With the property markets now under-going correction from their highs in 2006-2007 across most of the developed world, and savings rates at an all-time low, cash-rich investors are seeking returns on their capital like never before. Gone are the days of investments baked with the expectation of capital growth, investments now need to “stack up” in terms of cashflow from day 1. That’s not to say capital values are being ignored, far from it. Investors increasingly seek stable investments that provide a measurable and regular return. So markets should be in some sort of equilibrium in terms of supply versus demand, and capital values holding steady. In many ways then, conditions are back to normal in many respects for serious portfolio landlords.

So where are yield investors looking today? Working on the ProVenture team, we get to talk to yield investors every day from across the world and it is interesting to pick up on trends in their strategies. We hear about where investors have placed their hard-earned cash in the past, and where and why they are looking to invest in the coming years. Inevitably, many of the investors we speak to are focused on Germany as a place to invest for the coming years as this is our main area of operation as property consultants. But increasingly, we discuss investments in eastern Europe, other parts of western Europe and the USA as viable investment locations.

Let’s look at some different markets and find out what is drawing investors to them at this stage of the economic cycle.

USA

What an interesting market to look at, as we write this piece in August 2010. The USA is the home of raw capitalism, and this harsh approach applies to the property market in much the same way as the money and equity markets. Despite the assets in question being people’s homes and security, they seem exposed to harsh write-downs more than other countries, and this brings sorrow and hardship for those shielding loses and inevitable opportunities for investors.

Taking a historical perspective on the market, we see that the USA has typically had an average level of owner-occupation between 1960-1990 of around 60%. Home ownership was a realistic aspiration for many, but not an imperative like in other markets such as UK or Spain where owner-occupation rates have been as high as 85-90%. This led to, in most locations, a stable market to invest within and a ready supply of short to longer term tenants. The credit bubble of 1996-2006 changed all this.

During the period of low interest rates, sectors of the population who up until then could not aspire to home ownership at their stage of life, if at all, entered the market on “teaser” loans, affordable for the first few years of the loan but become crippling as the loan rates reverted to usual market rates or higher. This greed on lenders parts, and their shocking lack of due diligence into individual’s ability to pay, had a now famous global effect. Currently, 14% of the population are behind on mortgage payments or are in foreclosure. This is an average, and some markets have double this rate. That’s 9 million homes in trouble, double that are households sitting on negative-equity. So where are we now, and is the USA a place worthy of investment research? It is safe to say, the market is still largely bereft of confidence and sharp declines have been felt pretty much across the board. But are there areas that have suffered steeper declines than are justified?

Well, the USA is a huge market. Let’s focus on one city, Orlando [Florida] as a case study.

The Orlando region derives much of its economic power from tourism, business conventions, medial and hi-tech research and the “grey dollar” or those retiring to the warm climes from more northern states or from abroad. The property market has grown with the huge rise in population, up 30% in the last decade alone. Typical in this region have been gated developments and condominiums growing mainly to the south of the city and spreading at an alarming pace in the empty land. The city or downtown area is well-established with some property dating back 100 years or more, broken up only by the high-rise developments which seemed viable during the credit bubble.

Construction of property can be standard construction, or more rapidly built units from pre-fabrication section. Use of wood in structural elements is often seen.

During the credit binge, Orlando was front and centre, financing and constructing homes to service both the local and tourist market. Depending on location and subdivision, property soared 200-300% from 1995-2005, unheard of growth rates in this market which has no scarcity value and seemingly limitless land in which to develop. Commercial development went just as mad. Business plans for “strip malls”, small malls by the road side took off. Some areas of the city boast 10 Taco Bell franchised outlets in a 1km radius. All sectors of the property market, even in downtown locations, could be said to be very over supplied.

In terms of pricing, let’s look at the price history of a high-end 2-bedroom apartment in the downtown district using the excellent zillo.com tool:

The graph shows that such a unit was being sold off plan in excess of 0k, now priced around 0k [or even cheaper navigating the foreclosure route].

