Sim Property Newsletter June 2010 - name change, CEE winners & losers

This month we announce our new brand name for the old propertyinvestmentinternational.com and take a look at the winners and losers in the Central & Eastern European region.

CEE winners and losers

Since at least 2004 when many former soviet bloc countries joined the EU there has been a boom in their respective property markets. A boom that was at least as great as that seen in Western Europe and North America. Foreign investors piled into these markets attracted by low prices, cheap mortgages, low taxes, the hope of good rental yields and, it has to be said, a quick buck.

The CEE property markets are often, quite mistakenly, lumped together. Yet there are a wide range of differences between them and a wide range of profits were made depending on which location you had invested in.

So let�s take a closer look at how each market has fared and what action you should be taking if you own property there.

Czech Republic

The Czech Republic always had one of the strongest economies and healthiest property markets in the region.

Before EU entry Czech property developers held back stock in the hope of wildly booming prices, the result, instead, was oversupply and prices did not start to pick up until 2005. From 2005 to 2007 prices then increased around 15% per annum on average, though substantially more in some areas. Anyone buying during this time will have done well. However, from 2008 onwards prices (of both sales and rentals) peaked then fell substantially leaving many buyers with a property worth at best the same as they had paid and very often with negative cashflow.

Luckily even since 2007 the Czech crown has appreciated strongly in value (approx 30%) against the pound sterling allowing buyers of Czech property to sell up and make a good return without significant property price increases.

Currently the market is slightly oversupplied with property compared to demand. Sales prices have fallen substantially. Now is not the time to sell unless you really need to. Unfortunately, rental prices have also fallen substantially which is affecting many investors� cashflow.

The medium term prospects for the market are still good. Taxes are likely to stay low-ish with the formation of the new government, interest rates are still very low and the economy should do well relative to its neighbours. Overall, now is not the time to panic and sell, if you can hold on the market is likely to turn itself around. It could even be said that now is a good time to buy property in the Czech Republic � just a shame about the depressed rental yields.

Poland

From 2004 to 2007 the Polish property prices increased more than almost any other country in Europe (Denmark had the highest growth). With a new found confidence, a chronic undersupply of property, falling interest rates and unemployment levels, combined with cheap prices Poland had the classic ingredients for a boom market.

Most investors buying in Polish cities in 2004/2005 will have seen substantial returns. However, like most booms people tend to get carried away, developers built and built, prices were driven way above affordability levels. Naturally, since 2007, prices fell and continued to fall through to 2009. Now in 2010 prices seem to have stabilised yet there are certainly no signs of significant growth around the corner.

Polish rents remain at a level where it is often difficult to properly cover all running costs including a mortgage (though could be much worse compared to other countries). For those investors with mortgages in Swiss Francs it may still not be possible to sell the property and get any money back due to the fluctuations in exchange rates.

Poland, along with the Czech Republic, has weathered the financial crisis comparatively well and has a good base from which to grow again. Again for most investors I would recommend to hold on until the market picks up before exiting.

Slovakia

Often the poorer reflection of the Czech Republic, the Slovak property market also had its own mini boom before the financial crisis hit. The boom did not last long before the market returned to its perennial state of being oversupplied enough to dampen prices.

The new Slovak government is likely to try to stimulate the economy but even so we don�t foresee any significant movement in property prices for at least the next year. Bratislava is small market and over eager builders swamp the market quickly. For any one going to Bratislava just take a look at the construction taking place along the river to see what I mean.

If you�ve already bought in Slovakia it�s probably better to hold on. Otherwise investors with spare cash could do better in other markets.

Hungary

Budapest is a market I�ve never recommended investing in. Yet it seemed, in particular, to attract Irish and Spanish investors. Many of whom are licking their wounds after many years of stagnation in the market.

The whole structure of the market has just never added up. Economic and political problems have for years held back the Hungarian economy, taxes are comparatively high, mortgages have very poor terms for foreigners and yet there was never enough upside to make it worthwhile investing in (unless you just fell in love with the architecture).

Furthermore, the country is saddled with foreign debt (particularly in Swiss Francs), this in effect means a weakening Florin makes it increasing expensive to pay off ones mortgage. This will take years to fix.

Luckily with a new government recently having been formed and some relatively pro-business proposals on the table there is now more hope than there has been. You can buy relatively well located property for around the 1,000 EUR/sqm mark and yields are higher than in many other CEE countries (though they need to be due the very high mortgage rates). At some stage Budapest might be worth a look investing in, however, for the moment there are still too many issues with the market to tempt my money enough.

Bulgaria

The Bulgarian property market story seemed to be in every Sunday newspaper for years until recently. As I�ve written in previous newsletters developers made huge easy profits, and were able to afford to pay huge commissions to greedy sales people, which in turned funded a large marketing machine about this great investment location.

