The impact of the crisis that started in the US sub-prime mortgage market has subsequently rippled through financial markets and institutions around the world.

Few people now doubt that the negative effects will leave any location's economy completely untouched. For some it may mean recession - even, perhaps, a depression. The pundits are almost as divided as ever, although more now seem to be in the Bear camp than ever before.

Probably a result between extremes is still the most likely outcome. Some economies will be harder hit than others and the length of the slowdown will be indeterminate.

But what is (almost) certain - judging by events in the past - is that when recovery comes, it will come rapidly and very probably as unevenly as the slowdown.

Key then for property investors is to be well-placed to take advantage of that recovery and to be invested in those markets that are most likely to emerge the strongest.

That's why a new report on European attractiveness to business investors makes extremely interesting reading and throws into sharp focus some insights into which economies will be winners in the future - and where property markets are therefore most likely to perform the best.

And, as interesting as the headline results are - which markets business investors favour - the reasons they select those they do is equally relevant when we try to spot those key FDI magnets of the future ourselves.

Future property buyers

And this is important because this is where the jobs will be created and the new middle classes (future property buyers) will be most active.

Ernst & Young's 2008 European attractiveness Survey questioned 834 decision-makers about how competitive Europe is on a global scale in terms of FDI, and which countries within Europe are doing well, how they see the attractions of alternative business locations, and the criteria that drive their perceptions.

What is perhaps most striking about the report is that despite the received wisdom, and the undoubtedly large investments going into India and China, "Europe's multinationals still rely on proximity and take advantage of competitive, modern locations in Eastern Europe's renovated cities such as Prague, Budapest, Warsaw, Bucharest or Lodz."

As oil reaches record price levels and shows no sign of falling significantly without a huge fall off in economic activity globally, that proximity factor carries an even larger premium than ever.

And, as the report notes: "India, often thought of as a direct competitor, or even a threat to the future viability of back-office operations in developed economies, is struggling to gain ground, falling back to third place in our 2008 ranking.

"Aside from China, Central and Eastern Europe are frequently cited as manufacturing location favorites (17%), and Western Europe wins a surprising third place.

"Europe's dynamism comes from its Eastern borders...and beyond. Central and Eastern Europe, including Russia and its satellites, attracts 28% of the projects and a heavyweight 58% of FDI job creation."


The new near markets

Interestingly, new near markets appear to coming onto business investors' radar screens.

"Patterns are changing fast. The main growth is going to Russia, whilst Turkey and the Ukraine are proving increasingly successful in attracting investment, In a slow year, last year's stars - Poland and Romania - are catching fewer labour intensive investments.''

The significance of this is threefold. While it's interesting that new markets are coming on stream, the fact that investment into them is primarily labour intensive investment indicates they are being chosen for reasons of cheap labour. That tends to be the initial investment phase.

And while it opens up a market, through cheap manufacturing, nowhere (not even China) can maintain its attractiveness based entirely on cheap labour indefinitely.

Eventually, any country in this category is a victim of its own success - as wages grow, they erode this labour cost edge.

So, it's no bad thing that labour intensive investment is moving away from Romania and Poland - both of which are focusing more and more on knowledge-based activities.

In Romania the huge success in the IT industry is a marker of this; similarly, high-end aviation and associated manufacturing is taking place in Poland.

Investment benefits take time

Even so, once that manufacturing investment goes in, whether it's labour intensive or not, it is not uncommon that the full economic benefits to the recipient country aren't seen for several years.

Plants take time to build, production processes gear up to capacity over many months. Jobs are added slowly.

The effects of car manufacturing investment in Slovakia - firmly in the high value manufacturing category - have only really been felt in the last year or two, and this is a good example of this investment effect delay.

In turn, the Slovakian economy is now one of the great CEE success stories, its current star performer, and the property market in Bratislava one of the most attractive right now.

"The results show a remarkable shift. ....... The most important driving force for foreign direct investors is to access new markets. And as Europe's economy slows, they are increasingly looking to thriving economies and competitiveness elsewhere.

"Today, business leaders see the investment world as multi-polar, with destinations such as China, India, Russia, and the Middle East, which enters the top ten ranking for the first time, now strong rivals to the traditional dominance of Europe and the US."

