Ralph Schellin, Janka Polyakova and Jarrod Epps offer a guide to their home property markets
The number of overseas properties owned by UK residents rose by 7% in the year to mid-2008, to 410,000. The average price of second homes abroad for UK residents is currently averaging around £135,000, according to official data, which is notably lower than the average for second homes in the UK. Many overseas markets offer attractive growth potential relative to the UK.
The long-term potential for residential investment overseas is significant. By 2020, an extra four million Britons will retire abroad, according to a 2004 report by Alliance & Leicester International.
However, other countries have different laws and procedures for buying property, with direct implications for acquisition cost. Prospective purchasers should therefore seek expert local advice. We provide an overview of three markets that have not traditionally seen significant UK acquisition activity.
As the latest round of investment bank failures further shakes confidence in the worldwide economy, investors are increasingly careful when seeking safe havens for their cash. Despite the instability in worldwide financial markets, selected economies such as the Czech Republic continue to offer knowledgeable investors strong property fundamentals with solid return projections.
The US mortgage crisis has unquestionably slowed down the booming Central European residential market this year. Local banks alarmed by the length and depth of this crisis have tightened the rules for financing real estate projects. The banks now commonly demand a minimum of 30% of the total investment from the developer in order to finance a development, and a higher percentage of flats must be sold before the project is completed.
Developers who previously expected a 15% equity participation requirement are seeing development returns tighten, and in some cases they cannot bring projects to market.
However, in the Czech market the shift in lending practices has yet to affect end buyers, as local banks have not yet tightened rules for providing mortgage loans to local residents. The country still enjoys one of the lowest base lending rates in the EU (3.5% at the time of writing, expected to drop to 3.25%), and through September, consumers were continuing to purchase flats and draw down mortgages at an acceptable rate. To date, mortgage lending is up 25% over 2006 numbers, and down only slightly against the 2007 records, which were skewed due to buyers scrambling to get into the market before a VAT hike that took effect on 1 January this year.
Across the Czech Republic the prices of new flats are still growing slightly. This is somewhat due to the fact that the slight drop in demand from local customers has been offset by clients from abroad. These are no longer the Italians, English or Irish, as was the case in the past years, but customers from the East, primarily from Russia. These buyers are better prepared with cash to bridge the gap in financing that has appeared since banks are now offering less aggressive financing terms and typical loan-to-value has dropped to the 80-85% range for foreign buyers.
Unlike their Central and Eastern European counterparts, Czech developers have historically relied on local market uptake supported by a relatively low number of international buy-to-let investors. This strategy, combined with previously stiff governmental purchasing restrictions for foreigners, has capped BTL at less than 30% of any development, with most standing at less than 10%. Local developers have somewhat isolated themselves from the lack of liquidity and apprehension coming out of traditional BTL buyer pools of the UK and Ireland.
The local economy is strong, with unemployment hovering around 5% and inflation around 6%. In addition, the Czech Republic enjoys the lowest borrowing rates in the European Union, allowing mortgage rates to stand at around 5.3% on average. Last year's strong price growth was artificially accelerated by VAT increase implemented at the end of 2007, and we therefore projected a decline in certain market indicators this year. The main market indicator, mortgage lending volumes, shows that although borrowing in 2008 (at a projected 125bn Czech koruna) is slow compared with the VAT-boosted 2007 (CZK142.29bn), the country's lenders are on target to provide mortgage financing at a rate that is a 25% increase on the previous year (2006 - CZK100.84bn). These numbers show an overall healthy market.
We expect prices to exceed our initial targets of 6-8% growth for 2008, perhaps hitting 10% for the year. Next year is expected to remain steady, with 4-6% growth in Prague and 5-7% in key secondary cities (Ostrava, Brno, Hradec Kralove). Rental yields are low in Prague, averaging less than 5%, and are not expected to grow over the next 12 months. Some secondary cities have stronger rental figures, but these may decline somewhat over the next 18 months as more new developments are completing during that time.
The impact of the credit crunch is becoming more and more evident in Slovakia. One of the repercussions of the country's banks becoming more cautious is their changing terms for investment loans. In recent years, 15% equity input was sufficient, but today banks are asking for 30% equity with more and more pre-sale conditions.
In the same way, buyers have been shaken by international market volatility and as a result they are putting off real estate acquisitions. In contrast, several interesting investment and development opportunities are now being put on to the market as owners look to liquidate their assets. It is these properties that will offer attractive investment revenues.
Despite the financial crisis affecting confidence, demand for residential property and good demographic conditions still remain strong. There is currently a lack of pipeline developments for the middle and lower segment of the market, where thousands of properties are needed. In addition, mortgage conditions are still favourable and available for potential buyers.
Potential investors should also note that Slovakia's accession to the eurozone on 1 January 2009 is likely to have a psychological effect on the residential market, as the country looks to see how it will boost its economy.
As well as being the capital of Slovakia, Bratislava is still the most attractive residential market, especially for the middle market. However, strong investment opportunities still exist in regional centres such as Kosice and Nitra. There is also a high level of local and international demand (especially from Russia and Ukraine) for residential property in the hotel and leisure centres in the High Tatras. It's an interesting investment destination with many new apartments and hotels being built.
The Belgian market is now starting to feel the effects of the credit crunch, some months later than the UK, France and Spain. However, due to fewer new developments and a growing population in Brussels the market has, until now, shown stable house prices.
Following a recent study by King Sturge in June 2008 there were 61 larger residential projects (more than 30 units) under construction, or the equivalent of 3,984 apartments. This is 4.51% less than the previous year, although another 31 projects were given planning permission recently, totalling 2,971 units, which is only 1.75% less than in 2007.
In addition, the population of Brussels has been growing rapidly, with 5.65% growth over the period from 2002 to 2007. As a result, most areas in Brussels have fewer than six units per 1,000 inhabitants under construction, with only the South potentially risking oversupply with 6.4 units per 1,000 inhabitants under construction.
In addition, the constant commuter demand generated by nearby EU and Nato headquarters will ensure there is always a business residential rental market, and as such we believe that demand for new, affordable and smaller apartments of around 80m2 (one or two-bedroom apartments) will continue to be strong for the next years, particularly to the North of Brussels.
Nonetheless, rents in Brussels are only half of those in Luxembourg and Amsterdam and around a third of those in Paris and London. Even though the rates are likely to rise over the next decade - typically in the 4.5%-5.5% range - they will never reach the levels of other markets.
Speculative investors would also do well to note that 75% of the Belgian population owns their own house or apartment and the government is aiming to increase this percentage.
The remaining people who have not bought are often those who cannot afford to buy and, therefore, are also limited in the rental level that they can pay. Developers therefore have to concentrate on affordable, smaller apartments also for the letting market. Despite this, there is a growing market for more luxury apartments coming from expats, international companies and EU, so Brussels remains an exciting, if niche area for overseas residential investment.
- Ralph Schellin, Janka Polyakova and Jarrod Epps are King Sturge local agents in, respectively, Brussels, Slovakia and the Czech Republic.
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