Unfortunately, like many things in Bulgaria, it turned out to be simply not true. Many thousands of investors are now stuck with property that is worth substantially less than they�ve paid and at the same time often struggle to rent them out. Demand for our services (ie an efficient service where you can be sure you won�t be ripped off) in Bansko and Sunny Beach has been so great that our office Sofia has had to expand to cover these markets that we originally had no intention of touching.

The property market is simply a mess. Too much property was built and it will take many years for it to sort out. If you bought a property in Bansko 5 years ago I believe that in another 5 years you still won�t be able to sell it at the price you paid. That�s tough to admit for many people.

Sofia perhaps offers the best hope, though only in the right locations. Much of the south will be a building site for years to come. Until mortgages become more wide spread the market will continue to be frozen. Bargain basement opportunities do exist though there is no real rush to snap them up just yet.

Romania

Just when you thought a property market couldn�t get any worse than Bulgaria, Romania saves the day. As far as I can remember Romania has had unjustifiably high prices, a shaky economy and too many problems to speak of to make it worth investing in.

Many projects investors bought into went bankrupt or the money was somehow siphoned off, much of which will probably never be seen again. Prices have fallen by at least 50% and rents too are very low. Even if you�re able to handle such figures then the hassle of owning a property in Romania will probably be the nail in the coffin that makes you want to get out at all costs and never come back.

If you bought and sold at the right time then yes maybe you made money, though for the majority this was not the case and most investors are faced with crippling loses (and 24% VAT to pay on services!).

Currently I see little reason why to invest in the Romanian property market. At some stage the market might realize its potential but I think this will be many years away, in the meantime I�d much rather sit and watch from the sidelines and sleep easy at nights than invest there.

Baltic�s

The Baltic�s were the classic boom and bust markets of Eastern Europe. Small and rapidly reformed economies took advantage of the cheap credit available by joining the EU to create a credit binge frenzy and booming property prices. Unfortunately lack of financial discipline (amongst other things) lead to a huge crash that is only just starting to bottom out this year. Falls of 50%+ have not been uncommon in these markets.

Today, it�s possible to buy in their capital cities for around 500 EUR/sqm or so. This is 4 times less than say typical prices in Prague. It makes you think that at such prices you almost can�t go wrong in a relatively developed European capital city (more developed than Sofia or Bucharest) � what would it take to see them double to 1,000 EUR/sqm? Sounds possible right?. Indeed it is said that prices are already starting to rise again.

Estonia was the only country in the region to take significantly tough decisions to rein in spending (and thus still be able to join the Euro in 2011). The financial pain in Estonia is likely to be much more short lived than in more spend happy Latvia and Lithuania.

In August will be spending some time on the ground in the Baltic�s trying to work out is it really a good idea to reinvest there. Expect an updated and more detailed report in September.

Conclusion

The CEE property boom is now well and truly over, at least for the foreseeable future.

I believe these markets still have enormous potential, however, one has to be considerably wiser about where and when to buy than in the past. Many of these markets are still grossly oversupplied with new properties and it could be several years before there is any real growth.

For more detailed views see our previous newsletters or call/email for a more in depth analysis beyond the scope of a newsletter.

For anyone with property in the region don�t forget we provide a full range of property services from property management, rentals and resales in many of the above mentioned markets. Get in touch to find out more about our straight forward honest services.


New name for PII

This month we have finally taken the decision to change our name from propertyinvestmentinternational.com to simpropertygroup.com.

The former name was just a bit too long and confusing for English speakers never mind Czechs, Poles or Bulgarians. Furthermore, the new name also aligns our branding more closely to our SimReality local real estate agency brand.

The propertyinvestmentinternational.com website and email address will be in action for some time to come though will not be updated and we will gradually transition all communication and updates to the new domain, so please add the simpropertygroup.com domain to your list of safe senders � at least it will be slightly quicker to type than before.


Auctions

Up until recently it seemed not much property was sold in the Czech Republic via auctions and the whole scene was very much shrouded in secrecy with information hard to get. However, in the last year it�s been much more common to see auction houses advertising and more properties being sold in this manner, in large part due to the financial crisis.

Unfortunately, the auction I attended recently in Prague ended with most properties selling around market prices. Compared to auctions in the UK the Czech auctions are often have less properties, less attendance and operate at a much slower pace (not to mention having to deposit 10,000 EUR just to be able to make a bid). However, I believe we�ll see trend for more properties to be sold this way in Central & Eastern Europe � I just hope there will be more bargains available at them � watch this space.


If anyone has any views on where one should be investing ones money right now I�d love to hear from you.


Regards,
Simon Tweddle.
www.simpropertygroup.com