Even so, the top five countries for attracting FDI projects in 2007 remained the same - but Central and Eastern Europe countries rose quickly.

Who attracted what?

Countries and their total share of global FDI

US 12.5% (falling)
UK 11.1% (up)
France 8% (up)
Netherlands 6.8% (up)
China 4.4% (down)
Hong Kong 3.5% (up)
Russia 3.2% (up)
Germany 2.9% (down)
Brazil 2.4% (up)
Singapore 2.4% (up)
India 1.0% (down)

Continental Europe - 42% (down 1%)

The UK topped the job-creation ranking.

Europe is quite clearly still an active player, but less a dominant power.

"For the first time, Europe loses its historical, exclusive attractiveness leadership in our 2008 survey. Traditional FDI heavyweights (Europe and the US account for 58% of global GDP) now share the field with fast-growing global challengers."

But, much more significantly, the economic landscape of Old Europe, the survey shows, is rapidly changing, with the transformation undoubtedly more advanced in the UK.

What is being seen is a huge shift of manufacturing, a great deal of it high end manufacturing, from western Europe, eastwards.

The survey describes this as the two faces of Europe.

"....is showing two faces to global investors, and this makes it resilient. While Western Europe's potential attractiveness declines, Central European countries including new European Union members, and frontier countries, such as Russia and the Ukraine, continue to gain interest.

"Europe retains a considerable power of attraction and is ranked among the top three business locations by 75% of respondents.

"But investors seem also to be sending a strong message that their main interest lies in younger, more dynamic and competitive markets. This eastward transition, while evident in our attractiveness surveys since 2004, has become particularly marked over the past two years."

Where is the decline taking place in Western Europe?

Traditional industries.

In 2007, 30,527 industrial job creations were 'missing.' Four sectors are responsible for 60% of them: logistics, automotive, pharmaceuticals and industrial equipment.

"Together, these four sectors provided 31% of total FDI job creation in Western Europe in 2006. Their share dropped to 23% in 2007.

"New jobs in the logistics sector, the top industrial job contributor in Western Europe in 2006, fell by 84%, from 11,292 jobs to just 1,792 in 2007. The automotive sector, which used to rank second in industrial job creation, provided 2,865 fewer jobs, a 35% fall.

"Industrial equipment jobs were down 60% (2,730 fewer jobs), while pharmaceuticals industry hires decreased by 66% (3,413 fewer jobs)."

Job migration

So, where are these jobs migrating to?

The answer is clear.

"Central and Eastern Europe attracts 28% of the projects and captures 58% of all jobs created. In 2007, investment projects into Central and Eastern Europe grew by 15%, despite a 7% fall in job creation (against 29% fewer jobs in Western Europe and 18% fewer across the continent).

"While Western Europe continues to attract new FDI projects (72% of total European inward investment projects), more new jobs were created in Central and Eastern Europe.

"Indeed, 58% of jobs created in Europe were directed to Central and Eastern Europe."

The Czech Republic maintained its place, despite attracting 27% fewer projects. It moved from fourth to third place in the job creation table despite creating 14% fewer jobs than last year.

Russia leapt to fourth position for jobs created (+85%) and moved from 13th to 8th for number of projects (+60%).

Poland and Romania maintained their position in terms of number of projects. In terms of job creation, Poland fell to second, creating 41% fewer jobs than last year.

Slovenia saw the biggest growth in terms of job creation (multiplied by five) and jumped to 15th position in the ranking.

"How to" invest is becoming more important than "how much" for investors considering sustainable location options.

Survey respondents pay more attention to political and legal stability (54%) and telecoms infrastructure (51%) than labour costs (47%).

This places those countries of CEE that are either in or lining up as serious contenders to join the EU as those countries that will have lasting appeal to business investors.

Future focus

Those CEE countries that focus on infrastructure development, including telecoms, will be the winners in attracting new business. Those countries and regions that fail to see this requirement will have to increasingly rely on cheap labour to make themselves attractive - a far weaker strategy long term.

But the message is clear - the great migration of capital investment into central and Eastern Europe may be interrupted somewhat by the current aversion to investment risk, but the flow looks to be unstoppable longer term.

This then is where the new jobs and a new, growing spending power will continue to emerge - and dynamic property markets in turn.

