Sim Property Newsletter Feb 2011 - CEE tax & world crash

Sim Property provides a full range of property investment & property management services with a primary focus on the markets of Central & Eastern Europe.

This month we take a look at world investment trends, how these are going to affect worldwide property markets and ultimately where is best to invest over the next year.

CEE tax obligations

For property owners in Central & Eastern Europe it is at this time of year you have to make sure you comply with your local tax obligations.

Czech Republic - your property tax must be registered by 31st Jan and paid by May and your income tax return filed by 31st March.
Slovak Republic - similar to the Czech Republic, but in addition you must register for personal tax as soon as your rent is greater than 500 EUR.
Poland - income tax on rents should be paid monthly (in some cases quarterly) using either a flat rate or progressive tax method.
Bulgaria - since 1st Jan 2011 private individuals who are not tax resident in Bulgaria are required to pay a 10% withholding tax on rental income quarterly (the exact obligations depend the combination of if you and your tenant are a private individual / company / local resident / foreigner).

Whilst dealing with taxes is one of the least fun aspects of owning property it is important to comply with local regulations as failure to do so can lead to large fines being imposed.

As part of our services we handle all relevant taxes for our property management clients. If you're not already using our services and need tax assistance get in touch to see how we can help.

We've also produced a CEE tax guide which outlines your main tax obligations as a foreign property owner in Central & Eastern Europe. It can be downloaded here.


The next crash?

All but the most ardent hermit will have noticed the dramatic events taking place across the Arab world and the continued rise in oil (and other commodity prices) over the 6 months.

Whilst it's very important to look at local factors in a property market such as tax rates, supply and demand, rental rates, regulation and so on these details must be considered in an overall framework of world events.

Take, for example, oil and its rise in price. Oil is one of the world's key resources and is used in a plethora ways in our everyday lives. When oil prices rise they act like a massive tax on oil importing nations (and a massive revenue generator for oil exporting nations). Many European countries are facing many billions of dollars in extra expense which in many cases equates to several percent of national GDP.

Greece is a prime example. A country with a massive debt and shaky economy. High oil prices have already been crippling the economy and if the recent rises are sustained it won?t be long before Greece can't afford to pay its debts again, which will lead to whole host of problems for the EU.

Our view is that oil prices will continue to rise over the coming months. Supply is not getting any larger, new oil fields are in less hospitable environments and thus harder to extract, world population and demand for oil is increasing (particularly from Asia) furthermore the events in the Middle East are likely to continue for some time to come.

The Middle East holds much of the worlds reserves of oil (eg Saudia Arabia 22%, Iran 11%, Iraq 9%, Kuwait 8%, UAE 8%, Libya 3%). Any instability in this region is going to push oil higher and all the signs are that unrest will continue. Arab populations, which have been suppressed for decades, are mainly young and struggling with high unemployment and sharp rises in food costs. They feel completely let down by their governments, such anger will not be easily contained and is likely to further ferment over the coming months.

Many countries from the US, UK to southern Europe have not yet dealt with their massive debt problems. If oil prices are sustained at current levels ($115 per barrel) or continue to move higher we believe many countries will simply not be able to afford to service their obligations.

Could this combination of rising food prices, rising oil prices, massive debt problems, rising inflation and spreading unrest lead to another crash? If things continue as they are we rate the chances of a crash beginning around the middle of this year as very high.

Greece could be the first to default. Will they be bailed out again? Could they be kicked out of the Euro? What does this mean for other debt laden countries in the Euro zone? The ramifications will be felt not just across Europe but across the globe.

The US and the UK (both net importing nations of oil) will not be left out. On the one hand, the UK, for example, has a very dynamic economy, a rising population, restricted supply, strong rental yields and is viewed as a relative property safe haven for wealthy foreign investors. Yet on the other hand the UK is deep in debt, the cut in public sector jobs is only starting to be felt, inflation is rising, the GBP is still has weaknesses, interest rates will more than likely rise too and at some stage the stalemate between sellers (who seem unwilling to drop prices to realistic levels) and buyers will have crack and prices could then fall further. For these reasons we have been very cautious about recommending blanket buying of UK property.

Keep your eyes open over the coming months for signs of the next economic crash. Until the situation is clearer I remain cautious about investing in relatively illiquid leveraged investments such as property.


CEE banks

It's interesting to note the differences in attitude between the US/UK banks and those of Central & Eastern Europe when dealing with debtors in default.

In the US/UK banks have tended to take much swifter and decisive action. They recognize there is a problem and set about dealing with it quickly, writing off bad debts and getting their house in order.

In CEE the banks seem to have been burying their heads in the sand. The case is particularly clear when you look at their relationships with property developers. There are many new build developments across the region which have not sold a single unit for many months, some of these developers are getting seriously tight on cash and thus unable to make their loan repayments, and yet maintain sales prices unrealistically high. It is often the banks driving this. If the banks either foreclosed or allowed/forced the developers to reduce prices the properties then the market would, in the short term, drop further but then at least find a level which it could then build upon. Whereas right now we?re in an artificial situation where prices should probably fall further, but the banks are afraid of this happening and would rather keep waiting in hope that somehow the market will start to pick up again and thus be able to bit by bit escape from their current tricky situation.!

CEE banks hold the key to how CEE property markets will develop over the coming year.


There remains a lot of uncertainty and risk around when investing in many property markets at the current time. My advice is to take a cautious approach and only buy if you're getting an exceptional price/yield and can afford to weather any future storm ... this is not a time to be stretching yourself to your financial limits.


Regards,
Simon Tweddle.
www.simpropertygroup.com