As we come to the end of the Summer months, the thoughts at the back of your clients’ minds could well include returning to work, preparing the children for the Autumn term at school and deciding the best way to pay off the credit cards from exhaustive use over the Summer.
It is also a time where many clients, after falling in love with their holiday destination, decide to take the first steps to overseas home ownership. This is particularly true now, when commentators are forecasting a slowing in UK house prices, as some overseas countries can still offer spectacular growth.
A place in the sun
The British, through the centuries, have colonisation in their blood so buying a place in the sun has become a very popular pastime. So much so that, in a recent press article, The Daily Mail forecast that currently 2.2 million Brits in the UK have a property abroad and this is set to double by 2010. It stands to reason then, that a number of your clients will knock on your door for help in mortgage arrangements and perhaps an opinion on whether they are doing the right thing.
While in the past Spain was the most popular location, consumers are now looking far further a field in developing countries. It amazes me however, as someone who has a few overseas properties, how many people go into the overseas market with their eyes wide shut.
In the UK, if I was buying an off-plan property, the first things I would ask myself are:
- How many of the off-plan properties have been bought by investors or owner occupied?
- Who is likely to rent the property?
- When will I be able to rent the property?
- Who will buy the property off me when I am ready to sell?
Logic and planning
It’s important that clients don’t get emotionally attached to a property abroad – something very hard to do if you’ve just had the best two weeks of your life there. However, despite this, logic and planning need to prevail. Fine, if the client’s view is not to rent but bought just for their sole usage.
Take Spain for example. The recent new build phenomenon is the growth of accommodation on golf resorts especially in the Murcia area. But logic dictates if 8,000 apartments go up in 12 months, there may well be a lot of product chasing those holidaymakers to rent it. This is especially true if a further 8,000 apartments are built just two miles down the road.
So who will rent it while the rest of the complex is a building site? In addition, if new resorts are going up over the next 10 years, will someone want to buy yours second-hand rather than a brand spanking new one? Thirdly, as it is currently taking an average of two years to sell a second hand property in Spain according to recent figures, why will your clients’ property be any different.
Exit strategy
It is vital that when buying in the UK or abroad clients have a clear exit strategy. The starting point is to understand the potential market and this might require a good understanding of the underlying culture of the country in which they are buying, in particular the attitude to towards property.
You may then, depending on how long you intend to keep the property, need to make an informed decision as to whether the culture is likely to change. If, for example, you know that the underlying culture favours renting it might be unwise to base your exit strategy on selling to a local.
Many Eastern European states have a very immature mortgage market and the locals have a different view to debt than we do in the UK. It’s important that, when looking at your exit strategy, you study the average income within that country, as you need to assess whether the locals will be able to afford to buy it, or raise the appropriate finance when you want to sell it.
Lastly, the location can be an extremely important factor. For example, I own a property in Tallinn, Estonia. The property prices within 15 minutes walk of the centre of town are four times higher than those 30 minutes drive away. Why? Well, in Tallinn they have a culture of easy access to work. In Winter it can get down to minus 20 degrees with heavy snowfall. If you faced this each year, would you not want to live close to the office?
Who will rent?
This leads on to the question as to who will rent your property? Naturally, if it’s a holiday accommodation then it is likely to be European, but a growing trend – especially in the Baltic States – is purchasing to buy-to-let to locals or expatriates working in the country. The benefit of the latter over the former is the potential for longer term lets. So when a client is looking in these areas, it is worth looking at foreign investment. This normally leads to European companies building prestigious offices and factories often bringing over experienced staff from overseas to set the whole operation up. Obviously this can be an excellent opportunity to find a quality tenant.
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In cases where your client is tempted with purchasing a holiday property that requires a long haul flight from the UK and is looking at renting the property to UK tourists, ask them how many friends they have got that have ever rented a property in an exotic, overseas location in comparison to staying in a hotel. What do you think the answer would be?
Finally as mentioned above in my article, overseas property investment can be lucrative, but a client must go into any venture with their eyes firmly open to ensure that a lack of knowledge does not turn their dream into a nightmare.