Short term affordability issues among domestic buyers in some of those property markets may well cause a slow down in accelerated price growth along the way, but to focus on this would be a big mistake.


It would miss the huge potential for future growth that exists as productivity grows and wages rise fast. Just as importantly, we need also to stay focused on the tiny percentage of mortgage lending that still exists in most of these markets - a vital measure of potential growth.

A footnote on the UK

Amid all the gloom about UK Inc and the gloom forecast by some who seem to see the end of any kind of growth in the UK's housing market, it's perhaps worth bearing in mind that the country is still the star performer in terms of FDI. Its track record is really nothing less than outstanding.

The Ernst & Young Survey points out that "The UK is the undisputed leader of the European FDI competition.

"The country tops our 2007 ranking both in number of projects and jobs created. FDI projects into the UK grew by 4%. Although its market share was slightly down, the UK holds the largest-ever lead over its European competitors (19.2% market share in number of projects, ahead of France in second place with 14.6%).

"The country's performance is mainly due to its commanding share of service activities (24% of total service investment into Europe), especially in Greater London (52% of UK service investment). The UK dominates Europe's inward FDI in software (30%), business services (26%), and financial services (28%)."

But, along with this success, comes a rider - a very strong economic linkage with the US. Obviously, it's not necessarily a bad thing to be coupled with the world's dominant economy, but it does mean that the old adage (with a slight variation) applies - when the US sneezes, the UK catches cold.

In addition, the areas in which the UK is strongest at attracting inward investment are the very areas that will be hit first (and perhaps hardest) in a credit crunch induced economic downturn.

But, equally, it can be argued that as the US was first into the big slowdown that started in 2007, it will be the first out of it - including its property market.

That could well bode well for UK inc in the coming months and even - dare we suggest - the UK's housing market.

Here perhaps is some real perspective on the current state of the property market in the US and - if you follow one logical line of argument - also by extension the UK property market.

The Wall Street Journal is currently featuring a piece about how bargain hunters in the States are starting to circle in some of the areas most badly hit by foreclosures.

Deals are there to be done and some are spectacular - 40% and more off asking prices.

And, while some buyers are hanging back in anticipation of even more mouth-watering deals, it seems many buyers simply can't resist the kind of prices on offer. There is evidence of bidding wars over distressed properties and one agent describes how the showings they conducted tripled in February over the same time last year.

Near the bottom?

So, does this indicate that we are near or are nearing the bottom in the US, simply because the bottom fishers are becoming active? Could be.

Now there's no doubt that the US property market has been hit far worse than the UK's - so far.

Not so, in Spain's case, however, where the property market is currently being hammered on a US scale. The Spanish press is talking of falls in home purchases on the secondary market of about 35%. Total lending to home-buyers fell almost 28 per cent to €13.4bn. Anyone looking at the costas is going to find a lot of choice. No evidence of bargain hunters gathering there yet. But they surely will at some point?

In terms of the UK market, we've seen lots of evidence of some minor price falls, mortgage lending falling and even the BoE's Mr King has said he will be 'surprised' if real UK property prices are much higher in a few years' time than they are now.

Putting aside our faith in Mr King, few would disagree with that, surely. He added that such an adjustment in real prices would be a good thing - surely few would disgree with that either. There is no suggestion though that the medium to long term outlook is anything but positive.

So, if we believe the UK market will go where first the US and now Spain are going (two markets like the UK that have seen huge property price growth fuelled by cheap credit), then we may, in the US at least, see some glimmer of perspective about the so-called 'meltdown' we keep hearing about.

Why?

Because what really leaps out of the WSJ piece are the numbers.

Meltdown

It's often the case that the extreme pockets of the market are where the focus ends up - the huge price falls. These are what lead to talk of a 'meltdown'.

But when you look behind the rhetoric, things are a little less dramatic. The most distressed state is Florida - home to THE most distressed area in the US in terms of property price falls - the Cape Coral-Fort Myers metro area in southwest Florida, according to RealtyTrac of Irvine, California.

This is THE worst place in the whole, vast US property market, with a record 3,739 properties in some stage of foreclosure, or one in 84 households - that's nearly seven times the national average.

Average sale prices for family homes in Lee County, which encompasses Fort Myers and Cape, are down 17%.

