Welcome to the second part of a specially commissioned and impartial 3-part report for ShareCrazy.com from property expert Iain Maitland. Part 3 will follow later in the week. Here Iain examines property investment in emerging markets...

PART 2: PROPERTY INVESTING IN EMERGING MARKETS

By Iain Maitland, www.ukpropertyalerts.co.uk and www.internationalpropertyalerts.co.uk, free weekday e-news and free bi-monthly PDF newsletters.

Many British property investors looking to buy overseas want to profit fast from capital growth rather than investing in a long-term, buy-to-let investment. They aim to achieve this by investing in a property development at the off-plan stage; literally committing to buy a property on the basis of plans, designs and drawings. They sometimes invest even before the first hole is dug in the ground. By doing this, they can often purchase at between 10 per cent to 20 per cent less than the current market value. As the market grows over the next 12 to 24 months, the property values rise and these early-bird investors can sell on at completion to follow-on buyers and pocket profits of 25 per cent or more.

Of course, there are ifs, buts and maybes to investing in an off-plan development, especially in an emerging market. Investors need to be sure they can buy in at a genuine discount to market value – the values attributed to a development by a developer may be somewhat optimistic when compared to the current market values of similar but completed developments. Often overlooked, there needs to be more buyers than completed units in 12 to 24 months. That is not always the case when there are developments of 100’s of near-identical units coming to market at much the same time. The bottom line is that the market also needs to price-rise as expected to create profits above and beyond the initial savings made by the early bird discounts. An off-plan investment is far from an automatic money-maker.

This second part of your ShareCrazy report looks at three of the fast-rising property markets currently being targeted by Brit investors. Croatia, part of the former Yugoslavia, is a hidden gem that is tipped to see fast capital appreciation as and when (perhaps if) it joins the European Union. Cape Verde is the name given to the islands off the west coast of Africa. These are in the early stages of development but are still attracting the attentions of foreign investors, both large and small.  Morocco on the North African coast is relatively low-priced, accessible and is expected to see tourist numbers double within the next three years. For many investors, these emerging markets all offer the prospects of fast capital growth over the next three years.

CROATIA

Croatia, part of the old Yugoslavia, is a discerning tourists’ dream. The coastline is amazing with its red-topped houses, green landscape, hills and islands, and crystal clear water. For property investors, the country is appealing for many more practical reasons. It is affordable with apartments at the £50,000 mark in many places. Supply is relatively limited. The country seems determined to restrict the excessive and low value tourism that has blighted many coastal resorts in parts of Spain and Bulgaria. Demand for property is growing, albeit being driven at this stage more by foreign investors than tourists and the home market. Prices are already rising although it is important to note that these are largely paper profits and a ready buyers’ market needs to come into place for these to be turned into hard cash. At present, early bird investors are seeking to sell mainly to follow-on investors who have more interest in new-build than resale properties.

The big plus, and talking point amongst property investors, is European Union accession. Many overseas property investors profit from capital growth by buying into a market at the bottom and then selling when it is moving towards a peak. Internationally, the best places to do this are the countries that have not yet joined the European Union but are tipped to do so. These countries tend to have the more affordable property markets. As and when these countries join the European Union, the money, investments, jobs, tourists and low-cost airlines all come in and transform the economies. These have a positive knock-on effect on the property market. Many speculative property investors sell up as and when these markets rise and pocket their profits.       

Croatia’s property market is very new. It only really began in 2002 when European Union accession came on to the horizon. One of the practical problems in buying in Croatia, especially for existing properties perhaps for conversion, is actually finding property for sale. It is often sold by word of mouth from the seller. There are estate agents but they can be difficult to source. What’s more, many agents have little or no experience of dealing with foreigners so you need to be able to explain exactly what you are looking for. The market is not yet an established and transparent one. As an example, there is no cooling off period when you sign a purchase contract. Remember too that this is a cash-poor home market – there have been cases where agents have disappeared with foreign investors’ deposits because these represent four years’ earnings to them. You should also remember that a long-term hotspot really needs to be driven by the home market. If local buyers cannot afford properties bought by foreign investors, sell-on potential is limited.       

The EU Accession

For most property investors looking at Croatia, the key question is “Will Croatia join the European Union (and, if so, when)?” Property investors seeking to invest overseas for fast capital growth have traditionally bought into former Communist Central and Eastern European countries before they have joined the European Union. These countries offer buy-low, sell-high property opportunities. By comparison to more mature Western economies, most of these countries have a shared background of state control, a poor economy and low standards of living.  European Union accession tends to transform these countries, their economies and their property markets. Membership – in fact, even the anticipation of membership - brings in EU money, foreign investment, entrepreneurs and tourists. Those Eastern European countries such as Poland and Hungary that joined the EU in 2004 have seen some rapid growth in their property markets.

