Way of the world
We've entered the new year with more stability than in the previous two years but significant uncertainties remain. Stock markets have, on average, picked up substantially and commodities have continued their boom. World property markets, on the other hand, have been lacklustre with only a few exceptions.
The world's population has continued to grow substantially. At the turn of the century the world population was 6bn people. By the end of 2011 it is predicted there will be 7bn people. Since 1960 the world population has increased by 1bn people every 13 years on average. The worlds population is predicted to continue to rise over the coming years albeit at a slightly slower rate.
The combination of massive increases in population and the developing world developing more rapidly means it's little wonder demand for basic resources (and their prices) are so high. In the last year the price of oil is up 40%, gold 20%, silver almost 100%, wheat 40%, coffee 70% and so on.
It's important to realise just what this means for world dynamics and the flows of money around the globe in order to help determine the winners and losers over the coming decade. All things being equal countries with large natural resources are likely to do well (think Norway, Canada or Australia at the low risk end of the scale and eg Brazil, Russia or Mongolia at the higher end). Countries that are net importers of key resources, for example Spain or Greece, are going to have problems for a long time to come - it remains to be seen how they will be able to pay off their debts without defaulting. If oil prices continue to rise we could well see another global shock and countries such as Spain and Greece will be severely affected.
Naturally for the property investors there are a whole host of other macro & micro considerations to take into account when investing. So let's look at some markets in more detail ...
UK & US
The problems with both the UK and US property markets are well publicised. Opportunities in these markets abound despite the relative restrictive availability of finance.
If you are considering investing in these markets you have to ask yourself (1) am I happy to hold the currency? (2) could the property markets fall even further? and maybe even (3) what might the government do to private landlords?
If you're investing in the US but the dollar slides 10-20% or more compared to your local currency over the period you hold the property you're unlikely to come out far ahead. Ideally you want to invest in a market where not only property prices have the potential to strengthen but where the local currency is undervalued and has the potential to further strengthen.
Both the UK and US economies are saddled with unprecedented levels of private and sovereign debt.
In order to tackle this debt US is taking a more expansionist approach by printing/spending more money in the hope of stimulating growth and some inflation in order to reduce the size of national debt relative to GDP. Whether this strategy will work in the medium term or whether it's simply patching up the problems rather than fixing them remains to be seen. As the world's largest economy and reserve currency the US can perhaps get away with such policies longer than most, but in my eyes there is still a large downside risk when investing in the US property market.
The UK government is taking a slightly more aggressive approach by dramatically cutting spending in attempt to reduce the national debt. In the short term this is going to be tough for the UK economy and we are going to see continued job losses in the public sector for the next few years. There is also the danger that such cuts could dampen growth too much and take the UK back in to a recession. It's a fine balancing act to make. Despite the UK's increasing population, tough planning rules, lack of supply, good rental market, relatively low taxes I still remain cautious about the short term prospects of the market.
Central & Eastern Europe
Despite the region weathering the financial storm relatively well on the whole the biggest issue with the CEE property markets remains too much oversupply.
On a recent trip to Poland to check on the properties I manage in Warsaw and Krakow it was surprisingly noticeable just how many apartments were empty in some new developments. Much needed investment in infrastructure continues apace in Poland and medium term the market is likely to turn around, though in the short term I think the market will remain weak.
In Prague property prices fell by 12% in the first 11 months of 2010. Unfortunately, Czech rental markets have also been hit by an oversupply of units. Developers continue to build, albeit it more slowly in the past, and it could take a while before the supply/demand in balance is rectified meaning prices are unlikely to move in a positive direction for at least the next year. A similar story could be told of Slovakia though the problem is not quite as acute there.
Hungary remains a difficult market but a market with potential nonetheless. Hungary's property prices are around half the level compared to its northern neighbours. Rentals yields tend also to be more healthy. Decent mortgage finance remains a problem for the foreign investor and the economic/political/fiscal environment remains a little unstable and not so welcoming. It's one to watch but I'm not in any hurry to invest there at the moment.