In terms of rental potential, the downtown area enjoys solid demand. Around 00-2000 should be expected per month, bringing a healthly 12% or so yield.

Why would you buy this? Well, the current low capital value is compelling, as is the location of the unit in the downtown area which enjoys some degree of scarcity value. It is an interesting proposition.

Why wouldn’t you buy? Well, considering the lack of confidence in the marketplace, finance will be very difficult for the first few years of the hold. It should be best considered a cash purchase, so the power of leverage is not as easy here. Additionally, it really is not clear where capital values will go, but for a cash investor looking for a sustainable yield, this is a strong option.

The German Market

Over the last 10 years or so, property markets around the world have experienced rates of capital growth typically between 200-300%, fuelled by cheap and plentiful credit. There are few exceptions to this trend, one of them being Germany. Due to re-unification some 20 years ago, the property market in Germany, particularly in the old east, has been operating out of sync with other markets. Speculation by mainly western German buyers fuelled a boom which ended around 1996. As investors were chasing rents that were not achievable, the German market gave way and went into decline from around 1996 – 2001. This was the same time that most markets around the world experienced their greatest growth rates. Prices have stabilised in most areas from 2001 and shown some capital appreciation in certain areas, particularly the good locations in the bigger cities such as Munich, Hamburg, Frankfurt and Berlin.

Market Features:

The residential market differs considerably from other locations, with more robust tenant laws and longer typical residence times. Typically, a residential unit will be offered for letting totally unfurnished, without kitchen units, light fittings or even flooring. The incoming tenant will provide all their own furnishings and stay for a longer period, typically on average about 7 years. Tenants sign contracts of a defined period but are effectively on a lifetime lease thereafter, only needing to move out if they are not regular with their payments or the landlord (or close family) which to occupy the unit. Tenants must give 3 month’s notice to quit and will repair and decorate the unit to a good condition when vacating.

Finance for Nationals and international buyers is usually set around 60-80% loan to value. The level of finance depending on the client’s income and the rental value of the property. Typical interest rates are fixed for 5 or 10 years and around 1.3% above the Euro 5 or 10 year swap rate. So at present rates are around 3% for a 5 year fix and 3.8% for a 10 year fix.

Typical Prices:

Property, both commercial and residential tends to be priced per sqm and not by room or bedroom number. Therefore, investments can be easily compared by size, price and location. Residential property can be purchased either on a single basis or by purchasing a complete block of apartments. Purchasing a complete block tends to reduce the price per sqm paid. Some typical prices per sqm in the major cities, depending on size and location:

Berlin – 1.000 – 2.000 Eur psm
Frankfurt – 2.500 – 4.000 Eur psm
Munich – 3.500 – 5.000 Eur psm

Locations to the east of Germany (Dresden, Leipzig, Chemnitz for example) have properties in a good refurbished condition from 500 Eur psm. Remarkable value and the most undervalues market in the world according to the OECD. Location in terms of sustainability of rent is crucial in these locations.

As an example apartment block, below is a unit in Leipzig with 19 apartments. The purchase price is 420k euro and a yield of around 12% net is achieved.

Typical Yields:

In the same way that property is marketed for sale, rental property is priced per sqm. The rental is often broken down in to “cold” and “warm” rent, with the cold rent being the income to the investor and the warm rent covering all bills including ground tax and routine property maintenance. Cold rents start at around 4 Eur psm in the very cheapest parts of cities to the east of Germany with cold rents in cities such as Munich reaching 12 Eur psm and above in many cases. Yields range between around 5% for single apartments in Munich, Frankfurt and Hamburg to around 10-12% when bought as a block in cities such as Dresden, Leipzig and Chemnitz. Berlin offers the complete range of yields and is a very diverse market.

Running Costs:

Costs during ownership are transparent and are comparatively low. The majority of deductions to run the property are taken from the “warm rent” or ancillary cost and should not be included in yield calculations. This includes basic building maintenance, communal area cleaning, buildings insurance and property tax. From the net rent, apart from unplanned maintenance, the cost of letting management is the primary deduction. There are a variety of fee structures for letting management including a flat fee per apartment or a percentage of the rent collected. Letting management typically costs between 5-10% of net rents, depending on area and fee structure chosen.

