Sim Property Newsletter Feb 2009 - CEE and puzzling investments

The last month has not seen me travel anywhere exotic, though I have been to some of Czech Republic�s neighbours i.e. Germany, Poland and Slovakia. So I thought it appropriate to do a quick market update on these key Central European countries.

Czech Republic

For around the last 9 months I�ve felt the market in CZ has been slowly slipping (hence I chose to prune my portfolio a little at the 2nd half of last year) and recently official data has been released showed that the Prague property market fell 1.7% in Q4 08, on average. The reality is that some of the new builds that were originally overpriced are falling much faster.

Just a couple of months ago the Czech economy was still predicted to grow by around 4% in 2009, yet in the last couple of weeks the Czech national bank has now said they expect a contraction of 0.3% - how quickly things change these days! I personally expect that this will be further revised downwards, especially has the Czech Republic�s major market (i.e. Germany) is already in a recession. It just further proves how little so many so called experts/analysts know and are tied up by conservative sheep like thinking.

Unemployment in the Czech Republic is slowly creeping up and it seems like many people still have their heads in the sands. Many property sellers are oblivious to what is happening and many properties are still being priced unrealistically and are staying on the market for months.

Some of my friends who are estate agents in Prague are struggling even to sell 1 property a month at the moment. They are having to change their commission structures with their agents � these structures previously incentivised sourcing property as it was so easy to sell them, now they are trying to encourage the agents to find clients as they have so many properties on their books as there are few buyers out there and those that are are waiting.

It�s difficult to predict just how much worse the Czech economy and property market will get. My view is that we�re in for many months more of falling prices though medium term the market is still well positioned and not so badly oversupplied like some others.

Germany

My thoughts on the German property market are well know, so I won�t go into the why�s and wherefore�s again. I�d recommend most residential property investors to stay well clear for the foreseeable future.

Slovakia

Slovakia has had a great boom but that�s well and truly over for the time being (ie at least this year). The full effects of the global slowdown have not yet fed through into the system yet (a bit like in Czech Republic also) so there is still more pain to come in Slovakia. Action is just starting to be taken on the back of last year�s results and falling orders. Two of Slovakia�s largest industries � automotive and electronics � are in trouble and are going to mean further job losses throughout the economy � expect worse to come.

I know of a number of international companies who have recently being restructuring their operations, which has seen management centralised in the Czech Republic. Furthermore, I know of a number of Czech middle to upper level managers who over the last 6 months have been brought into Slovakia to control operations there and further cut costs � to the disadvantage of Slovaks.

Some of the larger Czech real estate agencies have tried to expand into Slovakia in the last couple of years, but because of the worsening market conditions they�ve been forced to either close offices or withdraw from the market altogether.

The Bratislava property market always had the tendency to become oversupplied quickly and thus it finds itself in this position again. Rental yields are still low. Property prices are continuing to fall. Although many developers will slow their projects down there is still potential for huge supply to come on to the market in the future. I always find myself feeling disappointed with Bratislava as theoretically it could be a great market in which to invest but when I measure it against Prague it always loses out.

Poland

I spent a lot of time in Poland during the recent property boom years and I remember being amazed at how many people thought it�s just impossible for property prices to go down. Because of this prevailing attitude many Poles (including many property developers) are still caught dazzled in the headlights and can�t quite grasp that property prices are still falling there.

Around 60-70% of mortgages in Poland were taken out in Swiss Franc�s. Given that the zloty has been hammered compared to the franc its meant that those who repay their CHF mortgages with Zloty�s are having to pay around 30% more in just a few months, this is naturally causing a lot of pain to people�s pockets.

It also means that if they wish to sell they need 30% more Zloty�s just to repay their mortgage. This meaning for some investors even though their property has gone up in value if they were to sell they don�t have enough to repay the mortgage. Ouch! This clearly a hard lesson in international currency markets and one which many Hungarian�s, Latvian�s are also learning.

This is one of the dangers of being tempted to invest in markets with high local interest rates � and then to borrow in a foreign currency.

The Polish economy cannot escape the global down turn but I think its robust enough to rebound again.

I see the Polish property market continuing to fall for most of this year. I think now is not quite yet the time to buy but it could be very shortly. There are starting to be some excellent deals available from desperate sellers. Start doing your research now and get ready.

It�s a difficult balance to strike between buying too early and buying too late that you�ve got too much competition in the market. Once the global problems get sorted out I still feel Poland (along with the Czech Republic) will be again a strong market in which to invest.


Investments

Anyone who has looked at our website over the last 4+ months will see no new investment opportunities � this is basically because, despite my hard work, I just haven�t been able to find any good enough to stack up to my criteria (apart from odd individual units). That is perhaps until now ...

1. No money down + large discount is not something you usually associate with Prague!

We are close to finalising a deal direct from a developer, in Prague, that will see us get around 15-25% off the list prices. The developer needs to make some quick sales to keep the bank happy � but does not want to be seen slashing prices on the Prague market and thus damage their reputation. Thus they have offered us these very attractive terms. Not only is it a great discount but the developer is willing to use the discount as a gifted deposit and thus even with an 80%LTV mortgage you will be able to cover the whole purchase price with a mortgage.

Worked example:
Example list price = 5,000,000 CZK (inc VAT, parking, storage)
Discount = 20%
Purchase price = 4,000,000 CZK.
Mortgage @ 80% LTV = 4,000,000 CZK
Money down = approx zero

Please contact me for more details (this is not on the website).

2. Taster: Prague off-plan substantially lower than the market value, great design, next to a metro � details still being finalised.


Puzzle

To keep the mind fresh in these times of economic doom and gloom I�ll now include in our newsletters a monthly puzzle. We�ll start with an easy one below, answers on a postcard:

Two trains set out towards each other on a straight piece of track from two different stations 200km apart.
Both trains are travelling at 50km/hr.
At the same time a fly sets off and travels between the two trains back and forward until the trains collide.
The fly travels at 125km/hr.
How far does the fly travel until the trains collide?


Holiday property

Those who hold foreign holiday property as part of their portfolio are going to feel the pinch even more than usual this year as people cut spending in the global economic downturn. I�ve long written about the many disadvantages of owning holiday property as a pure investment even during the good times (from bitter experience I might add) � now that times are going bad losses on holiday properties are likely to increase further. Fingers crossed it doesn�t get too bad.


Co-operation

In these interesting times we have found ourselves co-operating with others more and more. Ranging from companies who need our help letting & managing their clients units to partnering with others to put interesting investment opportunities together. Not only can these co-operations be interesting and enriching experiences they can also be financially beneficial for all involved. I guess that�s an open invitation ...


This year the gap between winners and losers will be magnified even more than normal. Despite the necessary belt tightening this year I hope one keeps one�s eye wide open for the range of opportunities that will arise this year.

Regards,
Simon Tweddle.
www.simpropertygroup.com