Eastern Europe Property

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Unscrupulous property advisers are targeting UK investors with overseas buy-to-let schemes that could ultimately prove disastrous, a leading estate agent is warning.

Ludlow Thompson says schemes launched in Turkey, Bulgaria and Dubai have been heavily advertised in the UK, offering guaranteed rents for one or two years.

While the guaranteed rents look attractive, they often bear no relation to what investors could charge tenants. Once the guaranteed period comes to an end, investors may not be able to get anywhere near the guaranteed rent, or even be sure they will be able to find tenants.

In one scheme identified by Ludlow Thompson, a Turkish investment company is offering a 40 per cent return over two years on a newly built development. In many cases, developers are leaving guaranteed rental properties unlet – or letting them out at much lower returns.

Stephen Ludlow, the agent’s director, said: “If there is no rental demand for the property, the investor could see their yield fall off a cliff once the guarantee runs out.”

The warning follows growing concern about a bubble in the buy-to-let market. Pension advisers are worried that many investors had put cash into their plans in to invest in buy-to-let following changes to the law last April. These changes were scrapped in December.

Although guaranteed return schemes look attractive, investors can end up worse off over the longer term, if they get stuck with low-yielding property that proves difficult to sell.
“A lot of investors have bought new-build flats in the UK on guaranteed rents and been disappointed with rental performance once the guarantee has expired,” Ludlow warned.

“But at least in the UK, most of these schemes are being marketed in large metropolitan areas with an active and researchable lettings market.”

Investors losing out on guaranteed rental schemes are unlikely to be able to claim compensation.

The Financial Services Authority, Britain’s chief City regulator, has repeatedly warned property investors to take care in the buy-to-let market. Property developers and buy-to-let mortgage products are not regulated by the watchdog.

Overseas schemes are likely to be particularly difficult for investors to complain about. However, the popularity of buy-to-let investment property abroad has risen over the past 12 months, following a decline in the rental yields on British property.

Last month, the Mortgage Works, the buy-to-let lending arm of the Portman Building Society, said that it would stop offering mortgages on newly built flats in the UK, because it had concerns about the true value of many of these housing developments.

Dubai is becoming increasingly popular with British property investors looking for some sun.

Currency specialist HIFX’s new Global Property Hot Spots report finds that the Middle Eastern state, along with Bulgaria, is increasingly popular with UK residents looking for a second home.

Since last year the number of Britons buying homes in Dubai has increased 60 per cent, with the number of people buying a property in Bulgaria rising 77 per cent.

Traditional favourites France and Spain are still the most popular places for UK residents to buy second homes in, but interest there is on the wane.

“Although France and Spain remain the most popular destinations to buy abroad, due to their proximity and the cheap price of travel, British citizens are starting to look further afield,” said Alex Wright, director of HIFX.

“Dubai is an attractive location for Brits with the winter sun averaging eight hours a day. Property prices are relatively cheap compared to international standards and rental yields are still high. Dubai has many grand projects to increase its visitor numbers which should sustain rental incomes for investors.”

But, overall, Britons owning property abroad tend to cluster closer to home.

Thirty-five per cent of Brits with homes overseas have a place in Spain and 24 per cent have a property in France.

But interest in buying in Spain has now dropped 26 per cent, HFIX reveals, with the number of Brits asking about France falling 24 per cent.

By contrast, the number of people enquiring about Bulgaria rose eight per cent.

“Bulgaria is booming and the Black Sea resorts are reminiscent of Spain 20 years ago; investors are buying in their droves and there is similar activity in some of the ski resorts,” said HIFX’s Mr Wright.

“Supply is in danger of outstripping demand from a rental perspective so investors should be wary; capital growth is what most speculative investors are chasing at the moment. Traditional areas such as Spain and France are still popular with families looking for a holiday home and retirees who plan to spend the majority of their time abroad but the younger generation are becoming more adventurous.”

ONE of the Ukraine’s largest property developers, XXI Century, is set to float on the London Stock Exchange by the end of this year, in a move that will value the company at as much as £300m (E440m, $530m).