Positive Investment Aspects:

Hands-off investment – long-term tenants, unfurnished propertyletting
Well regulated and robust tenant and property management practices
High rental yields possible, to fit all investor types
Good finance available, at competitive levels of interest
Reliable legal and land registry system
Transparent running costs

Negative Investment Aspects:

Robust tenant laws – a tenant cannot just be removed unless they do not pay rent
High purchase costs (between 10-12%)
High yielding properties can be subject to a forced sell and can be problematic to deliver

View on Market:

Very good yields, underpinned by strong legal system and high levels of finance. Capital values very low in comparison with anywhere in the developed world. Truly unfurnished property allows for significant holdings to be built up in a relatively “hands-off” manner.

Where Next??

In terms of property in Europe, beyond Germany, yield investors have very few options. Markets are either stable but producing yields in the 3-6% range, or falling in capital value and difficult to predict the floor. Markets across the Eurozone and UK have a few years to run you would say before re-entering the market for yield and stability in capital value. Places that have experienced huge capital falls, but stabilise well in the coming years [with increasing wages as a key index] should be kept in mind. The following locations could be worth noting in years to come, with capital falls experienced in last 3 years:

Lithuania [Vilinus, Kaunas] – 55% price fall
Latvia [Riga] – 70% price fall
Ukraine, Kiev – 55% price fall
Further afield, yields on 8%+ can be found in: Sao Paolo, Brazil 8.1%
Santiago, Chile 8.7%
Jakarta, Indonesia 11.1%
Kuala Lumpur, Malaysia 8.7%

The diligence here should include analysis of finance availability, interest rates payable and currency stability. No good getting a 10% yield when the interest rate is 12%, or if the currency weakens significantly during the period of your hold.

Good luck in your hunt for yield.

Real estate investment is perhaps one of the most lucrative forms of investment today. But it is also equally risk bound especially when one is not well versed with the trends and nuances of the real estate market. So if you are contemplating on investing in real estate, it is best to avoid costly mistakes in real estate investment especially when you invest your hard earned money into it. Knowing the most common mistakes made by real estate investors helps one steer away from making such mistakes in the future and ensures good return on investment.

Here are the top ten mistakes made by real estate investors, according to bankrate.com. Bankrate has put together the top ten mistakes after speaking to established, full-time real estate investors and other professionals involved in real estate investment such as bankers. Read on to know them and avoid them.

1. Not planning up ahead. Lack of a proper plan is the biggest mistake made by novice investors. Finding a house after forming a proper investment strategy is the right way instead of looking for a house to fit the plan. Many make the mistake of buying a house because it seems to be a good deal and then trying to see how they can fit it into their plan. Instead of buying a house and thinking one can plan in due course, investors should rather concentrate on the numbers and try to make offers on multiple properties. This will ensure a good property that not only matches their investment model but also works out well with the numbers they had planned for.

2. To believe you can make money quickly. The second major mistake that real estate investors make is to think it is very easy to get rich in real estate. This is only a myth and the reality is that investing in real estate is a long term project.

3. Doing it single-handedly. For becoming a successful real estate investor one needs to build a team of professionals who would assist the investor in his deals. This would ideally include a real estate agent, an appraiser, a home inspector, a closing attorney and a lender.

4. Making excess payment. One another reason that investors in real estate goof up in their investment is by paying too much for the properties they buy. Paying too much and locking up all the funds in the erred property deal will leave you with no money to redeem yourself.

5. Leaving out the groundwork. Not doing your homework could be a costly mistake if you were a real estate investor. Every field of business needs sufficient amount of homework to be done, and real estate investment is no exception. Learn the fundamentals and then venture into investing in properties.

6. Throwing caution to the winds. Investors have to exercise a certain degree of caution and take earnest efforts while making a deal. New investors often fail in this regard and sign a deal without doing adequate research on the property.

