Investing Abroad

The overseas property market can still produce satisfactory returns

In this article I want to lay out a view of the overseas property market in the current climate and offer some strategies for sensible investing overseas. If you are the kind of person who goes by what they read in the mass media, you could be forgiven for thinking the sky is falling and the world is ending for investors. 

Whilst it is true that at the extremes of the financial spectrum there are people facing difficult times, you may be in the enviable position of being relatively financially secure, with reasonable assets. 12 months ago, investing in equities or even simple savings accounts would have delivered reasonable returns but the decimation in interest rates in the UK and corresponding falls in share prices mean looking beyond mainstream investments becomes attractive. Enter stage left, overseas property.

The classic overseas property investment operates on the price rise principle: invest early and buy off-plan, then surf the price rises that correspond to stages in the build process; planning permission being granted, first foundations laid, first apartments finished, second phase started, construction complete, facilities, infrastructure and dressing. This model has certainly seen huge interest and influx of money, particularly in ‘safe’ regions for Brits like Spain and Portugal where the glut of easy credit and equity in highly priced UK homes made it easy to fund a purchase abroad.

In the boom years buying overseas almost became a retail financial product where for £10k or £20k you could pick up an apartment and then double your money when the prices rose, selling before a brick was laid. It also stoked an ‘Aero’ economy; lots of little market bubbles for particular regions stoked by stories of huge returns. A lot of hot air was devoted to where the next hot spot would be and even now most ‘news’ about the industry is someone trying to stoke their local market’s fire with a tenuous factoid to support why that particular area is going to be hot. Because the price of entry to the market was low (and corresponding cost of risk therefore acceptable), deep research wasn’t always necessary or even valued by purchasers.

The bald (and slightly boring) facts are that if you are chasing two or even three figure percentage returns, you’ll be flying way out on a limb, because there’s just not enough transaction volumes to support a bubble economy at the moment in property. The bulk of the retail level investors who drove the market on the back of low entry costs and minimal research are sitting on their hands and can’t or won’t spend. They’re worried about the situation at home and no longer have those fat equity cushions in their properties, even if the surveyors and banks would support remortgage values. The steep price curves previously seen have flattened along with demand and in some over-developed markets values are simply in freefall.

So where does that leave investors who do have money to spend?

Much like the collapse in the UK Buy-to-Let market (particularly in inner city apartments) a lot of the casual overseas investors are now out of the game. This is A Good Thing because those that are left are smart enough to see overseas property transactions as long term investments or relish the opportunities that a distressed market brings. A recent survey of Rightmove Overseas users showed that investment as a primary reason for purchase was down to 20% of users. For most, long term ownership as retirement or a second home in the sun was the primary driver for a purchase overseas.

Search volumes on Rightmove Overseas have remained relatively static throughout the down turn and the New Year actually saw a rise in the number of enquiries through the site. For the 80,000+ visitors we see a month, the dream of a home abroad is still very real but, this shift away from a short term outlook towards long term holdings and value driven investing means vendors and purchasers need to adopt different approaches.

A vendor perspective

At Rightmove Overseas we take advertising from both ends of the vendor spectrum, from private owners looking to sell their restored longére in Brittany up to multi-million pound schemes in Dubai. What unifies them in this climate is the need to stand out from the crowd. When the numbers of proceedable buyers diminish, but the stock volumes remain in over-supply, simply putting properties on the shelves and expecting them to be snapped up will not secure completions. For most locations it is absolutely a buyers market so sticking heads in the sand and pretending everything is okay and the things you did yesterday apply to today is a recipe for stagnation.

Advertisers seeing success are those willing to adapt their offering to achieve cut-through and invest to acquire interest. This can be painful for private owners or smaller single project developers if they are not able to divorce emotion from the sale and treat the transaction like the business it should be. It’s a huge risk to hang on to an asset that may not see appreciation or even return to value for years to come, so facing the brutal facts, recognising you need to lock in what gains you have and secure the sale at anything above cost, could in the long run prove sensible.

