Investment: Specific Considerations for Different Types of Markets

Overview

Considering a property investment is a very different process to deciding on where to buy a holiday home. Investment is a financial decision and must be made with the head, not the heart. Just because you love that beautiful old farmhouse in the heart of the French countryside, it doesn’t mean that you will make any money out of it. The question of whether you want sun drenched beaches or an equally sun-drenched terrace overlooking a medieval old town, ceases to be relevant. The real question is: is it better to invest in a city, the countryside or a tourist resort?

City or country

Research suggests that over the long term, the rental and resale potential of properties in cities outperforms that of properties in the countryside. Prices in cities are however often more volatile than in the countryside, partly because the supply of land is more limited and partly because of higher rates of population mobility.

What attracts investors to countryside properties, particularly in emerging markets, is price. However, low prices don’t necessarily suggest that prices are going to rise. You may be able to buy a run down village house in Bulgaria for three thousand pounds, but part of the reason that these properties cost so little is that nobody wants to live there. Even if your country house investment is close enough to new infrastructure, entertainment or commercial developments to increase demand, prices have got to go a long way before you make any significant profits in absolute terms. Our tip: stick to cities and major towns.

Buying in resorts: the impact of tourism

Many property companies focus on selling properties in resort areas. This is partly due to the fact that many people buying abroad are buying a holiday home, but it is also partly a result of increasing investor interest in resort properties.

Increasing levels of tourism bring increased wealth and demand for short-term holiday accommodation. In theory, with more people comes more demand. However, it is the intentions of those people that are important to decipher. Genuine resort investment opportunities exist in places where there will be considerable tourist demand for holiday accommodation and where buyers are landlords or holiday home purchasers rather than speculators.

Determining the longevity of an investment in a resort area is based on simple common sense. There must be genuine, fundamental reasons why people would choose to holiday in the resort and even buy a holiday home there. For example; will the Black Sea coast of Bulgaria with its short summer season actually be as popular a holiday and second home destination as Spain? The answer is probably not.

Climate and local attractions are important. People will always want to holiday and live in the Mediterranean area because of the climate. Equally, people will also always want to holiday or live near Disneyworld. Florida and Spain might be very mature markets, but there is a reason that prices have reached the levels that they have; there is genuine demand. When looking for emerging resort markets we have to look out for the same demand motivators.

There is also a potential, non-financial benefit to having a property that you can use yourself in a resort. In a holiday resort, your property is likely to be used for short term visitors rather than long term tenants and it is therefore likely that it will be available for you to use at least some of the time. On many purpose built resorts, developers offer packages where they let your property for you for most of the year but keep it open for your personal use at set times. This can be a good investment in your lifestyle as well as your financial future.

When considering a resort investment, we need to consider the main driver of rental and purchase demand; the number of tourists. As a starting point, the ten countries forecast by the World Travel and Tourism Council to show the highest levels of real growth up to 2015 are as follows:

Montenegro – 9.9

China – 9.2

India – 8.6

Reunion – 8.6

Croatia – 7.8

Sudan – 7.7

Vietnam – 7.7

Laos – 7.6

Czech Republic – 7.5

Guadeloupe – 7.2

These countries offer real opportunities. China is often seen as a city investment, but with the wealth of the local population rising so quickly, more and more time and money is spent in domestic resort areas. This is particularly the case in China where visa issues make it difficult for local people to travel abroad. Investing in a Chinese resort area such as Hainan may prove to be very profitable.

Europe. Other countries on the list have economies more closely geared to tourism and property markets that will grow in direct correlation with increasing visitor numbers. Montenegro, in the top place for tourism growth, was often also named as the single best destination when trying to find a holiday home in 2005.

Montenegro is a tiny country facing Italy across the Adriatic and is currently linked in a loose federation with Serbia. Like neighbouring Croatia, Montenegro has a fine coastline dotted with islands and a wooded interior studded with lakes. Both countries gained a reputation as high class holiday resorts in the 1960s and 70s. In Montenegro’s upmarket Sveti Stefan Resort, Elizabeth Taylor and Richard Burton are said to have disturbed other guests with their arguing, whilst Sofia Loren gave the chef lessons in how to cook pasta.

The tourist market in the region fell off during the 1990 war in the Balkans, unfairly in the case of Montenegro which had little involvement. There are no restrictions on foreigners buying property in Montenegro and prices are low. A house on the waterfront can cost from €60,000 ($105,000) with apartments from €30,000. For this reason alone, Montenegro may be a better bet than Croatia, a favourite with German and Italian buyers for many years. Prices in Croatia start from a higher base with three or four bedroom properties close to the coast unlikely to be sold under €120,000. In luxury new developments this sum might just stretch to a one-bedroom apartment.

The other European country on this list, the Czech Republic, is already one of the great success stories of the last ten years. The market for city centre property in Eastern Europe was practically invented in Prague and it is a model copied in many European capitals since.

There is arguably too much existing competition for the market to prove particularly profitable. Opportunities do however exist outside the capital. The Czech government is making greater efforts to attract visitors to spa towns and destinations outside Prague, and is seeking millions of euros in extra development funds from the European Union. The money will be put towards tourism growth and improvement of infrastructure throughout the country. Spa towns such as Karlovy-Vary are attractive areas for second homes; property here is good value for money and prices are now likely to increase faster than in Prague.

Beyond Europe. India is an interesting nomination: high levels of interest have been sparked after a loosening of restrictions on foreign investment. Like China, India should be seen as a long term investment with the chance of significant long term capital appreciation.

