With all the economic horror stories dominating the headlines, you'd be forgiven for thinking that now is not the time to be investing in property. The UK housing market has gone into reverse, mortgages are scarce and repossessions are on the up. It's even worse in the US, where you can now buy foreclosed properties for next to nothing in some places. Or how about Spain, where the coastal skylines are now cluttered with stopped cranes and the shells of half-built apartment blocks?
Nevertheless, it is in an environment like this that some of the best opportunities are to be had. To exploit them, you need to know what to look for and where to look for it. With careful research, canny investors can still achieve healthy returns over a reasonable period of time.
Just as you can find equities that will prosper even when the wider stock market is in retreat, you can also locate bright spots within property when the overall landscape is bleak. Within the UK, for example, certain regions have proved more resilient to the real-estate downturn than others. Cottages in rural Oxfordshire continue to appreciate even as the value of northern buy-to-let new-build flats plummets.
Many countries have not experienced either the excesses of the post-millennium real-estate boom and the subsequent pain as the credit crunch struck. The global economy may be more interconnected than at any point in history, but regional property cycles are still only loosely related.
For example, house prices in the UK and Spain climbed 167 per cent and 115 per cent, respectively, between 1997 and 2005. Simultaneously, however, they were tumbling in places such as Singapore (down 30 per cent) and Germany (down 10 per cent). Often, yesterday's loser becomes tomorrow's winner. Singapore, for instance, will see a record number of homes sold this year, and developers expect to raise prices by around 15 per cent.
Good returns, but no free lunches
Admittedly, the nature of the game has changed of late. In the go-go years, you could pretty much make money from watching a few episodes of A Place in the Sun then obtaining a foreign mortgage at the stroke of a pen and waiting for the market to do the rest.
Today's buyers need to look further afield than popular destinations such as France or Spain – which have historically attracted around half of the UK's buyers – as both markets are cooling rapidly as demand dries up.
Despite property's popularity as an investment haven, it remains an under-researched and poorly understood asset class. As a result, investors are frequently unable to do their homework properly and end up finding that their dream place in the sun rapidly turns into a nightmare. Even those buying purely for pleasure can't afford to invest unwisely, and will need to do due diligence to ensure that they understand the quirks of the local economy, legal system, and tax regime.
Currency fluctuations are another big issue for today's would-be overseas investors. The slide of sterling against the euro and now against the dollar too means that a prospective buyer may get less bang for his buck in his chosen market. Also, monthly repayments on a foreign mortgage in sterling terms are that much more burdensome – see our article "Paying for Paradise".
Doing your homework is essential
Despite a dearth of information about many overseas property markets, the task of researching a particular country or destination is easier than it was a few years ago. The internet is a great tool for finding out a bit of background knowledge and maybe even learning about the experiences of others that have gone before you in a particular market.
Attending property showcasing events can also be an excellent source of ideas for the would-be overseas buyer. Such events give investors first-hand contact with agents, promoters and developers operating across a huge range of markets. If you want to visit the resorts being advertised, exhibitors often offer subsidised or free trips. The Property Show taking place in September in London is the country’s biggest such event and comes highly recommended by previous delegates.
Looking for the next big thing
Rather than buying into a proven but expensive developed market, many investors look to buy into cheaper emerging markets. If those nations' economies prosper and their popularity among holidaymakers grows, there is the potential for considerable capital growth over the years. Naturally, these high returns are a reward for taking on high risks. Economic volatility, political uncertainty or even the withdrawal of a low-cost airline from a certain route can leave you with a depreciated and maybe even unsellable asset.
In markets like eastern Europe, where western investment is driving economic expansion, a growing professional class is looking for high-quality rental accommodation in major cities. As a result, investors have piled in, pushing prices skyward and limiting the potential for further large capital returns.
However, there are still opportunities to buy into growth. Take the Czech Republic, where property prices are expected to rise by 7.5 per cent a year between 2006 and 2015, as investors widen their investment horizons into more rural areas.
The growth of tourism in a country can boost property prices hugely over the long run. Look out for markets where the authorities are seriously trying to attract holidaymakers and putting their money where their mouth is by investing in infrastructure. Morocco, for example, has plans to more than quadruple foreign visitor numbers to 10m a year by 2010.
Getting into a resort before a major improvement in transport links can often prove a smart move. When a low-cost airline like Ryanair establishes a route to the local airport, it can really open the place up to the outside world. The risk is that the hoped-for improvements are never realised – or that the low-cost airline subsequently scraps the route.
Buying into recovery
Even in markets where the crunch has hit hardest, recent weakness has meant there are bargains to be found and deals to be negotiated. In Spain – where property prices may have fallen by a third since the peak in some areas – there are around 1.5m newly built but unsold properties.
That logjam will break at some point, most likely as sellers are forced to accept lower prices for their properties. The sharp downturn in the volume of planning applications should also help kick-start property prices. Real estate, like any asset class, will always be subject to cyclical ups and downs. But it will also tend to rise in line with the economy over the long term.
If there's one lesson we've learned from the UK's buy-to-let boom, or the spread of reproduction white villages in Spain, it is that not all property is equal. City centre buy-to-let 'boxes' have lost value more quickly than more traditional properties, largely because there has been a glut of residential development. In Spain it's a similar story – almost 600,000 properties a year have been built since 2002, mainly in the same areas and in the same style.
The moral is: buy carefully.
The old adage 'location, location, location' no longer stands true in isolation. Investors must consider a wider range of fundamental factors to mitigate the added risk of buying abroad. Is it an attractive development? What are the economic drivers of the region? Is the market attracting too much investment?
Unlike many other investment classes, however, property is a tangible investment. Although not altogether without risk, property offers the potentially high capital returns of investing in, for example, growth shares, but without the possibility that investment capital will be lost altogether. Houses may sometimes lose a percentage of their value – even a significant percentage of their value – but they don't generally go bust, and they can provide you with six weeks of summer sun each year.
