Property Investment International - Newsletters
PII Newsletter Jan 2010 - Where to invest in 2010?
Dear Investor,
This month’s newsletter focus is to review many of the world’s property markets and try to come to some kind of view as to where might be a good place to invest. We do this with a background of a world that, economically, is slightly more stable than last year yet is by no means out of the woods yet and many of the world’s mortgage markets are still frozen or still defrosting at best.
In such conditions I recommend a cautious approach, protect your capital and critically avoid over paying which is perhaps the most common mistake property investors make.
Where to invest in 2010?
Where to invest in the world is quite an expansive subject and one that is difficult to cover in detail in a newsletter without the risk of boredom. Hence, below I aim to highlight the salient points of each market and give a short and medium term view of where I believe the market is heading (summary conclusions at the bottom of the page).
Czech Republic – crucially still has the best mortgage market in CEE. Rentals were hit hard in 2009 with a large oversupply on the market. Sales prices have come down approx 30% and transaction volumes remain low. Economically CZ will bounce back quicker than most. Short term (6 months) I don’t see the market picking up, but later in the year I see more confidence returning to the market which should allow some measured price growth in 2011. These conditions actually mean there are some quite interesting deals around today and with good finance still available it makes the Czech Republic still one of the most attractive markets in which to invest in the region.
Poland – prices have been on a steady slide for the last couple of years, and are still slipping slightly today. Finance remains possible for foreigners but not at particularly attractive terms. Throughout the year I expect transaction volumes to increase which should help a base form in the market. Don’t expect any real growth until 2011. That said medium term Poland should do well.
Slovakia – similar to many CEE markets things got a little bit carried away and the market became overpriced and oversupplied. Prices have come down substantially and the market will remain weak throughout this year. Mortgage finance exists but is nothing special. Unless you live in Slovakia or already have property there I would suggest it’s better to invest in CZ or PL to gain exposure in the region.
Hungary – the market has had problems for years now (not to mention the economic and political instability). The country is still saddled with debt and currency remains weak. Prices are now relatively low, and yields respectable. Mortgage finance is not great unfortunately. Hungary is still a relatively risky market and higher returns can be had elsewhere. Market needs to sort itself out before I’d invest there.
Romania – what a mess! Massive speculation has lead to massive price falls and property waste land with many agents, developers and investors going bust. Rents have also fallen considerably. The governments Prima Casa scheme is helping marginally and if extended more widely should help the market find a base. Mortgages are theoretically possible but practically very difficult for most – this is a huge problem. The outlook in the short term is not pretty. Good opportunities exist for brave cash rich buyers.
Bulgaria – after being pumped and dumped by foreign agents the Bulgarian market is well and truly on its knees. The coast and ski resorts are a joke, with prices still less than half what were being sold more than 5 years ago. Sofia too has some large oversupply issues as well as lacking in key infrastructure (eg roads). Mortgages are currently not possible to obtain (unfortunately) and until this changes the market will continue to be in pain.
[aside note: in both Bulgaria and Romania it’s possible to buy properties at very low distressed prices today, for which practically you need to be a cash buyer, but such prices could conceivably double or triple in the next few years … but if you have your cash tied up with no finance does it make a good investment? Probably yes, but you need to time the market well so you don’t wait too long for finance to come in. Thoughts welcome.]
Balkans – generally I don’t see any real reason for most people to invest here. Prices are relatively high, property services are lacking, costs are higher, risks more difficult to manage and when there are distressed opportunities in EU countries I would question why you would take on the extra risk and hassle.
Southern Europe (Portugal, Spain, Italy, Greece) – markets and economies are in trouble. Just forget it (perhaps unless you live there). These markets are going nowhere fast (perhaps except down the plug hole).
Germany – long touted as the most undervalued market in Europe, yes, perhaps, but for good reason! Just check out the 12-13% buying costs for a start, you need quite a lot of growth just to get your money back, this makes the market very illiquid. Not to mention the disadvantageous regulations you have to face as a landlord, no thanks. Rental returns are nothing special (don’t believe the hype) and mortgage finance is not particularly good as a foreigner. The list of negatives could go on. That said I do expect some low levels of growth in the market. I have people who would source me property tomorrow in Germany but every year I look at the market the conclusion is always NO. Perhaps this will change one day, but I don’t see it in the short term (at least from a foreign investors point of view).
Baltics (Latvia, Lithuania, Estonia) - perhaps boom and bust best describes these markets (especially Latvia). They are facing massive economic contraction and property price falls. Banks have been sorely hurt. I still think there is time (eg til next year) before rushing into these markets to try to find distressed properties to snap up. Watch from the sidelines for the moment.
Norway – despite the country wasting a lot of money buying mortgage backed securities from the US, Norway is still likely to do well. They are still enjoying the wealth brought by north sea oil (as well as other industries such as fishing, forestry, tech), unemployment is low and economic problems minor. Property prices dipped briefly but are already back to 2007 levels. Prices are not cheap. In this commodity hungry world Norway will surely benefit, but how much more the property market can grow is a question I find hard to answer.
