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Investment Guide

Introduction

Investment in property, or real estate as it’s called in most English-speaking countries other than the UK, has never been more popular. Investor anxiety about poorly performing shares and pensions has seen tens of thousands of Britons place their trust in bricks and mortar in order to secure their future prosperity.

Initially, the UK’s booming property market – according to data produced by the Economist, house price capital appreciation between 1997 and 2004 was 147 per cent, which, in Europe, was second only to Ireland – saw investors put their faith in the real estate at home. However, around mid-2004, as the market in Britain peaked, the canny speculator turned his attention overseas.

In truth, the really savvy investor had long been putting his money into overseas property. In keeping with the UK, the global real estate market began to rise in 1997. Capital growth in South Africa was the highest worldwide, at 195 per cent from 1997–2004. However, unlike in the UK market, house price inflation continues unchecked in many corners of every continent.

For example, in the first quarter of 2006, Estonia witnessed capital growth of 17 per cent – the highest in the world ¬– in year-on-year performance, according to the Knight Frank Global House Price Index. The figure will make for an impressive return for those who entered the Estonian market last year, but what all investors will want to know is not where has performed well, but where will do so next.

In preparing this guide, we aim to provide an introduction to property investment, outlining the what, where, why and how, to assist you in your ambition to build a profitable international property portfolio, whether you are investing overseas for capital growth or for income.

INVESTING FOR CAPITAL APPRECIATION

Know thyself

The first rule of property investment is to know thyself. Investment is synonymous with speculation, and, by its very nature, is not a certainty. In other words, prices can fall as well as rise, and you could lose your capital, in addition to not making a profit. Over the best part of a decade, in the main, global property has been on a bull run (prices have risen faster than their historical average), but, as we have witnessed in the UK, bearish (the opposite of bullish) tendencies are afoot in many countries’ property markets.

It is imperative, therefore, that you not only know yourself but are honest about your investment personality. Are you a risk-taker? Can you afford to be a gambler? Or do you prefer to make a smaller amount of profit in return for less stress? If you prefer a stress-free life, place your capital in a high-interest savings account. You will know what interest you will earn and when it will be paid. Barring a highly unlikely collapse in the financial institutions, your money will be safest there.

If, however, you prefer a modicum of risk in order to gain, and can afford to take it, you may look to invest a proportion of your capital – it is not advisable to put all your investments into one commodity – in an established property market (such as Spain or France), where the return may not be as high as in an emerging market (for example, Bulgaria or Turkey), but is less risky. Alternative, arguably lower-risk, strategies are investment funds (including Real Estate Investment Trusts, or REITS) and Property Investment Clubs (PICs) – see section headings below.

Lastly, should you have nerves of steel and the financial acumen to back your judgement, there are a number of higher-risk-but-with-greater-return strategies you can adopt. For example, you could invest in an emerging market, such as Bulgaria, where double-your-money capital gains have been reported in only three years, between 2002 and 2005. Alternatively, buying off-plan (literally before a brick has been laid), when prices are cheapest, and selling the property before completion, when prices have increased, having paid only a deposit, is another. See below for a fuller explanation of off-plan purchasing.

Capital appreciation

Capital appreciation is the figure, usually expressed as a percentage, by which a property increases in value over a specific period. Governments and analysts generally publish figures quarterly or annually in arrears. Several things influence a property’s capital appreciation: economic factors (both national and local), supply and demand (which are themselves impacted upon by many influences), location, the type of property, and local amenities. Often, the advent of a new airline route or the opening of a major attraction in an area will bring about a rise in local property prices.

According to the Knight Frank Global House Price Index (published 29 April 2006), average global house prices stood 6.1 per cent higher at the end of March 2006 than at the end of March 2005. Furthermore, global house price growth has slowed sharply from the peak reached in 2004, when prices were growing by 10.9 per cent per annum. Currently, the annualised growth table is led by Estonia (17.0 per cent), Denmark (16.1 per cent) and New Zealand (13.5 per cent). Bulgaria figures at number four of the 29 countries assessed, with a 12.5 per cent growth. Spain is sixth in the table, demonstrating an 11 per cent rate of annualised capital appreciation.

Past performance, of course, is not necessarily an indicator of future ones. Be aware that capital appreciation predictions you may read are not always impartial. For example, a property developer or estate agent may have a vested interest in promoting a certain area or development, and will exaggerate potential capital growth and rental yields. Therefore, seek unbiased opinion as best you can. Government statistics are generally accurate when reported, although not always when forecasted, as has been witnessed in Chancellor Gordon Brown’s u-turn on Britain’s forecast GDP growth in 2006, which was later downsized to half what he originally predicted.

More pages

Page 1: Introduction
Page 2: Opportunism
Page 3: Purchase costs, fees and taxes
Page 4: Investment funds – REITs – and PICs
Page 5: Purchasing factors
Page 6: Taxes
Page 7: And finally...

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