Sim Property Newsletter Aug 2010 - Baltic thoughts

The summer is almost over and the world outlook is as uncertain as ever. Whilst deal activity and company profits have increased we are far from being back in the boom times. The world may have staved off a depression for now, but it does not mean all the problems are sorted (eg debt levels, inflation). Property markets around the world continue, in the main, to be subdued, especially those with restricted mortgage conditions. Working out where to invest is a quite a different challenge than it was say 3-5 years ago.

In my view your property investment options, outside your local area, consist of the following categories.

• Markets with strong fundamentals and long term prospects - such as Canada, Norway, Australia ... whether you can buy at a good price is a different matter
  
• Western markets that have taken a knock but should rebound - such as the UK or US
  
• Parts of Asia with strong economies and demographic trends
  
• Eastern European markets that have taken a knock but should do well over the medium term - such as the Czech Republic and Poland
  
• Eastern European markets that imploded and could rebound quickly - such as Bulgaria, Romania, Hungary and the Baltic's
  
• Potentially higher growth emerging markets - such as Brazil
  
• Invest in alternative asset classes

Many of these markets have been discussed at length in previous newsletters. Wherever you invest one of the best ways to reduce your risk and increase returns is to buy at a very good price.

This month, after my recent trip to the Baltic's, we'll take a look at the markets of Lithuania, Latvia and Estonia.


The Baltic's - buy now and double your money or lose your shirt?

Having travelled from Prague to Warsaw and then on to Vilnius, Riga and Tallinn it was interesting to compare and contrast each country.

The capitals in all three countries are far from shabby and looking around you wouldn't guess they've just been through an economic crisis.

Vilnius is quite pretty but lacks real economic power - even Ryanair lands in the country's second city Kaunas. Riga is the largest and most dynamic city of the three and is a business hub for the region. Tallinn is the most developed, with strong trade links and Scandinavian efficiency. Perhaps with the exception of Riga the major towns and cities have a very sleepy backwater feel to them compared to those in the Czech Republic or Poland.

There is a huge Russian portion of the population in each country, which helps to increase trade but also increase tensions (partly due to historical reasons) especially in Estonia where the languages are so different.

Economically I struggled to see what drives these countries. Sure there are well established industries such as agriculture, fishing, timber and some IT but you certainly couldn't compare them to countries such as Norway (oil and gas) or Switzerland (finance, pharmaceuticals etc) and the like. What will transform these countries into world leaders? I don't know. Yet at the same time due to their relative small size, if positive change were to occur then it would probably not take much for them to boom once again.

Despite the lack of great long term economic and demographic drivers it doesn't not mean these are terrible countries in which to buy property.

From 2001 to 2006 property prices across the region boomed anywhere from an incredible 20 to 50% per annum. A classic boom fueled by low taxes, foreign investment, low interest rates and lots of debt with little consideration of how it would be paid back.

During this time of rising prices rents stayed approximately stable meaning yields fell dramatically (2-4%). After 2006 when interest rates started to rise it left many property owners unable to pay their mortgages. Both the economy and property prices crashed dramatically.

Property prices dropped over 50% to lows of 500 to 1,000 EUR/sqm (area dependent) but have recently started to creep up again. There are certainly signs the market has bottomed out and is beginning to turn around.

There is simply too big a disconnect between buying in Prague at a typical price of 2,000 EUR/sqm and in Riga of 700 EUR/sqm. From such lows I don't see why prices could not increase substantially in the coming years.

The question is it worth the risk and hassle?

This is something you only can answer yourself. Though it's probably not worth it unless you can really buy at prices well below the 1,000 EUR/sqm mark and thus have the chance of a large upside. Otherwise the costs, hassle and low rental yields just won't make the investment add up. Furthermore, mortgages, whilst possible, are still difficult to obtain in the Baltic's.

Whilst all three countries have made strides to rein in spending and cut deficits, it has only really been Estonia that took quick and deep enough action. They succeeded in maintaining their peg with the Euro (and will join the Euro on 1st Jan 2011). I predict that Estonia will outperform its two neighbours over the coming years and this is likely to have a positive impact on the property market there.

In my view property prices across the Baltic's will increase substantially from their current low levels over the next 3 years, though by how much will be is anyone?s guess. If you plan to invest there don't forget to take into account the other factors mentioned in previous newsletter such costs, rental yields, taxes and so on.


Czech Republic

We've heard on the grapevine that one of the largest developers in the Czech Republic is planning to build a much larger number of units next year in the Czech Republic after a slower building rate in the last 2 years. This is a sign that they have confidence in the market going forward but at the same time this could continue to increase the supply on the market which is bad news for investors.

Higher levels of supply than demand is still the biggest problem facing the Czech property market in the short term.

The rental market remains relatively tough and sales still go through but only if well priced.

We don't foresee much change in rental or resale prices in the next year.

There has been an interesting trend amongst foreign property owners in the Czech Republic. There were those owners who, in 2008/09 when the financial crisis started to bite, decided to off-load their properties quickly whatever the consequences. There was then a lull in sales as the remaining owners generally wanted to hold for the longer term. Recently, however, many owners have been coming to us asking us to sell their properties as they can just no longer stomach the negative cashflows they endure (and are likely to continue to endure for the foreseeable future), which is a most unfortunate situation to be in.

For anyone looking to sell their property in the Czech Republic just get in touch to see how we can help. For those who are even more desperate for whatever reason we also have a "quick sale" service which finds you cash buyer for your property fast.

Final thought

This summer we've seen yet more natural disasters in the world, whether it be floods, fires or volcanic eruptions. The trend is that over the coming years there is likely to be a lot more of such events. For the nimble and alert investor this is likely to create very profitable opportunities (eg 50% increase in wheat prices due to Russian fires or falling airline stocks due to ash clouds and so on). So key your eyes open and cash at hand to take advantage.


Regards,
Simon Tweddle.
www.simpropertygroup.com