Russia – undoubtedly has massive potential but at the same time substantial risks. A huge country with large reserves of natural resources (whether it be oil, gas, minerals etc) with access to European and Asian markets it highly likely to be a positive beneficiary from world trends and the currency should strengthen. Prices have fallen a lot in major cities such as Moscow and St. Petersburg, so for the brave investor opportunities surely exist. Still remains very high risk and the rule of law (and property law) remains shaky. A market not for the faint hearted.
UK – is an interesting market. On the one hand you have a growing population, a shortage of housing, a well developed service sector and finance industry (despite the recent shenanigans this remains true) and still one of the largest economies in the world that you just can’t discount. On the other hand unemployment is not particularly low and both the government and consumers are in huge debt, which just has to cause some problems in the future, at the end of the day nothing is for free in this world. There are some interesting deals around (and I think there still will be through the year, so no panic!) but do you want to put your money into a country where the currency could well weaken over time? My view is that its often a good idea to invest on your home turf in a language that you understand and streets you walk on a daily basis, but still be careful not to over extend oneself as the future is far from certain. I’ll be keeping perhaps 20% of my portfolio in the UK.
USA – too large a market to be specific in a paragraph. Despite the recent problems the US remains the largest economy in the world and is likely to rebound from the current mess it’s in. Finance will become more widely available again and people will soon forget the problems of 2008/2009. Distressed markets such as California, Nevada, Arizona and Florida are likely to come back (despite the overbuilding) but the real ghost towns of the mid-west and north-east I would be not invest in. These are often the same markets where you see 25% yields advertised etc – my advice is don’t be fooled and don’t invest in such rubbish.
Canada – suffered less problems that the US. Prices did indeed fall but are already on their way to rebounding. Canada is extremely well positioned to benefit from world trends in the future. It has massive resources from oil, to gas, cereals, water, timber etc. The country is very stable, well educated workforce and enjoys a high standard of living. No wonder many people want to go live there – hence the population is also growing (1% per annum). All this bodes well for the Canadian property market. Expect the Canadian dollar to strengthen over the medium term.
Central America – Mexico has been hit in 2009 by the recession and it’s hard to get accurate detailed information about the market there. Foreign investors are nervous about the instability there and the drug war problem. That aside Mexico has a huge young and growing population and an undersupply of affordable housing. These strong dynamics are likely to put considerable pressure on property prices over the medium term. Mortgages are possible. The Peso is likely to continue its strong appreciation against the US dollar. Mexico aside the only markets that have favourable conditions for investment are Belize and Panama, which were both affected by the down turn in the US but are likely to continue to attract investment as well developed low tax locations. Panama will further benefit from the billions being spent keeping the canal open. Other central American countries I wouldn’t touch and avoid beach resort investments.
South America – great place for a holiday but full of economically/politically unstable countries. Perhaps after people like Mr Chavez (or his socialist brothers Mr Delgado in Ecuador and Morales in Bolivia) have destroyed Venezuela and being kicked out of power it will be a bargain basement opportunity, but until then I wouldn’t go near. Chile and Argentina may at some stage regain some of their former glory, but the real jewel in the crown is Brazil. Brazil has seemed to promise for a while that it would deliver and now it seems to be doing just that. Full of natural resources and a large growing population I think Brazil is now here to stay. Economic growth is continuing apace and better mortgages for foreigners is expected to come in 2010. The currency likely to continue to appreciate. Please avoid overhyped, expensive coastal resorts that are pushed by dodgy salesmen. For those looking for a higher return of slightly higher risk Brazil (Rio / Sao Paulo) could well be a place worth a look, lower/mid-standard housing is where the real demand will be (not overpriced luxury units).
Australia – like Canada I believe Australia is very well positioned in the world to benefit from world (and especially Asian) demand for resources. Growing population, well educated, strong economy and an undersupply of housing. Expect property prices to rebound quickly and continue on an upwards trajectory.
Middle East – the principle market most people had invested in was Dubai, where I’d be warning for years that a huge bubble was forming and now prices have plummeted. In many respects I see these markets as very high risk with uncertain returns. Unless you live there and/or have deep market knowledge I see no real reason for investing here versus many other places around the world.
Africa – see my comments in the September 2009 newsletter.
India – huge potential but relatively difficult to invest in as a foreigner. India’s booming economy and demographic trends are well known, and pressures are likely to increase on the housing market. Prices dipped abruptly in major cities (such as Mumbai) due to the world financial crisis but should spring back quickly once confidence returns. Specialist local knowledge is needed to navigate around the system in India and is not without its difficulties investing there. Unless you have family connections there it is not the easiest of places to invest, despite the potential.