7. Miscalculating money flow. Investors whose strategy is to buy, hold and rent out properties need to ensure sufficient cash flow for maintenance. Property managers could be expensive and the owner has to incur more expenses such as mortgage, taxes, insurance, advertising costs etc. Investors have to allocate their budget such that all these expenses are taken care of, or end up having their asset turn into a liability.

8. Lowering the volume. A larger volume of deals or transactions helps in increasing the profits by reducing the impacts of marginal deals.

9. Getting trapped in your own deal. Having more number of options at hand for the property you buy is a wise strategy. This helps one to be prepared for fluctuations in the real estate market. Plans to rent out the house could go awry when the rental market slumps. Having alternative plans helps you cut down losses and tackle unexpected situations.

10. Making incorrect estimates. People who plan to rehab their house need to check if they will still reap the benefits at double the time that they had estimated. This ensures they do not miscalculate and lose money on the deal.

The United States housing market may still be in the middle of a downward slump, but East European real estate investors are reaping the benefits of double-digit returns – some as high as over 50 percent! The explosive growth in Central and Eastern Europe are bringing investors from all over the globe to the area.

Poland

With the housing market growing at more than 33 percent last year, property in Poland has the distinction of being at the top of the list for the East European real estate market. In the ancient city of Krakow, for instance, investors are celebrating a 58% rise in 2007. That means that Krakow currently generates the highest returns on real estate investment in all of Europe.

This rise in property value in Poland can be partly attributed to the fact that a number of American and British companies have elected to open offices in the country. Another reason that property in Poland has become highly desirable is due to the recent trend of Poles moving to Britain to make money and returning to their homeland to open their own businesses. It comes down to basic supply and demand!

Bulgaria

Bulgaria is an emerging economy still finding its place after its 2007 EU accession and adoption of the Euro. This has many investors watching the East European real estate market in this area very closely. With a 30 percent gain in housing values in 2007, this East European real estate market looks to continue its growth in 2008 as well.

The capitol city of Sofia has seen significant employment growth over the past couple of years and as a result property values have also been on the rise. This level of growth has been seen in the ski resort towns and coastal vacation areas as well.

Czech Republic

The Czech Republic is one of the shining stars in the East European real estate market. Foreign investors find that the country makes business investments and real estate investments extremely easy to conduct.

Businesses who choose to set up offices in the Czech Republic find that the country offers an efficient infrastructure that can connect them directly with most European centers via railway. They also have a pool of skilled workers that work for a comparatively cheap hourly rate as compared to their output.

The Czech Republic also offers East European real estate investors a high credit rating as compared to other Eastern and Central European states. Businesses who have already made significant investments in the Republic include such well-known names as Coca Cola, Volkswagen, Pepsi Cola, Siemens and others.

Romania

Romania is perched on the cusp of a huge real estate surge. With many lenders currently offering 100 percent mortgages, Romanians have more money available to invest in a limited supply of property. This is another example where the power of supply and demand is expected to cause property values to soar in Romania in 2008 – making it one of the top East European real estate markets to watch.

Supply is so limited in Bucharest, for example, that a new complex called The Old Bread Factory has 500 reservations for just 200 units and another development called The New Town has over 450 reservations for just 220 units.

There is no doubt that the real estate market in Eastern Europe is becoming one of the most competitive in the world. As people emerge from the confines of communism and embrace free trade economics the investment opportunities in these countries will simply explode.

Property appraisal or property valuation is the process of determining the value of the property on the basis of the highest and the best use of real property (which basically translates into determining the fair market value of the property). The person who performs this property appraisal exercise is called the property appraiser or property valuation surveyor. The value as determined by property appraisal is the fair market value. The property appraisal is done using various methods and the property appraisal values the property as different for difference purposes e.g. the property appraisal might assign 2 different values to the same property (Improved value and vacant value) and again the same/similar property might be assigned different values in a residential zone and a commercial zone. However, the value assigned as a result of property appraisal might not be the value that a property investor would consider when evaluating the property for investment. In fact, a property investor might completely ignore the value that comes out of property appraisal process.

