FORGET the 2012 London Olympics. If you want to cash in on the excitement surrounding the world’s biggest sporting event, take a look at Beijing.
Bizarre as it sounds, investment firms are targeting UK investors with buy-to-let schemes in the Chinese capital as it gears up for the 2008 Olympics.
Understandably, many people are nervous about investing in property in the capital city of a communist state 5,000 miles away. So, to sweeten the pill, developers are offering to guarantee rents. Key Universal, a UK investment firm, is marketing apartments in Beijing, starting at £118,000, with a guaranteed 5% rental return for the first 10 years.
During that time a subsidiary of the Hong Kong-based developer Hopson will take responsibility for maintaining the fully furnished flats and finding suitable tenants. Even if it can’t find tenants, it will still pay the guaranteed rent, which should be just enough to cover the mortgage payments. If it works, investors should then be able to benefit from rising house prices.
Over the past few years Beijing’s property market has been booming. Residential house prices rose 20% in 2005, according to the Beijing Municipal Construction Committee. Prices were 29% higher in 2004.
Although some analysts believe house prices will slow, Key Universal thinks values could rise by 34%-80% over the next three to five years.
Patrick Phipps at Key Universal said: “The combination of the 2008 Olympics, interest from foreign investors and a burgeoning rental market should see the trend continuing.”
For all but the most adventurous investor, buying a Chinese property is likely to prove too much of a step into the unknown. A quick glance at Key Universal’s prospectus reveals a number of complications. These include various property taxes, such as a 5% tax on rental income, and the need to take a Chinese name — footballer David Beckham is known as Bei Ke Han Mu in China.
Even though you can sell your flat at any time, transferring the funds out of the country can take up to three weeks and can only be done using officially licensed banks.
There are also question marks over legal ownership. Under existing laws the Chinese government could claim the land back. That is why most buy-to-let investors still prefer to sink their money into property nearer home.
Deciding where to invest overseas is a question of weighing up the potential for growth and rental income against the risks and costs. On that basis, which markets offer a better deal? “Latvia is amazing us,” said Paul Willcox of Someplace Else, a property-investment company. “You can borrow up to 90% of the value of a property, which is very favourable for investors. There are no problems for foreigners who want to buy and it is a full EU member.”
Latvian property prices have been rising by between 15% and 20% a year, and Willcox expects more of the same this year. Rental yields are about 6%.
Paul Owen, chief executive of the Association of International Property Professionals, a trade body, highlights eastern Europe, but only if you buy in the right places.
“City lets in eastern Europe aimed at the local rental market look attractive and returns look sustainable. Prague and Warsaw are both interesting,” he said. Prices in Prague rose about 15% last year, rental yields average about 5% and mortgage rates start at just over 3%.
Other commentators are tipping southern Cyprus as a hotspot for 2006.
Key Universal isn’t the only investment company to use guaranteed rents to tempt investors. They are becoming an increasingly common feature of overseas deals, especially in emerging property markets where it takes more courage to invest.
Flats in the Bulgarian Black Sea resorts guarantee rents of 8%-15% for two to five years. Buy-to-lets in the more established Dubai economy promise 8% for three years.
Developers argue that the guarantees provide a safety net. But property commentators warn investors not to be taken in by what may be simply a clever marketing tool.
While the promised rents look attractive, they may bear no relation to what you will be able to charge when the guaranteed period ends. Stephen Ludlow, director of estate agent Ludlow Thompson, points to a scheme in Turkey offering a 40% return for two years. “If there is no rental demand, investors could see their yield fall off a cliff once the guarantee runs out,” he said.
Beware of guarantees being used to shift property that otherwise wouldn’t sell.
In some cases, said Ludlow, overseas developers are leaving guaranteed rental properties unlet or letting them out at a fraction of the promised return.
Developers don’t mind because they have already added the cost of the guaranteed rent into the price at which they sold the property. But investors will get a shock when they try to rent it out or sell it and discover it is not worth what they hoped.
The guarantee is only as good as the organisation offering it, warns Mike Boles at Savills Private Finance, an adviser. “Ideally the deal should be underwritten by a bank,” he said. “If the developer guaranteeing it goes out of business the promise is useless.”
Most schemes are not well regulated, so you would have no redress if they collapsed, and there may be onerous terms buried in the small print. Arlette Adler of the Federation of Overseas Property Developers, Agents and Consultants, a trade body, said: “Always check the small print for hidden clauses that enable the developer not to pay the rental guarantee.”
The Times