That's bad, but remember this is THE worst. So, is this the meltdown we've been hearing about?

And the rate of price fall across the nation, in which the property market is regularly described as being in freefall? An 8% fall.

When you factor in all those huge discounted deals of 40% and 50% and suchlike are wrapped up in that figure of 8% overall, this starts to put matters in perspective, surely?

If this is a meltdown, it's not as we know it!

What is also very significant is that once the lending blockage starts to ease - as it will at some point this year - we are going to see a huge amount of hoarded money (hoarded by banks) aimed at investment through credit lines, and a lot of this is almost certainly going to head into property markets that look like they offer real bargains.

Where to invest?

Where else will it go? 8% down - even 17% - compared to what equities have done in the last few years is reassuring.

Now, while it may not be time to dip a toe back in the water of the UK market yet, because things will almost certainly get worse before they start to get better, maybe, that worse isn't really going to be so bad after all - even if it is still likely we won't see much growth in the UK for the next two to three years.

So maybe now - while sentiment is depressed and yet fundamentals are basically the same as previously - is the time to look at those markets that will really benefit from the pick up in confidence?

Those economies with huge potential for growth and which have previously attracted huge amounts of FDI. Which for any smart property investor brings us back to selected markets in central and Eastern Europe...surely!

I was distracted by an email from Ryanair today that was offering 1 million free seats if its horse Mossbank won the 2.55 - incidentally the horse came in 2nd.

My colleague told me it was slow to start off - reminded me of a few times I've sat on the runway on a Ryanair flight.

To get to the point - I have always felt that horse-races are a potential indication of a country's economic performance, measuring spending power and local confidence in the market.

I like to attend horse races so this type of fuzzy analysis comes easy.
I am in no way suggesting that horse-racing is directly linked to economic performance or house price growth, but I am saying that it is ONE of the ways I like to measure local market confidence.

For instance, I have been to the Galway races in Ireland on several occasions.
Over the past number of years the races have attracted more and more non-racing types, as it were people that were more interested in who was in the corporate tent than who was in the 3.15.

Each year the visitor numbers, along with the volume of helicopter traffic increased, and it became all about big bets and even bigger hats.

This is not an exact science - this is fuzzy analysis - I believe that property investment is not all about economics - it's also about sentiment and confidence in the market.

As the Irish economy boomed, investor confidence could be measured at the races.

I'm not saying that this year's Galway races will be a disaster due to the performance in the Irish economy - after all, horse racing is in the Irish psyche, but I am just putting it out there during the Cheltenham festival week to see if anyone else sees even the smallest method in my madness!

It's a bit of a long shot - and this year's weather will not have helped matters, but I will be watching visitor numbers at Cheltenham this year.

PS - Any tips would also be welcome!

The Homebuyer Property Investor Show 2008.

An interesting show this - one that doesn't seem entirely sure of its audience. Hence the slightly confusing full title - The Homebuyer Show and The property Investor Show 2008.

We don't have the official figures yet, but numbers appeared to most veteran show goers to be well down on previous years. Not surprising really given the amount of gloom in the UK market at least.

It's fair to say that speakers and exhibitors seemed to fall into three groups - those selling property related services; those effectively selling overseas locations; and those with a vested interest in being bullish on the UK property market.

As far as I could see the overseas location exhibitors sub-divided again (as they always do) - into:

1) Those appealing to serious investors looking for overseas growth markets and

2) Those offering holiday property locations with a bit of implied investment potential thrown in.

And it was the second category - the holiday home/investment location exhibitors that suffered most from the fall off in numbers.

Business was dead.

Again, not surprising really, considering this is probably the group we can say appeals to amateur investors - those who confuse investment with a dream home abroad. Nothing wrong with a holiday home, of course - but never confuse it with property investment.

People manning one particular stand plugging an especially hard to sell Med island holiday location were even seen virtually chasing passers by down the walkway!

So, what was left seemed to be a mixture of fairly hard-headed investors - those looking for serious opportunities in markets outside the UK in order to capture capital growth, and those who seemed to have a generally bullish view of the UK market in the long term. Most of the latter seemed to already be invested in the UK.

It was hard to find anyone out there who could pretend to be bullish on the UK market as of now.

