Property investment > investment

By Sharlene Goff

Published: February 17 2006 15:47 | Last updated: February 17 2006 15:47

Aluxury ski-chalet in Bulgaria. An eco-house in Venezuela. An elegant terraced apartment in Paris. These are just a few of the hottest properties that UK investors are snapping up as they increasingly rebuff their home market in search of racier returns overseas.

The Royal Institution of Chartered Surveyors estimates that up to 225,000 UK households now have at least one property overseas. Many of these are holiday homes but, as buy-to-let investors have grown tired of relatively low rental yields and sluggish property prices in the UK, a growing number are turning abroad for investment opportunities.

They do not have to look far. Parts of eastern Europe such as Bulgaria and Croatia are seeing yields of 10 per cent or more, compared with around 4-5 per cent in the UK. Evolve, which specializes in international property investment, has in recent months seen a sharp increase in inquiries on buy-to-let opportunities in Poland, where capital growth has equated to around 25 per cent annually over the last 18 months.

Some countries also have lower interest rates – the euro base rate is currently 2.25 per cent, compared with the Bank of England base rate of 4.5 per cent – and there is growing demand for long-term rentals from foreign businesses and embassies. The advent of cheap flights has also enticed investors to property hotspots such as Dubai, Morocco, Latin America and Cape Verde – a group of islands off the coast of West Africa. But property prices in these newer markets are already rocketing – a two-bedroom luxury apartment in Bulgaria can go for as much as €120,000. Investors are also returning to more traditional markets – Cyprus, France, Greece, Italy, Spain, Portugal and the US – after a quieter couple of years.

Experts warn that channeling money overseas is not for the fainthearted. Simon Conn, managing director at Conti Financial Services, specialists in overseas mortgages, says: “There are a lot of risks attached to buying properties abroad and investors must buy with their head not their heart. They are buying in a foreign jurisdiction where the rules are just not the same.”

Each country has individual risks and costs that differentiate it from the UK. As a general rule, buying property abroad is more expensive. Nia Jones, a lawyer at Goldsmith Williams Overseas, a firm of solicitors, says investors should expect the total costs of buying a property overseas to be around 12 per cent of the purchase price, once stamp duty, local taxes and notary fees have been factored in. UK house buyers generally pay a fixed fee rather than a percentage charge but the total costs are normally a fraction of overseas purchase costs.

There is also little concrete evidence of the kind of rental demand you can expect in many of these overseas markets and although some estate agents promise high rental returns, there are few guarantees.

Mike Boles, head of international at Savills Private Finance, the mortgage broker, says: “The high rental yields in certain markets reflect the risks of unstable currencies and economies and low access to credit.”

Although European lenders have become more flexible, it is still generally harder to take out a mortgage abroad than in the UK. Overseas lenders are generally unwilling to base a mortgage on potential rental income but require details of your actual earnings. This means it is still difficult to build a portfolio of properties abroad unless you have large sums of disposable capital.

Investors therefore either siphon money out of their UK property or use cash. Rightmove Abroad, which specializes in Bulgarian properties, has also seen UK landlords selling buy-to-let properties in the UK to fund their overseas investments.

However you finance your purchase, one of the main considerations is currency risk. To minimize your exposure to currency movements if you are using sterling assets to buy overseas, you could use a foreign exchange specialist such as Moneycorp or Currencies Direct, which generally offer better rates than high-street banks and have lower fees.

If you do need a mortgage you may be restricted to more established markets and should note that the rates can vary enormously, even within the Eurozone (see box).

If you want to let your property, a management agent will administer the rental and, in some cases, give you a guaranteed return. Tenancy rights are often stronger overseas than they are in the UK. In France, for example, specific rules make it difficult to evict tenants in the winter months even if they have not paid their rent.

There are also a number of legal loopholes that could trip up UK investors. For example, the National Association of Estate Agents has warned about buying property in northern Cyprus as most of the developed land is still owned by Greek Cypriots who could try to reclaim it. In Dubai, all property is currently available only on a leasehold basis – usually with leases of 99 years.

And in countries such as Croatia and Slovakia, investors could also face difficulties in proving they are the rightful owners of their properties.

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