The company, the second ever Ukrainian firm to seek a London listing, has hired Dutch bank ING to prepare it for the float, The Business has learnt. XXI Century is expected to be the first in a series of Ukrainian entrepreneurial firms the bank will bring to market over the next year.

XXI Century, founded by Ukrainian-born Georgian Lev Partskhaladze, has seen the value of its portfolio expand eightfold in five years, and floating it on the London exchange will allow it to raise its international profile.

It develops shopping centres, high-end apartment blocks, business centres, and fast food restaurants, predominantly in Ukraine’s capital Kiev.

“They’ve been looking at raising capital on western financial markets for a while,” said a Kiev-based corporate financier.

“It’s like Ukrproduct. They’re just a small dairy company, but now they are in London, they are serious. That’s probably worth the hundred thousand dollars it cost,” added the financier.

Ukrproduct, which makes processed cheese and butter, raised £6m on London’s Aim growth market in February, drawing in 18 investment funds and 33 private investors.

ING has been targeting Ukrainian businesses built from scratch by their owners. It argues that the country’s industrial conglomerates, which would generate far larger fees, pose too many problems, because of the complicated way many of them gained the assets from the state.

So where – and why – are people investing in property?
March 2005
A poll of potential overseas investors has shown that almost 40 per cent of respondents would invest in emerging markets, such as Bulgaria, Slovakia, Poland and Croatia, among others.

Beach destinations (19 per cent) were the next most popular destinations for investors’ cash followed by existing markets (15 per cent).

To my mind, the survey reveals that people want to make the most from their money by investing in such countries that provide long-term growth and high capital gains.

In fact, more than 25 per cent of the people polled in the research, which was commissioned by The Homebuyer Show, are buying a property overseas in the hope of making long-term capital gains.

Holiday time

But some (21 per cent) also intended to use it as a holiday home and others for short-term holiday lets (20 per cent).

The poll also revealed that more than 50 per cent of respondents believed that budget airline destinations are more appealing to property buyers and therefore have greater investment potential.

Other investment plus points revealed by the survey include: becoming a member of the EU (22.41 per cent), the building of new facilities (10.34 per cent), the staging of an international event, such as the Olympics (5.17 per cent), and even extensive media coverage (5.17 per cent).

Foreign ownership of Land in Romania
Law no. 54/1998, regarding the juridical circulation of land, explicitly provides that “the foreign citizen shall not be granted the ownership right for land” but such a citizen could establish a company in Romania, in order to buy as much land as he wishes.

In fact, foreigners completed more than 95% of the recent large real estate investments in Romania, declared Ionut Bordei, sales director with Eurisko. Investors from outside the country have completed the bulk of commercial property transactions including most of the class A&B offices, residential compounds, shopping- malls, business parks and hypermarkets completed in the last few years.

Israelis, Austrians and Spanish are at the top of the list. The French have invested heavily in retail property – Carrefour and Cora representing the leading French companies. German investors, particularly, Metro Group International and Selgros are equally prominent players in the retail sector.

In the Office sector, Portland Trust, a Dutch company, has built two class A offices in the heart of the city – Opera Centre 1 and Opera Centre 2. Europa House, has built a 13,000 sq. m. Office building, owned by the Israeli company GTC.

The price of land in central Bucharest is up to 1,500m2, dependant upon location, availability of utilities and building height limitations.

Agricultural Land During 1998-2004, the total surface of extravilan agricultural land transacted was of 355,725 hectares. “80% of which was sold to foreign investors”, stated the ARAI presidents. The Italians were the quickest to spot the potential of the Romanian land business, by buying large plots in Banat, Ureche added. The businessmen in the Peninsula have bought land at 200-300 euro per hectare and now they sell it to the Germans for 1,200 euro/hectare.

