Sim Property Newsletter April 2011 - Rental Default Crisis

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 the ongoing debt crisis, commodities and rental default insurance.

Ongoing crisis

As I've alluded to many times in these newsletters I'm very cautious (if not negative) about the short to medium term prospects of many property markets around the world. Generally I still see overinflated prices, low yields, overbuilding and too much debt (which is currently only manageable due to the very low interests rates). I wish this wasn't the case.

On the other side I've been very bullish about the stock market (though far less so now 1-2 years ago) and in particular commodities and those countries which are major producers/exporters of commodities.

Anyone who bought, for example, gold, silver or oil just 6 months ago will have done very nicely indeed. Silver alone is up more than 50% (in dollar terms) just this year which is far more than most property investments will give you right now.

The question for any investor is always where can I get the best returns for your money for the lowest risk (and lowest hassle)? The answer to this in most cases over the last couple of years has clearly not been in property.

Looking further forward where should you put your money?

Unfortunately I still see the general outlook for residential property markets as quite shaky (sure there will always be local opportunities to pick up great deals). The US/UK/EU continue to print money and borrow money they just don't have, oil prices remain high and I don't see enough being done to avert another full blown crisis. The current policies seem designed only to put the problems off to some future date and hope things will mend themselves in the meantime, somehow I don't see this happening, especially given the FED's recent comments alluding to the fact that quantitative easing could continue

There have been many property companies pushing UK and US property over the last couple of years. These markets clearly have their problems which I see them continuing for some time. But even without such problems why would you want to invest there when their currencies continue to slide? I just don't get it.

Currency fluctuation is a very important consideration when investing internationally and one often forgotten about. For example, if you're a UK investor who invested 1 year ago in the US property market you'll have lost 15% just on the currency and will likely lose more are the dollar continues to decline. If you're a Czech investor investing in the UK you'll have lost 10% on the currency just since the start of this year. Not very clever is it?

Until western governments really start to get a grip of inflation and their growing debts I suspect the stock/commodity markets will continue their rise. At some stage (perhaps later this year) this will have to change and there are a lot of nervous fingers out there ready to hit the sell button and get out before the markets crash. Once this does happen there could be some phenomenal opportunities around - so I would advise to get yourself ready for this situation both mentally and financially. That said I see the medium term prospects (after a short term correction) for commodities being still in an upward direction.

If you do still want to invest in property I'd suggest buy a farm as food prices continue to rise and world population increases unabated farmers will do very well (for a change, unlike the last 30 years), furthermore, being self sufficient on a farm has got to be one of the ultimate hedges against continuing world disorder.


Mortgage fixations

If you are planning to sell your property in Central & Eastern Europe make sure you don't make the common mistake of assuming that just because your initial mortgage fixation period has ended that you automatically revert to the bank's standard variable rate.

In most cases your mortgage will be automatically refixed for another term and thus should you sell during this fixation period the bank will charge you a mortgage redemption penalty which is often very large (eg around 10%) and thus can dramatically affect your investments profitability.

As this is a common problem in Central & Eastern Europe we have a number of strategies available for those wishing to sell their property in order to mitigate the effects of mortgage redemption penalties. Contact us to find out more should you wish to sell your property.


Rental Default Insurance

We are now able to offer rental default insurance in the Czech Republic.

For 5% of the rental contract price you gain 6 months coverage should you tenant default on their rental payments.

Contact us for more details or a quote.


Regards,
Simon Tweddle.
www.simpropertygroup.com