In recent years the sun has shone brightly on the UK mortgage market. Interest rates have been low, property prices have risen and increasingly borrowers have turned to the market as an investment opportunity. Business volumes have grown significantly over the last five years, average loan sizes have blossomed and business has generally been very good.
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The market has matured quickly and sectors, which were little more than backwaters to the mainstream market a number of years ago, have developed into huge areas of lending in themselves. Buy to let is a prime example and the market is now responsible for over 11 per cent of gross lending in the UK.
As the buy to let market has mushroomed, potential investors have become better educated to the potential opportunities of buying property to rent and not just in the UK.
It used to be that buying foreign property was little more than an exotic rarity. It was not an option for the vast majority of people, but that has changed dramatically. Lenders have made it easier to arrange finance on foreign properties, while foreign lenders have opened their door to overseas borrowers. Low interest rates have also given British buyers the chance to afford finance they would never have dreamed of in the past.
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Mortgage brokers have been quick to see the potential that lies in the overseas market and develop new propositions. Those in any doubt over the number of brokers offering to arrange finance for foreign purchase need look no further than this year’s Mortgage Business Expo in Manchester.
The trade show played host to many intermediaries specialising in overseas homes. There have always been brokers who could arrange this, but the number now operating in foreign property has grown significantly. However, not only have market commentators begun to question the expertise and experience some of these brokers bring to the table, but also the actual role they play.
At first it may appear many of these brokers are offering independent advice on a mortgage to buy property abroad. However on closer inspection, many of these intermediaries are acting as UK agents for overseas developers. Not only will they earn a commission if they arrange the finance required to make a purchase, but they will also earn a much meatier commission if they sell one of the developer’s properties in the first place.
Simon Conn, senior partner at Conti Financial Services has been working in the overseas property market for over 20 years, and believes those brokers also acting as property agents have little to offer clients.
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He says: “A lot of brokers are getting involved in this market and they are now selling properties as well as doing mortgages and I think you cannot do the two as it is not independent advice.” His own firm has been asked to act on behalf of developers and agents, offering commission of up to 15 per cent of the property sale price, however he has refused to compromise his position.
He adds: “A lot of brokers are coming into this market and do not understand it. I do not think it is right for brokers to be selling property at the same time as arranging finance.”
The problem is that investors are beginning to see potential returns in the UK diminish and those in overseas countries continue to flourish. As such they are now looking further afield and no longer is the average overseas purchaser buying into the lifestyle that foreign property offers them, but is instead looking to make a quick return.
This is ok for the one or two professional operators who have researched their market, but the majority of investors could benefit from doing much more investigation or avoiding such ventures all together.
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As Conn says: “A lot of the people investing in the emerging markets should not be anywhere near them as they do not understand the risks involved and in two or three years time there will be media coverage of all of these people who have come a cropper.”
It is no surprise that people want to get into these markets. The Knight Frank Global House Price Index makes for some very interesting reading (see box one). Leading the charge, Latvia returned annualised house price growth of over 61 per cent in the first quarter of this year.
Although there was then quite a drop to second, third and fourth place, the returns were still very attractive with Estonia recording over 24 per cent, Bulgaria over 22 per cent and Lithuania over 21 per cent.
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Liam Bailey, head of residential research at Knight Frank is in no doubt investors from the UK, Ireland and Scandinavia have had their part to play in this growth, as they have bought up properties in large numbers. However he says there are also some other fundamental factors, which have driven property prices up in these markets.
He comments: “Property was very cheap in these regions until recently and so you are seeing rapid growth as a catch up on prices elsewhere. We have also seen mortgage liberalisation in a lot of Eastern European countries and so suddenly people can borrow more money and they can now get the money they need to buy. It is a combination of catching up, liberalised finance and speculation, which has delivered these very high growth figures.”
Looking to the future, Bailey believes there is more growth to come from these areas, but also feels they will be affected by the overall slowing of property prices globally. He comments: “I think for another year you will see big price rises in these areas as I cannot see it slowing down from the current level overnight. However the pattern is clear and I think there is a general slowing of price growth in most locations.”