China – similar to India the market in China is fast growing and risky. Not a completely free market with much government interference. Again difficult for foreigners to invest. Huge potential but large risks. Not practical for most individual investors.
Japan – the conditions which brought about years of decline in property prices and a stagnant market seem unlikely to change in the short term. I see no real reason to invest here for the time being.
Hong Kong – is a classic boom and bust market, partly driven by locals propensity to gamble. Huge financial centre that will continue to do well. If you can time the market right good profits can be made. Good local knowledge needed.
Singapore – perhaps one of the lowest risk and stable places in the region. Strong government influence. Property prices are already rebounding fast after some stagnation. Could be a good long term bet in a growing region and expected large population increases in a small geographical area, just watch out for another bubble.
Philippines – an interesting case study of an Asian market often overlooked. Decades of American presence makes many aspects of the Philippines surprisingly well developed, vibrant and with relatively good infrastructure. 92 million people make the Philippines the 12th most populous country in the world (which still growing around 2% per year). FDI increased 17.9% in first 10 months of 2009, exports are increasing (especially from electronics) and economic growth of 3.5% is expected in 2010. The day time population of Manila increases from 11m people overnight to 15m during the day as people flood into the city to work. Prices of decent quality property near the city centre are only around 1,000 euros/sqm (which is relatively low compared to some other large Asian cities). Mortgages are theoretically available. English is very widely spoken. Perhaps would make an interesting place to invest if you are looking for something slightly higher return but with more uncertainty (eg like Brazil).
Thailand – not the easiest place to buy property as foreigner and not without its political instability. Many holiday villas sold on the coasts. Market still has potential for growth but not without its risks.
Cambodia – still recovering from the years of destruction that took place under the Khmer Rouge. Desperately lacking in infrastructure. Small emerging market with potential, yet naturally with many uncertainties. Prices are relatively cheap, long term trend will be upwards but perhaps not the easiest market in which to operate.
Vietnam – often tipped as a high growth market. The potential is clear but is not a market to be taken lightly. Unless you’re looking for high risk with perhaps high rewards (and a lot of headaches), similar to Cambodia, it would be better to stick to Singapore, HK or the Philippines in this region.
Malaysia – whenever I looked at the market in Kuala Lumpur I could never work it out. Most sales were high end units to a primarily expat market that I felt was unsustainable, this same market is now oversupplied. Taxes are reasonable but I would be very concerned about the continuing political uncertainties.
Indonesia – the 5th BRIC country. Huge population and economic growth potential. However, it’s not particularly easy to buy there as a foreigner, taxes are not very favourable and political instability remains a risk. Such conditions would keep my money out of the country despite perhaps having the most potential of nearly all countries in the region for growth.
Conclusion
2010 is undoubtedly going to be a year where the bold (and sensible) property investor can make money. The world is evolving and as international property investors we have to evolve with it. Economic relevance is already shifting east to the creditor nations away from the debtor nations such as the US and UK. There are a myriad of factors when investing aboard whether it be local laws, taxes, mortgage finance, currency trends etc that make it highly risky for the uninformed yet very profitable when you get it right. I will explore such factors, and how best to make investment decisions, in more detail incoming newsletters.
For now I’ve made 4 categories of property markets that you should consider investing in 2010:
- Your home town – always a good idea, where you know the market in detail and potentially have lower running costs
- Low risk markets with good mortgages and moderate growth potential – eg Canada, Australia, Czech Republic
- High growth markets (positive economic conditions, demographics and currency trends) – eg Brazil and parts of Asia are both low entry cost and could boom in the next few years
- Distressed markets - eg Bulgaria, Romania, Baltic’s it’s possible to buy at very low prices whilst still being in the EU
Czech Tax confusion
I’ve had a quite a few emails recently about tax in the Czech Republic (partly fuelled by inaccurate information from other sources). If you own property in the Czech Republic there are two annual taxes you need to consider:
- Annual property tax
- Your property needs to be registered for property tax in the January after purchase
- All clients for whom we manage property for in the Czech Republic we have already done this for them (we do this for free for our property management clients where as I see most other companies charge extra).
- Payments of the property tax need to be made by May. Again for all our property management clients we do this for them as standard, and this payment will appear on the monthly statement of account at this time, so no need to worry.
- Your property needs to be registered for property tax in the January after purchase
- Annual income tax return
- For anyone with income (eg from a property) in the Czech Republic you have to file a tax return.
- Filing date for the 2009 tax return is 31.03.2010.
- Whilst everyone’s circumstances are different we typically charge a client that owns one property 3,000 CZK + VAT for this service … where as I’ve seen other companies charging around 10,000 CZK, which is quite a big difference.
- For anyone with income (eg from a property) in the Czech Republic you have to file a tax return.
As always I’d be interested in any comments/feedback anyone has on the above.
Wherever you invest in 2010 I wish you good fortune.
Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com