A good property investor would evaluate the property on the basis of the developments going on in the region. So property appraisal as done by a property investor would come up with the value that the property investor can get out of the property by buying it at a low price and selling it at a much higher price (as in the present). Similarly, property investor could do his own property appraisal for the expected value of the property in, say 2 years time or in 5 years time. Again, a property investor might conduct his property appraisal based on what value he/she can create by investing some amount of money in the property i.e. a property investor might decide on buying a dirty/scary kind of property (which no one likes) and get some minor repairs, painting etc done in order to increase the value of the property (the value that the property investor would get by selling it in the market). So, here the meaning of property appraisal changes completely (and can be very different from the value that property appraiser would come out with if the property appraiser conducted a property appraisal).

A property investor will generally base his investment decision on this property appraisal that he does by himself (or gets done through someone).

Copyright (c) 2010 Nadine Davis

Thanks mostly to new laws regarding the foreign ownership of land in Australia, there are more offshore investors in Queensland property than ever before. The Foreign Investment Review Board changed laws concerning foreign ownership in late 2008. Before that, offshore investors could only own up to 50% of any Australian property. Under the new laws, full foreign ownership in brand new residential construction is now permitted.

The Allure of Australian Real Estate:

Although the pace has picked up significantly in recent years, foreign investors have long been enamoured of the Australian real estate market. Indeed, buyers agents Brisbane are regularly hired by investors from Russia, China, Malaysia, South Africa and other far-flung places. With the help of a buyers agent Brisbane, such investors seek to make exceptional money through well-placed real estate investments in Queensland – especially in Brisbane and the Gold Coast. With full ownership now possible, it’s clear that foreign investments in Australian property are only going to escalate.

Who’s Doing the Investing?

There are two main players when it comes to offshore investing in Australian property: Russia and China. The Chinese invested approximately $22.76 million in the last year alone; Russians invested approximately $22.7m themselves. Since it’s only been a little more than a year since the new laws went into effect, it is quite likely that these numbers are only going to grow going forward. What’s clear is that the Russian, the Chinese and many others are achieving very great success with their Australian property investments.

The Chinese have been investing in Australian property for quite some time. and continue to be the biggest foreign buyers of property in the country. A country that is catching up quickly though is Russia, due to its economy as its fast changing demographic points are prompting many citizens to buy into the real estate market. Success in the mining and oil industries has armed many Russians with the means to invest seriously in real estate – and Australia is a natural choice. Furthermore, a growing middle class in Russia means that there are more people with expendable income than ever in that country.

The Dubai Connection:

Not only due to the fact that the laws in Australia have changed, but developments in Dubai have had substantial impact on the broadening popularity of offshore investment in Australia. The real estate market in Dubai collapsed, leaving many investors high and dry – and scrambling for new, more reliable opportunities. For many of them, Australia was a natural choice. Close on the heels of the Dubai real estate market crash, Australian rules and laws changed, opening up the playing field to more foreign investors. All of these converging factors have created key opportunities for offshore investors in the Australian real estate market.

Traveling and tourism are the ways to escape for professional individuals and families from daily life activities and they certainly like to have a change in the daily life with fun and entertainment. Similarly, the real estate professionals like to visit different countries to find new investment opportunities so that they can exploit the potential of the real estate market. If we talk about the potential in real estate market, UAE real estate takes one the topmost position in the list. UAE government is especially focusing on the travel and tour industry after the industry of oil. It is an open secret that oil has been the main source of revenue for the Middle East countries and UAE. But now UAE government is also paying attention to utilize the potential of UAE real estate market.

UAE charms the tourists a lot as they have built special recreational activities and amusements parks for the vacationers and tourists. In UAE, the visitors can find the most beautiful furnished and non-furnished apartments and flats to stay along with the best hotels in the world. Talking about Dubai is indispensable when we talk about UAE. Dubai is considered to be the gold capital which is very true. On the whole, UAE receives a large number of visitors annually and Dubai is on of the high number visitor receiving. These visitors certainly find charming places to stay as Dubai apartments for rent. On the other hand, properties for sale in Dubai are also available.