The European Union comprises Belgium, France, Germany, Italy, Luxembourg, The Netherlands, Denmark, Ireland, the United Kingdom, Greece, Portugal, Spain, Austria, Finland, Sweden, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Bulgaria and Romania. The eight Eastern European countries of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia that joined in 2004 have seen significant improvements in their economies, trade and property markets since then. Bulgaria and Romania, who joined in 2007, have been the most recent beneficiaries of European Union accession. Bulgaria, for example, has seen GDP growth at above 5 per cent in both 2005 and 2006. UniCredit, the Italian bankers, put it at 6.2 per cent for 2007. Property prices there rose by about 27 per cent in the year to the end of June 2007. 

The Hotspots

With most countries joining the European Union, the capital city tends to attract much of the foreign direct investment as well as grants from the European Union itself to improve its infrastructure, and so on. As such, the capital city of Zagreb, although a relatively small market by European standards, is worth consideration. The city has all of the fundamentals in place to achieve capital growth and, indeed, rental yields. Demand exceeds supply and there is a steady rental market already. But it is wise to be aware that this is not a rich city; not yet anyway. The average income is lower than in Western Europe. As at July 2007, the average monthly net salary in Zagreb was the equivalent of about £550 a month, The average unemployment rate in Zagreb was around 8 per cent. However, being well placed to connect Central and South Eastern Europe, this city is regarded as having significant commercial and industrial potential.

CAPE VERDE

Cape Verde is an archipelago of islands about 400 miles off the west coast of Africa. The most developed islands are Sal, Boa Vista, São Vicente and Santiago. Others include Barlaventos, Santo Antão, Maio, Santa Luzia, São Nicolau, Sotaventos Fogo and Brava. Cape Verde has been compared to the Caribbean in terms of the warm year-round climate and the sun, sea and sand beach resorts.

Sal is currently the most popular island. The main town is Santa Maria. It has been popular for some time with the Portuguese but is now growing in popularity with the British. Direct flights from the UK take six hours. Property development is most apparent on Sal. The price per square metre varies between €1,200 and €2,000 depending on location and position. 

Where’s The Infrastructure?

Any property investor who visits the islands almost inevitably asks the same question – “Where’s the infrastructure?”. Some of the smaller islands offer little more than one main road with lights – at best. In many ways, Cape Verde is a hotspot that has been created by the media and foreign investors and developers. It has not been created by, say, EU accession or a growing economy or a strong domestic market. The islands have beauty, charm and grace. The government is keen to bring in foreign investors with a variety of tax breaks. For example, the government of Cape Verde is encouraging foreign direct investment and development on the islands with five year initial tax holidays and tax reductions of 50 per cent on corporation tax for the next 10 years for non-resident investors. And tourism is clearly rising. Tourist numbers are tipped to rise from 150,000 a year now to 500,000 by 2010. Cape Verde is the media’s darling.

But, as a property market, the islands are being driven by foreign investors which is why they do not have the infrastructure and support network in place. The property market here is still in its infancy. Some property developments are going up in anticipation of the infrastructure following on. It is almost as if the media, foreign investors and developers have decided that Cape Verde is ‘the next big thing’ and have created a market where developers are building properties and investors are buying them and everyone is congratulating each other on making lots of paper profits. But the tourist market is not quite there yet, nor is the infrastructure and nor is the home market to bolster demand for sell-on properties. The property market has been set up on-spec and everything now needs to fall into place.       

The Hotspots

As the islands are discovered and facilities, infrastructure and tourism flow into place, there should be profit potential here. The islands have much to offer. The earlier you invest, the greater the profit potential. However, there are risks in an emerging market and you need to work out how and where the tourist boom is likely to unfold. The biggest risks of investing in property overseas are that you may buy in the wrong resort or in a large development that unbalances supply and demand. The risks can be higher in an emerging market if you do not check where the expected facilities and services will emerge.

Most property investors look at accessibility, infrastructure and facilities first and foremost. As such, Sal is likely to lead the way.   
The main international airport is located in Sal. The airport is sited in the middle of the island and there is a good north-south highway which puts the beaches within a 20 to 30 minute drive. This island is also the most advanced in terms of developments, infrastructure and tourist facilities. That’s backed up by recent tourist statistics which show that 67 per cent of all hotel visitors to the islands come here. The resort of Santa Maria on Sal is worth checking. There is a new aquapark around which developments are taking place.