Although probably about a third of those attending seminars addressing the issue said they'd be looking to buy in the UK in 2008, and roughly a third said they'd be holding.

Far, far fewer said they'd be selling. Quite what the others were planning is anyone's guess! They could probably be classed as floating voters.

So, in the light of this, one of the most interesting and best quality debates took place on the first day of the show and was packed - again, as we might expect, given the title: 'Is the UK Buy-to-let sector facing its Armageddon?'

The discussion panel consisted of Seamus Nugent of property developers Dandara, John Wrigglesworth, of Wrigglesworth Ltd, Ray Boulger of John Charcol, David Austin of Property for Life and Neil Lewis, our own CEO.

Much of what the panel said about the fundamentals of the UK property market were actually quite similar.

And, while Neil Lewis appeared to be the only bear on the panel, Neil I think would be the first to admit that he wasn't writing off the UK market, but talking about where the best opportunities lay over the next 24 months or so. And that isn't in the UK.

The rest of the panel unanimously saw 2008 as a time of opportunity - a time to buy in the UK. Only some 30% or so of the audience agreed with them, as a show of hands proved at the end of the seminar.

John Wrigglesworth described himself as at the optimistic end of the spectrum. While there was certainly a slowdown in the UK property market, the fundamentals of the market were the same as ever - it was just that funding had dried up.

(But isn't funding one of the fundamentals of a property market?)

John saw a huge distinction between the US and the UK markets and blamed the 'stupidity of the international market who can't tell the difference between the US and UK.

'People are not stretched in terms of affordability. This is not a structural economic problem,' and 'sense would prevail by the end of the year.'

(And yet, again, this is about sentiment, isn't it? And isn't sentiment as much an economic fundamental as any other factor? )

'Rents are rising because of affordability problems, prices are weak, yields are rising. This is a great opportunity to buy.

'And the credit criteria is only going back to where it was three years ago.'

Seamus Nugent essentially agreed with the view that the 'fundamentals in the UK are strong' and that the market there cannot be compared to those in Ireland or Spain where huge oversupply had taken place.

In fact, Seamus saw aspects of the credit crunch on the BTL market in the UK as positive. 'There were people who wanted to get into BTL with no money down. They're gone. Good!

'It is harder to get products for BTL, but there are deals for people who have the wherewithal.

'There are hotspots and there are places that are doing less well.

'But property investment is a long term punt, not a short term one.'

Now, where've we heard that before?

Seamus cited the fact that the UK was experiencing net immigration of 300,000 a year, that single households are set to double, supply is low and there will be increasing rental demand as well as affordability being a problem as great reasons to invest in the UK.

'30% to 40% of people rent in Europe. In the UK it's 10%. We'll move to the European model.'

And in the short term the view was that the banks would recover and lending criteria would ease after a period.

'Don't worry about the banks. Look at them - they're reducing risk AND raising the fees they charge.'

David Austin, of Property for Life, believed the UK was now a 'buying opportunity' and that the market would 'pick up by the end of the year.'

'We've got overbuild in some city centres, but land supply is drying up.

Developers have slowed their land buying programmes and the cost of building itself is going up. There are great discounts now, but they won't be around for long. Developers will stop building.

'The lack of supply makes me bullish long term.'

Ray Boulger, of John Charcol, gave an interesting insight into how the mortgage market was reacting to the credit crunch.

'Affordability is a problem for first time buyers.'

Talking of BTL mortgage products, Ray added: 'What we're seeing a lot of is that fees are being used to make up for a lack of rental cover on mortgages.

So, you might get a rate of 4.99%, but a 3% fee - and the rental required by the lender is based, of course, on the interest rate.

'But there are still deals out there suitable for most people.

'Lots of lenders will lower their LTVs by 10% - but that is purely for new build flats, not for houses.

'The government has insisted on density levels, so we are seeing over supply of flats in some areas - an example of the government interfering with the market.

'The mortgage market will get worse before it get better. But it's a great time to put in cheeky bids, look for distressed sellers and be unsentimental.

'Meanwhile, keep an eye on three month libor - that's key. It's usually around 0.16% above he base rate during the initial phase of the credit crunch it went to 1% above. Now it's 0.6% above. This is a good indication of the way the markets are moving.'

