Property Investment International - Newsletters
PII Newsletter Feb 2010 - Bulgaria, Romania & Brazil
Dear Investor,
This month I want to follow on from last month and look in more detail at some markets that could be a good place to invest in 2010 and why you should consider them. Over the last month I also spent time at our offices in Bulgaria and Romania, so these two countries will get a special mention, as well as some other random items.
Where to invest - exactly?
I concluded last month's lengthy newsletter with 4 types of property markets that you should consider investing in 2010, namely (1) home markets, (2) low risk markets, (3) high growth markets & (4) distressed markets.
1. Your home town:
All things being equal this is nearly always a good idea. Typically this is where you will know the local market in detail, speak the same language, have a support network to help out, running costs are often lower, finance easier to obtain and so on. There is likely to be greater potential to get a property below market value which could be a good deal even if you have no faith in the future growth of the market. Don't dismiss the advantages of investing locally when being lured into investing in more exciting foreign land.
2. Low risk markets with good mortgages and moderate growth potential
The combination of stable low risk growth combined with good reliable cashflow and mortgage finance is one of the keys to successful property investment. People often get carried away with these latest high growth market and forget about the fundamentals basics of how to make money without putting your capital at serious risk and without serious headaches running your investment portfolio.
As mentioned last month two of my favourite markets in this category are Canada and Australia. I would include Norway and to some extent the Czech Republic here too. I still have some concerns about the US and UK, so they come lower down the list for now. Structurally countries like Canada and Australia are likely to continue to benefit from global trends of increasing population and demand for commodities. Canada is the world's second largest country and has huge resources in oil, water, timber, cereals and so on. It also has direct access to a huge trading partner to the south and does increasing amounts of trade with the booming, credit rich, Asian markets. Canada also ranks very highly as one of the best places to live in terms of quality of life, and as such there is no shortage of people who want to move there which naturally supports the local housing market. The population growth rate in Canada is approx 1% per annum.
Unlike the USA, Canada never went crazy with high risk mortgage lending giving the market a slightly lower but more stable growth trajectory. Currently finance remains widely available and interest rates are still low. The combination of being highly developed economically, huge future potential, good access to mortgage finance, a growing population that is likely to get increasingly rich and like to invest in real estate makes it highly probable that, despite its higher than average entry costs, Canada will be an excellent place to invest for low risk solid growth. Over time these are key factors to becoming substantially wealthy.
3. High growth markets (positive economic conditions, demographics and currency trends)
As mentioned last month I believe Brazil and parts of Asia offer both low entry cost and could boom in the next few years. This month I want to look in a little more detail at Brazil.
It's quite difficult to find a property investment market in the world at the moment that ticks all the right boxes. Brazil is one of the few countries that comes close. Here are some of the reason why I like it and why you should consider investing there:
- World cup in 2014 & Olympics in 2016 - this will pump billions of dollars in to the economy, create jobs, improve infrastructure etc
- massive spending on infrastructure
- increasing demand for housing (both rental and sales), especially at the lower & mid end of the market (many foreign agents will tell you to buy luxury or on the coasts - please avoid this strategy)
- huge natural resources (making it self sufficient and gaining key foreign currency reserves from exports)
- growing population (195 million people, 27m in Sao Paulo, 15m in Rio de Janiero, approx one third of whom live in favelas)
- government economic stimulation, rising incomes, falling unemployment
- financial market reforms (banks now have a proper pledge against the property until mortgage is repaid) allowing locals to get mortgages (including from government sponsored institutions). Loan terms have increased from 10 to 30 years, interest rates have fallen and are expected to continue to fall
- mortgage loans only make up 2.2% of GDP (compared to many places in Europe which are at 50-80% levels)
- locally driven market (not driven by foreign investors)
- expected continued GDP growth
- strengthening currency (even if the property doesn't increase in value your asset will relative to your home currency)
- average rental yields around 6-10%
- country's housing deficit estimated at 7.5m units!
I believe Brazil is just starting what is likely to be a massive real estate boom.
As in many developing markets buying property is not as straightforward as you would hope, but nevertheless very possible. Naturally there are different legal and tax conditions you need to be aware of before investing, but nothing something to be scared off by. One of the biggest obstacles for individual foreign investors in Brazil is the wider availability of mortgage finance for foreigners. It is currently possible to get a mortgage in Brazil as a foreigner but it's quite difficult. This situation is expected to change at some stage in 2010.
If you're convinced by the potential of the real estate market in Brazil my recommendation is to stick to lower to middle level properties in either Sao Paulo or Rio de Janiero. Don't get sucked into buying luxury or into the future real estate disaster zone on the Brazilian coast (many investors will get burnt there and not just buy the sun).
4. Distressed markets
Whilst there are many distressed markets around, I want to focus this month on two recent EU entrants, Bulgaria and Romania. Not only do we, as a company, have offices in both these countries, but a huge number of foreign investors have bought there over the last 5 years or so.
Both markets have had the characteristics of frenzied greed and speculation, which has led to oversupply and falling prices. This has been doubly compounded by global economic and credit conditions. The markets are now licking their wounds making it a perfect time to find good investment opportunities.