Turning to the areas from South East Asia, Vietnam is one of the countries generating a real buzz at the moment. Construction has started on several prestigious second home developments and so far is concentrated on the coast. The new developments are expected to appeal to the many people who have fallen for this exotically beautiful country when travelling. Vietnam is also a very popular second home market for investors from China and Japan.

Ski Property

Second homes might generally be associated with escaping to the warmth and the beach, but rental yields in ski resorts can be higher. The supply of ski resorts is still far below that of beach holiday destinations, meaning that demand for accommodation can be high.

Skiing holidays are becoming increasingly popular. The Ski Club of Great Britain’s analysis now estimates UK visits to ski resorts at 1,205,000 – an 8.5% growth since the 2000/2001 season. However, with an average cost of over £600 for a week in the Alps, the expense is prohibitive. This gives the new resorts in central and Eastern Europe an opportunity to break into the market.

The rental season for ski property may also be longer. Resorts are often in areas which can appeal to people throughout the year. For example, the Alps now have a thriving summer market with people enjoying walking holidays and adventure sports.

Ski Destinations. Four key markets still dominate world skiing, accounting for two-thirds of the world market: Austria (56 million visits) France (57.6 million), the US (52.2 million) and Japan (52 million) but the market share of these countries is shrinking fast. The number of visits to Japan has declined by 40% over the last ten years.

Eastern Europe. There is a strong perception that the Eastern European markets offer the best value for money. A week in a Romanian or Bulgarian resort, including costs such as a week’s lift pass, can cost a third of the price in France or Switzerland. The facilities in Eastern Europe are not bad either – Bulgaria is a favourite to host the 2014 Winter Olympics, with the resorts at Bansko, Borovets and Pamporovo poised to benefit.

The Tatras, the range of mountains bordering Poland and Slovakia, also merit a look. The High Tatras in Slovakia are particularly notable, providing the only real competition for Alpine skiing in Eastern Europe. Skiing here is Olympic standard, with reliable snow and good facilities. The best known resort is Strbske Pleso which is also a centre for adventure sports including paragliding and bungee jumping.

The High Tatras are a good bet because the high standard of skiing is backed up by a very solid housing market. With 19% flat tax, a burgeoning economy and a tourist industry ranked 25th for long term growth, Slovakia presents an interesting opportunity.

Emerging Markets. Eastern Europe appeals to skiers from the West of Europe because of the comparatively low prices and reasonable flight times. There is, however, evidence that dedicated skiers are prepared to travel further and further for good snow.

Skiing in exotic locations is easier to arrange than people realise. Buyers looking for something further abroad could try looking at Chile, Japan or even China.

Skiing is one of the biggest trends to hit China in years. A decade ago, less than 200 people in China were believed to have tried skiing; now it’s one million. The market is expected to grow to twelve million. The best resorts are in the northerly province of Heilongjiang. Yabuli, the site of the third Asian Winter Games, has excellent facilities and the longest toboggan run in the world. Buying here could be the equivalent of investing in Whistler twenty years ago.

Renting Ski Property. As with beachfront property, it is possible to agree rental contracts with holiday companies. You may want to look for a development with a leasing agreement or guaranteed rental scheme already in place. More than 60% of ski holidays are sold as inclusive packages. The six key companies to look for are Airtours, Crystal, Inghams, Thomson, First Choice and Neilson. Renting directly should also be possible. Figures from the Ski Club of Great Britain show that people arranging independent trips now make up almost 25% of the market; a rise of more than 300% over the last five years.

Beach Destinations

The sheer number of beach resorts, everywhere from the Americas to the Black Sea, means that the relationship between supply and demand is not nearly as favourable as with ski property. Nonetheless, 18.7% of buyers still say that they are looking for a property close to the coast. The majority of these buyers are looking for personal use rather than investment property. Prices are often higher on the coast and in most countries the number of second homes at the coast will ensure intense competition for holiday lets.

For those people determined to buy on the coast, the most favourable conditions are often in emerging markets where there is little competition. Prices may be low on the Black Sea coast, but with the number of people buying in Bulgaria and Turkey, rental yields are going to be low. In Brazil or Goa, the numbers of apartments built to the standard expected by Western tourists is lower, meaning that rental yields on high quality property are likely to be more satisfactory.

Another policy is to buy near a beach, but in an area which also has other strengths. The Costa del Sol in Spain has benefited from proximity to Barcelona; Dubai attracts tourists to the beach, but also for the shopping and nightlife. Prices have risen much more quickly in these markets than in straightforward beach towns.

Some of these ‘beach extra’ markets are still in their infancy and provide a good opportunity for buyers. Gdansk, for example, is a beautiful Hanseatic town in Poland which attracts high numbers of tourists. Attractive beaches lie just outside the city limits, but with the relatively short summer season it is the city’s other attractions which provide a basis for demand. The south of Italy and Sicily also combine historical attractions and beautiful cities with glorious beaches.

The newer markets in the Middle East can also be good places to look. The Middle East is becoming more and more fashionable. Travel agents report that since January 2005, the number of UK visitors has increased by 54% to Egypt, 25% to Morocco and 47.4% to Dubai. Cities such as Doha and Muscat may be the next big tourist destinations to look out for.

Another good place to look is in Kenya and East Africa. Kenya has beautiful beaches, with proximity to Zanzibar and other island resorts. People visiting Kenya on safari also book a few days at the coast. Mombassa and Malindi have good transport links, large expat communities and visitors who return year after year.

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in “Where to buy a property abroad – an investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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