So, what makes Property Secrets and Neil Lewis in particular the bear among these bulls?

Neil's point was simple: it'll get a lot worse before it gets better.

'I don't think the UK economy is sound. 10,000 jobs are expected to go in the City . Two thirds of estate agents will be out of a job by the end of the year.

'Mortgages have dropped 31% for home buyers - but for BTL it was up as investors draw down on their mortgages to complete on new builds.

'The accurate reflection of the market are the figures for homebuyers NOT for investors.

'This is a sentiment driven phenomenon and that negative sentiment is having a very REAL negative impact.

'We've had nine to twelve months of negative sentiment and we're going to have more. My advice - steer clear of the UK market for at least the next 12 months.

'If the UK economy can maintain its attractions (to migrants), it'll be fine. In ten years we'll probably all agree.

'But, because I can see that the economy is going to get worse before it gets better I can also see that the discounts are going to get better probably in 12 months time.

'If you look at Spain, it is losing jobs and fast. Spain is not having a credit crunch, it's having a rapid slowdown of its economy.

'If you're in the UK market now and rents are going up - then hold on.
'But in the future we think we'll see a kite mark on mortgages - there'll be good and poor quality.

'Be careful, because that portfolio of 20 terraces in a northern city are going to be the sub prime properties of the future and rates will be higher for these properties.

'If you take the long term view, then maybe none of this matters - but the best opportunities are elsewhere over the next 24 months.'

And as the news out of the US and UK gets grimmer by the day, surely Neil's view is increasingly hard to argue against.

No one is seriously disputing the long term trend in the UK market or about the UK property market's fundamentals. So, the answer to the question posed to the panel is 'NO, the UK BTL market is NOT facing Armageddon.'

BUT the economic reality is what is going to influence the property market over the next year or so - not long term fundamentals.

So, whose view do you subscribe to on the UK market?

Buy, hold or sell?

"Europe’s periphery has emerged as one of the most vibrant parts of the global economy – a fact little recognised by investors mesmerised by the emergence of China and India"

FT, 8th Jan http://www.ft.com/cms/s/0/4f1867d8-bd44-11dc-b7e6-0000779fd2ac.html

How true is this?

This is a quote from the chief market strategist at Bank of America on the FT's site yesterday - 8th Jan 2008.

Well, I kind of want to say 'told you so'! And aren't you glad you have invested in these markets before the rest of the FT reading public?

But what is really interesting is that it is now becoming public knowledge that China and India have mesmerised investors into missing the opportunities in central Eastern Europe.

Why is that?

From BRICS to 'BRICEES'

Well, one possible (but false) explanation for why investors might have missed central Eastern Europe is because the opportunity isn't as good - but I don't believe this and nor does the Chief Market Strategist of Bank of America based on his recent article.

I believe that investors missed central Eastern Europe because it is a complex and diverse region and isn't as easy to prononuce as India or China.

As I argued in my recent End of Term Performance Report - the term BRICS (Brazil, Russia, India and China) has missed out the other most exciting (but also most stable and secure) region of central and Eastern Europe.

Hence, I propose that we should now talk about Brickies (BRICEES) and not just BRICS! (This also seems the most appropriate name given that we are interesting in property in this region).

It is much easier, for instance, to talk India - than it is to talk about the 12 new countries that have joined the EU in the past 3 years - along with as many languages and nearly as many currencies (Cyprus, Malta and Slovenia have now all successfully adopted the Euro).

Yet, this diversity is exactly why the region offers such opportunity. Whilst the Baltics have done their bit on property price growth for now - the focus has shifted to Romania and Bulgaria.

However, just as Czech Republic began a second wave of property growth last year, so Slovakia is re-entering the property price growth curve and will be followed by a second wave in Poland - in about 12 months.

The good news - is that many investors still haven't figured out where central Eastern Europe is - nor have they managed to stick any money there yet.

Hence, whilst these markets certainly registered excellent growth and are experiencing increased interest from fund investors - the region remains relatively untouched by foreign investors!

This would suggest that there is plenty more growth to come! But that you do need to know your Bucharests from your Budapests! And that is the sustainable advantage that Property Secrets can offer.

Cheers
Neil

ps. One last quote from yesterday's article 'Europe’s got its own China next door'