At the moment however, the growing publicity and potential returns to be made from Eastern European property make it almost impossible for many in the UK to ignore and the majority of buyers remain those who see it as a money making venture. There is nothing wrong in this, although it would seem too many are ignoring the core concerns that any property transaction should carry.
As Conn explains: “I would not go anywhere near these areas until you know that the title and legal issues are going to be satisfactory and that a foreigner can actually buy there and register the property in their name and that if they are getting rental guarantees, they know on what basis they are being guaranteed.”
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Although many investors are currently looking at Eastern European countries for the quick return they can make, it is possible this will change in the coming years. There has been large-scale emigration from these countries and in the years to come many may wish to return to their families in retirement.
If this trend develops then there will be steady demand for those who are able to arrange finance to purchase property in these countries from the UK. In many ways this would help legitimise the market, given that the clients would be nationals of the country they were buying in and so be less likely to accept a poor service or anything that was not set in stone when it came to the legal and title issues involved in the purchase.
This type of market has already begun to develop in the Caribbean, according to Conn and he sees no reason why it should not develop in Eastern Europe.
For those looking to buy a holiday home, rather than an investment, traditional overseas markets such as France, Spain and Italy still lead the way. These people want a property, which they can use for themselves, rent out occasionally and then move into when they retire. As such profit is not the only driving factor, although annualised returns in both Spain and France were over 7 per cent for the first quarter of this year according to the Global House Price Index.
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As Perry Jones, spokesman for Barclays says: “They are buying because they want to live abroad and maybe use it as a holiday home and rental property before using it as somewhere to retire to.”
However he is under no doubt that clients need to be sufficiently informed before making any sort of purchase and says: “We suggest people get as much advice and information as possible. We offer fully English speaking services, but we also would advise they speak good independent legal advice.”
However the real threat in this market is that buyers begin to think with their heart and not their head. They see the lifestyle they wish and cannot get the sale completed fast enough to begin enjoying it. In chasing their dream, in the same way some investors have chased returns, in markets they do not understand, there are serious pitfalls to be navigated and not all those arranging finance and selling properties are looking to give them the kind of advice they need.
A cash purchase on an overseas property is much simpler than arranging finance. As such, many intermediaries are advising clients to remortgage their UK property to raise the funds they need.
From a regulatory point of view, the question is what obligation do brokers then have to ensure their clients are using the equity they are releasing from their UK property wisely.
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At the moment the answer is very little and while it may be correct that clients have the right to use their own money in any way they choose, surely there are issues in regard to Treating Customers Fairly, where brokers have helped a client remortgage in order to make a cash purchase on a property where the title rights and surrounding legal issues remain cloudy at best.
As the demand for overseas residential property investment has grown from those looking to either buy into a lifestyle or make a good return, so too have the vehicles in place to support it. Companies such as The Right Move Abroad offer what they refer to as fractional ownership schemes, allowing investors to become shareholders of an organisation that buys foreign property.
The scheme advertises potential returns of 40 per cent on initial investments, and enables investors to put £1200 into the scheme each year over a five-year period. Investors can use the properties when they are not rented out and seem to offer a perfect solution to many of those unable to buy outright.
However the problem is that researching such an investment, understanding the risks involved and investigating it at a local level is difficult for those not involved in the market on a regular basis.
The worry is that too many people are being blinded by potential financial gains or the promise of a wonderful life abroad. They are refusing to make the necessary checks or take appropriate care when it comes to handing over their money.
As long as there is demand to purchase abroad, then brokers will meet that demand, despite the potential risks it may open up to clients. For those intermediaries who are keen to see their clients do well and build a relationship with them over the long term, then there is business to be done.
However there are also those out there looking only at their own commercial success. As sharp practice in this market is brought to light brokers must be sure they are acting on behalf of their clients and not simply leading them down a blind alley for their own financial gain.
The overseas property market may have blossomed, but there are still a number of rotten apples that threaten to create real problems for a significant number of investors.
