most investors.
Czech VAT increase and completions
On the 1st January 2010 the Czech government plans to increase their VAT rate by 1% (i.e. from 9% to 10% and 19% to 20%).
For anyone who is due to complete on a Czech property in December 2009 but were considering delaying the completion until early next year it may be wise to try and complete this year and avoid paying an extra 1% on the remaining monies still due to the developer. A development that falls into this category, for example, is the Golden Brook project in Brno.
It’s almost the end of the year and December will see me spend too much time in airports but at the same time will give me a chance to review the worlds property markets and where I see opportunities for the international property investor in 2010.
Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com