The Romanian market has been a mess for a long while now and will continue to be so for reasons discussed at length in previous articles. Bulgaria too has way too much supply and is struggling in part due to the near complete lack of finance. Both markets will take some time to sort themselves out. For investors with properties there you can either bail out at a significantly reduce price or hold on and put up with low rental yields and hope the market picks up (just don't hold your breath).
I discussed the opportunities in the Baltic markets in detail back in August 2010. At such low prices the markets were bound to rebound, and they did. Especially Estonia that took the most drastic action to sort out its national finances. Prices will probably continue to rebound, but whether you should consider them an essential part of your portfolio for the medium term is another matter.
With high debts, high unemployment, faltering economic output, a near complete lack natural resources I see little reason to invest in Southern Europe at this time. The structural problems with the market in Spain could take a long time to sort out, here I still think the reality of the situation has not quite dawned on people (don't be tempted by cheap Spanish property just yet).Portugal, Italy and Greece fit in the same category - steer well clear of for now.
Asia (South and East)
The property markets of the creditor nations of South and East Asia probably have the biggest potential for long term sustainable growth.
With booming populations, rapidly growing economies, large investments into infrastructure and many underdeveloped but growing sectors of their economies which are just in their infancy the potential upside is significant.
Many of my comments made this time last year remain true and we'll look at the markets in this region in more detail next month and how to invest in them.
Resource rich countries
Like it or not oil is one of the world's most important natural resources and is used in a multitude of ways in our everyday lives. For those countries that produce and export oil it is a huge revenue generator and those countries that import oil it acts like a huge tax on the nation whenever the price increases.
In this current world of increasing demand and lack of supply of oil (and other important resources such as gas, water, food stuffs, timber, rare metals etc) those countries that "have" will naturally experience a large stimulus to their economies, strengthen their currencies, keeps taxes lower and with money to spend this often gets reinvested into assets such as property.
Three well developed and stable countries that fall into this category and stand out are Norway,Canada and Australia. Prices are already quite high and are likely to head higher (assuming no government intervention).
For those looking for higher risk take a look at Russia, Mongolia, Kazakhstan among other or some of the countries along the western coast of Africa. Whether these countries are stable enough, have the right legal & tax frameworks, have mortgage finance for foreigners and so on is another matter.
Brazil seems to be finally showing its true promise. It's a country packed full of natural resources, a large population most of whom have substandard housing, has a government that has stimulated investment and growth, lack of supply of property, large investments infrastructure not to mention being the host of both the world cup and Olympics in near future. The property market in Brazil is booming and has been for some time now. Is it too late invest and is a bubble forming? I think not in the short term, but there is a danger people and prices will get ahead of themselves. That said Brazil has massive potential, if it also had good mortgage finance for foreigners it would tick most of my boxes.
Other countries worth a mention
Germany has, for the last 15 years, had a very un-dynamic property market. Prices fell for many years and have only recently started to pick up slightly in certain areas. Taxes remain very high in Germany (eg buying costs of 12-13% extra on top of the purchase price!) and a lot of regulations to comply with as a landlord don t make the market the most appealing to the foreign investor. Economically Germany remains a powerhouse and as a long term place to invest you can't go too far wrong. However, if you did want to invest in such a market I would recommend looking over the border to Switzerland (if you can even raise enough money for a deposit that is).
Turkey continues to move in the right direction economically. It has a large and young population that bridges Europe and the Middle East. Politically there are still some risks and one has to ensure you have a good lawyer when buying there due to the potential to be cheated during the buying process for foreigners. Istanbul is already becoming somewhat of a region centre, inflation and interest rates have fallen, mortgages are available for foreigners and the government continues with a program of reform that should continue to boost the economy. Beware of paying too much and getting the wrong tenant in (as the law is not particularly on the landlords side in Turkey), otherwise an investment in Turkey should do well over the coming years.
Simon Tweddle www.simpropertygroup.com