At the start of the boom, 80 per cent of the UK's second-home owners financed their overseas property acquisitions from their own wealth. But the research shows that by the market's peak in 2007 the number of cash buyers had dwindled to just 20 per cent, with 80 per cent of buyers taking advantage of liquidity in foreign mortgage markets. Furthermore, deposits for those foreign loans were typically obtained by remortgaging UK property.
Buyers were happy to speculate with borrowed money, believing that capital appreciation would enable them to sell out to future investors at a profit – a classic 'greater fool' market – with rental income covering mortgage payments in the interim period. All too often, rental expectations have failed to materialise. And, once you're in, foreign property markets are notoriously hard to get out of.
UK foreign owned property is now £58bn
Investor-driven developments have no appeal to domestic home hunters, so liquidity rests on more speculators entering the market. Worsening economic conditions, the weak pound and the withdrawal of mortgage products have killed off this demand. Markets are vastly oversupplied, with Spain thought to have more than five years of supply at current sales levels, and investors struggling to sell their properties are competing against increasingly desperate developers who can vastly undercut them on price. The result? A world-wide price crash for holiday home investments.
The worst-affected markets are Bulgaria and Dubai, where our research reveals that prices have plunged by up to 75 per cent, and mortgages are no longer available. There is mounting evidence that desperate property owners are selling out to opportunists for a fraction of what they paid a few years previously. Negative equity means that many leveraged buyers who want to get out simply can't afford to sell. And despite low interest rates, from Florida to the Costa del Sol, overburdened Brits are handing the keys back to the bank, hoping they can walk away from their debts.
Location of UK second homes abroad
No debt holiday
The Citizens Advice Bureau reports a 49 per cent annual rise in callers with mortgage problems and, with foreign repossessions rising there is growing evidence that lenders will come looking for their money in the UK.
Creditors can obtain a judgement in their own country, and seek to enforce this under English law. Since December, they can also pursue a European Enforcement Order for Payment (EOP) which makes recovery easier and cheaper.
"There hasn't been a sudden rise since the legislation was introduced, but we get a steady trickle of cases where people are in situations abroad that haven't worked out," says Paul Connearn of the National Debt Helpline. "Creditors could try and enforce the debt through a charging order on UK assets, typically the family home. This secures the debt on that property, but doesn't necessarily force the sale. Or they could pursue an attachment of earnings, where you have 14 days to respond to the court with details of your income and circumstances."
If you're affected, Mr Connearn's advice is do not bury your head in the sand. This is particularly the case in Spain, where penal interest rates of 20 per cent can apply from the date of default. "Whether they come after you at all boils down to whether there is a business case for chasing the debt," he adds.
Plane stupid
So who is the blame for the financial mess many foreign property buyers are now waking up to? In a thinly regulated market, the naivety of investors who "leave their brain on the plane" is staggering. Trawling the plethora of internet messaging boards devoted to the subject of holiday home investments, it seems the key mistake is failure to obtain independent professional advice, or conduct any research other than reading a marketing brochure. It is all too easy for buyers to use the developer's solicitor, who will often be biased towards their client, and to take everything the commissioned (and usually unregulated) selling agent says as gospel.
Debt levels in the second homes markets
The risks of financing your place in the sun
The setting may be picturesque, but the financial structure behind foreign property transactions is often precarious, with smitten investors choosing high-risk strategies to secure their dream property.
Take the case of Essex-based Harlequin Property. Promising to "make the Caribbean affordable", many buyers attracted to its off-plan resort developments on the islands have taken the financial route outlined on its website.
After paying a £1,000 reservation fee, a deposit of 30 per cent of the purchase price is required. The "100% Finance Example" detailed on Harlequin's website suggests purchasers could remortgage their UK property to raise this. Furthermore, Harlequin even offers to pay the additional interest on UK mortgage repayments until the Caribbean property is completed.
According to the developer's example (which is subject to the usual small-print disclaimers) assuming the value of the Caribbean property has risen by more than 50 per cent by the time of completion, investors will be able to get a mortgage to cover the balance, plus repay the rolled up interest repayments on their UK mortgage. There is no discussion of how the investment might be funded if the price rises fail to materialise, or conditions in the mortgage market tighten.
As Harlequin has yet to complete a development, this strategy has yet to be tested. However, unforeseen delays with the construction of Harlequin's Merricks development in Barbados have caused some off-plan investors to try and back out of deals they originally signed up to.
A group of dissatisfied investors on the Merricks scheme are seeking to pursue a legal case against the developer, and have instructed barrister Stuart Kennedy of 3PB chambers to act on their behalf. They are seeking refunds of deposit monies where completion dates in contracts have not been achieved.
In a statement released to Investors Chronicle this week, Harlequin claims it has "no knowledge of any impending legal action". However, the company says it is "well aware of the fact that we are behind schedule with some of our developments, and that some of the contracts have passed their completion dates". Progress on obtaining planning permission continues.
"While most of our purchasers are happy to waive their right to cancel, a small number have requested a refund," the company says. "We have no intention of refusing this although, as a result of our launch event last month, we are catching up with a few of the outstanding requests. A number of the purchasers have openly stated they are only requesting refunds due to their own financial difficulties and not the late completion. All refund requests will be considered sympathetically."
Those investors who have received mortgage interest payments from Harlequin will still have to repay this debt in full upon cancellation of their contracts.
When pressed about the high-risk nature of its "100% finance" example, Harlequin responded: "Purchasers make their own decisions as to whether they wish to finance the deposit by way of a loan, or using their own funds... Neither we nor our primary agent in the UK offer financial advice as we are not authorised to do so by the FSA... Our guidelines recommend that purchasers seek financial advice to ensure they are aware of any risks involved with secured borrowing before they make a commitment."
The developer is still hopeful that capital appreciation of properties under development will occur. "We anticipate an increase in value due to the fact that the economic history of the Caribbean islands suggests that property values tend to increase steadily over a period of time... we always suggest that our purchasers carry out their own due diligence to satisfy themselves that they are happy to proceed with the investment."
Harlequin says that it is "in discussions with a number of lenders" who are interested in offering mortgage finance to purchasers upon completion, adding: "We are so confident that we will be able to successfully assist our purchasers to secure finance [to complete Caribbean purchases] that we have written to all of our agents to advise that in the event that purchasers are in breach of contract for failing to complete, we will not chase their UK assets."
For certain investors, though, the Caribbean may not be as affordable as it first appeared.