MOROCCO

Morocco was first identified as a would-be property hotspot by British and other overseas investors in the early part of this decade when the government there launched its ‘Vision 2010’ plan. The aim of this plan was to increase tourist numbers to 10 million by 2010. This massive tourist campaign – with all of the money that was to be invested to achieve it - acted as a trigger for a huge wave of foreign direct investment coming into the country and, not least, the property market.

The government committed to upgrade roads and infrastructure in tourist zones where new hotels and other facilities would be built up to 2010. It also agreed an ‘Open Skies’ policy with the European Union. This removed all restrictions and limits on flights and national airlines operating between the European Union and Morocco. This has led to the low-cost airlines flying in and bringing more and more tourists into the country.

What’s Happening Where

Property investors looking to buy into Morocco want to know what exactly is happening and where. This is primarily a capital growth opportunity for property investors, buying in at an off-plan stage and then selling on to follow-on investors. Anecdotal evidence suggests that those who invested in £100,000 units in Saidia in 2005 generated paper profits of £30,000 within the year. With tourism rising through to 2010 at least, the demand for properties, not least from foreign investors, should keep rising over that timescale. There is almost unlimited upside from tourism, infrastructure, flights and tourist facilities combined with easy buying processes, accessible mortgages, tax breaks etc.

Supply and demand are the keys to successful property investment, whatever the market. These new resorts are the obvious hotspots within the country. However, they are massive developments and you need to be careful of an over-supply of the type of property you purchase. It is advisable to look at smaller developments rather than larger ones. As it is an foreign investor-driven market, it may be sensible to sell out in 12 to 24 months rather than stay for the letting market which may, or may not, follow on. The home market, as is often the case with these hotspots, lags some way behind.    

This market – as is so often true with overseas property hotspots - is being driven mainly by foreign investors. Those who move in at an early stage profit from follow-on foreign investors who will eventually have to sell to the tourist or home sectors of the market. There is no guarantee that these will follow on. At some stage, the tourist numbers do need to reach the magic 10 million mark to avoid the bubble scenario that can sometimes be seen in other countries. Early-bird foreign investors can sell on and profit to late-arriving foreign investors but, at some stage, a ‘real‘ market needs to be in place. Otherwise, late-coming foreign investors have no-one in turn to sell on to.

The Hotspots

Morocco is likely to see price rises because of the Vision 2010 Plan and the ripple-out effects. The new resorts will see the greatest activity. The Mediterranean Sea and the North Atlantic Ocean coastlines, and especially the new resorts, offer greater investment potential. Saidia on the Mediterranean coast is a marina and golf resort that runs some six kilometres along the beach. It comprises a marina with 750 moorings, three golf courses, six hotels and some 3,000 properties. Price rises, rule of thumb, are currently at about 20/30 per cent a year.

Other places are being marketed in the world’s media but do not have the same prospects. Riads – traditional Moroccan properties built around a communal courtyard - are cheap to buy in Marrakech, Fez and Casablanca. These need to be restored and at substantial costs. The sell-on potential is limited. Marrakech, for example, does not have the key ingredients required by tourists and other holidaymakers to Morocco; the sand and sea. This is why the Mediterranean Sea and the North Atlantic Ocean coastlines, and especially the new resorts, offer greater investment potential. The tourist market is looking for traditional tourist facilities, infrastructure and a more Westernised holiday. Other resorts are also being marketed nowadays. A good example is Oukaïmeden, the ski resort in the North Atlas mountains. This may well see price rises, as all of Morocco is likely to do, but it will not keep pace with the new resorts.

COMING LATER THIS WEEK

Croatia is generally seen as a safe bet for European Accession within the next few years – as such, those who invest for growth can expect substantial double-digit annual returns once an entry date has been confirmed. Cape Verde has potential – but should really be seen as a long-term punt. Developers and early-bird investors have (slightly) anticipated a boom. Morocco looks a steady growth investment so long as investors are mindful of the supply-demand fundamentals; there is rapid building taking place here with lots of similar units. Even so, these markets all have good, solid reasons to expect growth – EU accession, growing tourism and the Vision 2010 plan. Yet some investors are looking for even more speculative growth than is offered in these markets. As such, Part 3, Property Investing In Speculative Markets, comes out to you on Friday. This looks at hot but speculative India, Panama and Turkey.

Iain Maitland is a well-known property writer who runs a range of information websites including: www.ukpropertyalerts.co.uk -  www.internationalpropertyalerts.co.uk - www.francepropertyalerts.co.uk -  www.americapropertyalerts.co.uk - www.spainpropertyalerts.co.uk  www.investmentpropertyalerts.co.uk - www.lifestylepropertyalerts.co.uk.