During 1998-2004, there were requirements for the purchase of 430,000 hectares located in the extravilan and 200,000 purchase contracts were signed, according to the data supplied by the Ministry of Agriculture at the end of last year. The Timis County was on top in terms of land sales with 108,000 ha, which represents 15% of the county’s size. This is followed by the Arad county- 34,000 ha, Constanta – 15,000 ha, and Caras-Severin – 14,000 ha. The highest value of extravilan lad was registered in Prahova, with 80 million lei, followed by Ilfov, with 49 million lei. In the south, in Baragan, land was sold also to the Greeks, Turks and Italians. “The demand is for lands of at least 500 hectares, between 600 and 1.200 de euro/hectare”, Ureche added.

Jurnalul National, April 1st, 2005

Eastern Europe eclipses the rest of the EU
The union’s new entrants have seen their markets grow by up to 82% — but can the boom last? By Kathryn Cooper

IT IS exactly one year since 10 more countries joined the European Union (EU), and they have been rewarded with stock- market growth of up to 82% in that time.
Estonia has been the best performer out of the new member states, returning 82% in sterling terms. The Czech Republic takes second place with a gain of nearly 75% and Hungary comes third with a 63% rise. London’s FTSE All-Share index has returned 10% in the same time.

Of the other countries that joined a year ago — Poland, Latvia, Lithuania, Slovakia, Slovenia, Malta and Cyprus — only Slovenia (squashed between Italy, Austria, Hungary and Croatia) and Cyprus have returned less than 10%.

Eastern European stock markets have boomed as foreign investors have piled in to take advantage of EU accession. Plamen Monovski, manager of the Merrill Lynch International Emerging Europe fund, said: “One of the key benefits of EU convergence has been lower interest rates, which have produced a borrowing and spending boom in the new members, and boosted economic growth.”

Interest rates in Poland have tumbled from 24.5% in 1997 to 6% today; in Hungary, they have been slashed from 19.3% to 9.5%; and in the Czech Republic they have dropped from 16.5% to just 2.3%.

However, some professional investors have been cashing in their stakes in the new EU states because they fear the bubble could burst. The MSCI Emerging Eastern Europe index has slipped 1.4% in the past four weeks, compared with a 5% rise over three months.

Raj Shant, manager of the Newton Continental European fund, sold all his eastern European stocks six months ago. He said: “Admittedly it looks like I was six months too early, but it is better to be early than too late. While it is clear that accession countries are growing rapidly as they catch up with their counterparts in the West, I feel that there are echoes of the tech bubble.”

Jonathan Garner, an emerging markets analyst at Credit Suisse First Boston, the investment bank, reduced the bank’s stake in the Czech Republic, Hungary and Poland in February, warning that the markets had become more expensive than those in western Europe.

He said: “We are becoming increasingly cautious on central Europe and would not be surprised to see a sharp setback.”

Investors have also become more cautious because there are signs that the American economy, which underpins global growth, is slowing down — and emerging markets are usually the first to suffer when investors get cold feet.

Glen Finegan of the First State Global Emerging Markets fund said: “Investors’ appetite for risk was, in my opinion, irrationally high at the start of the year and we have certainly seen a return of caution over the past month or so. Having said that, eastern Europe might actually fare better than other emerging markets if there is a setback, because it is considered less risky than, say, Latin America.”

There are also cracks in eastern Europe’s economic miracle. Hungary’s current-account deficit of more than 7% is bigger than that of America relative to the size of its economy: the Hungarian central bank has been forced to raise interest rates to rein in government spending.

Moreover, economic growth in eastern Europe may have peaked last year: Poland is expected to grow by 4.7% this year compared with 5.5% in 2004, according to Finegan; the Hungarian economy is forecast to expand by 3.5%, down from 3.9% last year.

While there is a case for short-term investors with eastern European funds throwing in the towel, Monovski said the region still looked attractive in the long term: “It is clear that the market will remain under pressure in the short term, but I do not think we have seen the end of the convergence process. More than 90% of Hungarians still do not have mortgages, which is a great opportunity for banks.”

One of his favourite stocks is OTP. The Hungarian bank is expanding into Bulgaria and Romania, which are due to join the EU on January 1, 2007.