In both markets there is an element of oversupply and severe lack of finance. Until mortgage finance starts to reappear the short term outlook is bleak. However, prices are now very low (eg 2-3 times cheaper than say Prague or Warsaw), so could they represent an unmissable opportunity for the brave property investor?
My view is that there is a clearly an opportunity to invest but you have to take a view on when the credit conditions will improve. If you wait for credit conditions to improve then you're unlikely to be able to buy at such cheap prices and yet if you don?t wait for credit conditions to improve you could have your cash tied up for a long time.
Let's look at some numbers:
- Sofia or Bucharest: let's say prices increase by 100% in 3 years (eg 800 euros/sqm to 1,600 euros/sqm) with no financing = approx 30% ROI / annum
- Prague or Warsaw: let's say prices increase by 30% in 3 years (eg from 2,000 euros/sqm to 2,600 euro/sqm) with 80% financing = approx 50% ROI / annum
I've heard than banks in both Bulgaria and Romania are looking to lend again. It won't come tomorrow as local banks are strapped for cash (just look at the high interest rates they are offering to attract deposits) but banks being banks if they don't start lending then again then they wouldn't be banks. By the end of this year I would expect some movement in this area.
I have not yet reinvested in these markets but I expect that sometime over the summer conditions should be right to purchase again.
Rentals remain tough in both markets and running costs high. For anyone who has ever complained about needless Czech or Polish bureaucracy (that includes myself) try getting things done in Bulgaria & Romania and soon you'll realize what a paradise other places are. So when it comes to property management and related services it is one of the reasons why there are very few decent companies in Bulgaria and Romania - hence one of our main aims as a property management company in both Bulgaria and Romania is to continue provide the same western style levels of services as we do in other countries such as the Czech Republic.
The Romanian market has found some support from the governments Prima Casa program which helps first time buyer with cheaper loans, and has recently been extended to include slightly more expensive properties. This program is helping to put a base in the market around the 50-80,000 euro price mark.
Bucharest remains the place to invest and still attracts the bulk of foreign investment as well as people. Brasov will always be the lifestyle capital of Romania and a new high(er) speed rail link and future motorway will help to improve trade and mobility. Developers in both cities have already gone bust and many more are struggling. The residential departments of large international real estate agents such as Colliers have completely closed. There is no doubt about it things are tough in the property arena in Romania.
In Bulgaria the situation is a little less clear and the property markets are frozen. You can now buy property on the beach and in the ski resorts around the 300-500 euros/sqm level - but still I would not recommend it, these markets will be mess for another decade to come. In Sofia it is a mixed bag some of the more central and eastern parts of the city are suffering from general market conditions and the south of the city where the real oversupply and lack of infrastructure is found. The south has a lot of great long term potential but short term it will take time to get basic infrastructure in place and in the meantime will suffer.
Typical prices in Sofia are now under 1,000 euros/sqm, though real prices are difficult to determine as there is not a fully functioning market and transaction volumes remain low.
Bulgaria now has some of the lowest corporate taxes in the EU (some could call it the new Cyprus almost) and with the new governments help is starting to attract new investment and much needed EU money. Again, the country has potential but it will be a hard slog to turn things around.
Whether you are interested to invest in either Bulgaria or Romania or whether you already have property there get in touch to see how we can help.
5. Conclusion
Naturally the ideal market would be one that combine many of the above factors, eg markets where you live (or have lived) or spend a large amount of time in particular if the market has good finance, is low risk and stable conditions for investment, if they are in a distressed condition and with potential for future growth then this is a real winning combination. For me personally this means investing in the UK, Prague or some other parts of CEE, where many of this conditions are currently satisfied.
New languages
To cater for our increasingly multi-country and multi-lingual client base we've started to add pages in other languages on our main website as well as hiring, where we can, people who speak multiple languages. This is a trend that we aim to push forward of the coming months and years. With our local CEE real estate agency websites we always advertise in both the local language and English as a minimum.
Tax
In many countries annual tax returns are due at this time of year. It goes without saying it's important to comply with local tax regulations to avoid the often hefty fines.
For those clients using our CEE property management service please ensure, if you haven't already done so, you send us all relevant documentation, by the date we suggested.
Property and IT
We're currently working very hard to make a number of exciting upgrades to our IT systems, some of which we'll be releasing throughout this year.
Technology is an important tool, not only for running a property business efficiently, but as an investor it allows rapid access to large quantities of information/data in multiple locations, hopefully if used correctly we can make better and more informed decisions about where to invest (and at what price). Though, curiously, it also means that everyone else (eg sellers) also have more market information and thus incorrectly priced properties are perhaps less likely than they used to be, so there is no room for complacency.
For anyone who likes looking at pretty pictures, check out the heat map of prices in the Czech Republic on the following link: http://cenovemapy.bezrealitky.cz
Not only have many property markets been down in the doldrums but they've also been hit by one of the worst winters on record, this has kept many potential tenants and buyers in doors. Perhaps this spring we'll see a gush of demand and a revival in fortunes?
Whatever the state of your property investment portfolio keep your eye on your goals and don't lose heart, now is an incredible time of opportunity and there are some great deals out there for those with their eyes (and minds) open.
I wish you all goodwill hunting.
Regards,
Simon Tweddle.
www.propertyinvestmentinternational.com