Rightmove advertisers can take advantage of showcasing properties at the top of search results or email campaigns to our subscriber base. If you’ve signed up to our newsletter or email updates you may have seen these. If you are not advertising with Rightmove, I'd suggest ensuring you have a good mix of wide coverage with highly trafficked portal, and explore some small local sites with niche offerings who likely will let you advertise for free. Google PPC can be worth exploring, but popular, generic keywords will be expensive, so I'd suggest only bidding for specific terms referring the local area you property or development is in.

If selling is undesirable or would result in negative gains, you may be able to extract greater yield from the property (or at least tread water until prices pick up) by renting it out on short term holiday lets. Rightmove's sister company www.holidaylettings.co.uk specialise in this field and will be able to offer lots of advice.
An investor perspective

There are two main streams available aligned with the serious buyers left in the market: personal properties for long term appreciation and holidaying or business-driven bargain hunting to capitalise on vendors in distress. Chasing hot spots is extremely high risk in this market as you are relying on optimism and confidence which are in short supply amongst purchasers. Chase value, not hot spots.

For personal properties, it's absolutely a long game and actually better not to think of it as an investment at all. Purchasers in this market are buying to match their taste and lifestyle and essentially each purchase is unique. The chances therefore of you securing a property that a) appeals to a wide enough market of this type of buyer and b) at a price that makes sense are pretty slim. Better to recognise that justifying a lifestyle choice with some rationalisation about it being an investment is a self-serving and just buy what you would be happy to live or holiday in. Play safe, don’t buy holes in the ground, don’t buy off-plan, and don’t buy in left-field countries, but in well established markets with strong ex-pat communities. If you were targeting Brits, this means perennial favourites France, Spain, Portugal, Florida and Italy. Get the property on sites like holidaylettings.co.uk and just enjoy it for what it is. If you struggle to find the time to search, try a bespoke service like Cavendish Brooke (+44 (0) 207 429 0344).

For more aggressive investors, market conditions have left some rich pickings from developers under pressure from falling interest and prices, and their banks drive to shore up balance sheets. The banks supporting many of the developments are not as free with releasing funds for progressing to the next phase of a development because they’re nervous about when returns will materialise and are tightening up on terms and defaults. At Rightmove we have several partners working directly with Spanish banks for example who have large portfolios of repossessed or defaulted property that simply has to be removed from their books. We're also hearing more stories from developers who have been put on notice that they need to be servicing their debts to the banks and demonstrating sales before any more funds will be released.

At this level, properties cease to be emotional purchases and they become simply numbers on a balance sheet. There's the number the property was built for, the raw cost, then there's the number it was valued at previously (in some markets essentially meaningless now) and there's the number the bank wants to clear it or the developer wants to cover their costs and secure the next round of funding.

In the case of repossessions in particular, prior to the bank taking over, the developer would have had all sorts of motivations and emotions bound up in the price they wanted for a given property. To the bank it's just business driven by the need to clear liabilities from their books and present decreasing numbers to shareholders and markets.

There are amazing bargains out there driven by market motivations that are very different to only a few short months ago, but unless the deal you get is out of this world, you should still apply due diligence to the location, character and facilities of the properties you buy into. Look for rental guarantees, proximity to airports and tourist facilities and developers with good history and reputation. Assessing quality of a company abroad can be tricky so look for trade associations and charter marks, for example Association of International Property Professionals members (www.aipp.org.uk) subscribe to voluntary code of conduct and sanctions.

Put yourself in the bank or developer's shoes, when making an offer. They could have no sales at unrealistic prices or some sales at a price that achieves their aim. Best story we've heard this year (for the lucky buyer) was a project with 10 apartments left, originally marketed £325k, priced down to £220k. An investor approached the developer and said "I'll take all ten for £1.1m now. Each week the price goes down £100k." Aggressive and cheeky yes, but I'll leave you to guess how many weeks the developer held out for…