It can be argued that the potential for investment in the UK, whether it be in property development or buy-to-let market is levelling off due to the increase in house prices. More and more investors are looking to the overseas market to invest their hard-earned cash and the market is growing at a phenomenal rate.
You only have to take a look at the abundance of overseas property shows and television programmes that have escalated the market and highlighted the potential to prospective buyers.
It is fair to say that buying overseas is not just for the investor as a significant proportion of overseas clients will be your average holidaymaker who has recently been on their summer holidays, doesn’t want it to end and hence may be buying inadvisedly on impulse. This sector of overseas borrowers will typically be active on a seasonal basis usually after the summer holidays.
Established/emerging markets
Interest in the overseas market has increased so much that there is now a distinction between the established and emerging overseas markets. Established markets now include the likes of Spain, France, Italy and the United States. In these established markets there is still potential for upside but not to the same degree as some of the newly-discovered property hotspots, but then again the risk is not as great. As usual in the investment market it is a question of finding an acceptable balance between risk and return.
Investors are now realising the potential of places such as Bulgaria, Croatia, Dubai and cities such as Prague. Buying in these places can offer investors returns of around 10-20 per cent. Bulgaria is a particularly good example of a property hotspot as it not only offers buyers the option of a coastal property alongside the Black Sea, but also the opportunity of investing in a ski resort, which would be significantly cheaper than buying in the likes of Switzerland or France.
Likewise Dubai has great potential as a growth area due to the high demand for real estate. The country does not want to be seen as being dependent on oil revenues and is encouraging technology and media companies to start up so that the country can establish itself as a business hub in the centre of the world, offering tax incentives for doing so.
Eyes wide open
So, how does buying overseas differ from the UK? The key to buying in the overseas market is that the investor must go into it with their eyes wide open. Overseas markets are significantly different to the UK market and each country will have a different house-buying process, whereby estate agents and legal professionals take on differing roles. Fees will also vary from country to country and the choice of mortgage products will also differ; in fact in some countries it’s still not possible to obtain mortgage finance and in that case the buyer would need to raise finance against their UK property. The UK mortgage market offers by far the most diverse selection of products for the investor.
Buyers must also be wary of currency/exchange rate fluctuations. This situation has been made easier due to the Euro; even those not currently part of the EU, but are due to enter, such as Bulgaria, now deal in Euros.
Law of the land
In the UK, English land law applies. Legal systems are different in overseas markets’ therefore it is important to instruct a lawyer who understands the intricacies of the foreign market to prevent any issues further down the line. For example, in Croatia, following the war in the 1990s it is important to thoroughly investigate title when buying a property, as otherwise you may be faced with a claim on your land.
The most common way of raising capital to fund an overseas property would be to remortgage an existing property in the UK. However, some borrowers prefer not to choose this method as they do not want to put their current property under any risk. Another option would be to take out a mortgage on the overseas property using a foreign lender, which can sometimes offer lower rates than UK lenders. Clearly there may be difficulties with language if they are not an English-speaking lender. Another option would be to take out a mortgage with a UK lender that has a subsidiary overseas, for example, the Halifax, Leeds or Norwich & Peterborough building societies. This would overcome any language barriers but they may only operate in a limited number of established markets such as Spain.
Income potential
Regulation has meant that intermediaries now have to spend more time with individual clients and it is clear their productivity has been adversely affected. Increased costs due to regulation have put more pressure on the broker to make the most of every opportunity they’re faced with. It is clear the overseas market offers great potential for much needed additional income.
Currently brokers in general have tended to shy away from the overseas market because it is perceived to be complex and typically the average intermediary does not have a great deal of knowledge of the ins and outs of buying overseas. While there is clearly a great demand from investors to buy overseas, UK lenders do not have a very strong presence in the overseas market. Those that do tend to operate in the established markets and not in the likes of the emerging markets such as Eastern Europe. This means that there is not a great choice for the broker and consequently the borrower.
Solutions
To avoid missing the boat on this additional income opportunity, brokers should firstly take the time to increase their knowledge of the market. This can be done by reading the many articles currently in the trade press, or if they are part of a network, by utilising the knowledge of their Principal. For example, Pink is moving into the overseas market and will be providing its intermediaries with regular information on it together with seminars to upskill its members.
Firms then have the task of finding clients who are interested in purchasing overseas. There are many ways to generate leads in this area; it can be as simple as advertising in local newspapers to attending one of the many overseas property shows.
What next?
Finally, once the broker has a client interested what do they do next? The simplest option would be to pass the lead onto a specialist in the market to source the mortgage and deal with all of the necessary administration. Pink is currently in talks with a number of such companies who are experts in their field and deal with all aspects of the purchase, taking the stress away for the broker.
In conclusion, it is clear there is still great potential for the investor of buying overseas and likewise the intermediary would be wise to make themselves aware of this potential market before others do.
Tony Jones is managing director at Pink Home Loans