Dubai apartments for rent attract the visitors while properties for sale in Dubai attract the investors. There are ample benefits of going to Dubai whether you are a vacationer or the investor. Both get equally satisfied being in Dubai or UAE. In fact what benefits the vacationers, the same thing gives advantage to the investor as the investors put their Dubai apartments for rent; the temporary visitors rent those apartments at affordable rental charges.

In the same way, the investors put their properties for sale in Dubai and the visitors who visit Dubai with the intention to settle down, they certainly are interested in buying the properties for sale in Dubai. Sometimes, the short-term vacationers or visitors are so inspired by the environment and facilities of Dubai that they decide to make a permanent stay in Dubai, thus they have to buy properties for sale in Dubai at any cost. And the interesting thing is that it is impossible that a visitor does not get impressed by the beauty of Dubai and the available amenities of life.

Now it is quite clear that being in UAE fills up life with the immense feelings of joy and the sense of fulfillment of life. Another important reason to stay in Dubai or somewhere else in UAE is that there is no crime rate in the whole of UAE. And there is no fraudulent company or person can enter the UAE real estate market as the law deals with frauds and cheats with a heavy hand. So you can approach any UAE real estate service or Dubai real estate service with confidence to find Dubai apartments for rent or properties for sale in Dubai.

Off the back of dubizzle’s wildly successful International Market Investment pages, we have decided to vastly improve our up and coming Dubai Property for Sale section. We already have one of the largest online databases of fresh real estate for sale in Dubai with live feeds from Landmark, Better Homes, Taktical and Halcon and various new agencies starting the sign up process every week. With such a fantastic listing, however, we decided that a better search and design was desperately needed. People who are looking to invest in property in Dubai require a different type of listing than someone who is in the market for a couch, so we had to stray a bit from the basic dubizzle design. Instead, we instituted a listing in which real estate seekers can view photos and information about a property without committing to clicking on the listing. This makes the browsing experience much quicker and easier for the real estate investor. Furthermore, the search for real estate in Dubai is much different than that of a second hand refrigerator. Firstly, the turnover is much slower, and secondly the neighbourhood plays a much more crucial role. The trouble is, Dubai has 100s of neighbourhoods, they’re not clearly defined, hardly anyone knows their names, and new ones spring up every day. It’s confusing enough for someone who lives in Dubai, let alone someone who is looking to invest in property in Dubai from overseas. With consideration of all of these factors, we decided that we needed to devise a new clever yet simple property search . The solution was quite simple, we decided that we needed to break Dubai into a number of key areas where people search for housing in Dubai . All of Dubai’s no-name neighbourhoods would fall under one of these areas, as would any new property developments. From looking at our property search map you can see that we broke Dubai into 17 distinct areas: Palm Jebel Ali, Palm Jumeirah, The World, Palm Deira, Jebel Ali, Dubai Marina, Beach Communities, Bur Dubai, Freehold Suburbs South, Al Barsha, SZR Trade Centre, Garhoud, Qusais, Dubai Land, Dubai East, and Mirdiff. With the new property search, users are able to view this simplified map of Dubai and select in which neighbourhoods they would like to conduct their search. The new additions have been a welcomed change on Dubizzle as we have already seen our page-views on the Free zones in UAE for Sale pages double over the month of April.

Mumbai Extravaganza offered a unique platform for international real estate institutions as well as developers to launch and promote new products. Apart from high net worth individuals, the high life show also attracted professional advisors such as lawyers, bankers, brokers, top management and decision makers of Mumbai´s leading corporations, successful entrepreneurs and celebrities.

Mohamed Binbrek, CEO of Dubai Properties, said: “We were pleased with our presence at Mumbai Extravaganza. The event gave us an opportunity to present investors with instant information on the latest developments from Dubai Properties, as well as introduce our latest project launches to a new market.

“Indian nationals are amongst the top investors within the booming real estate market in Dubai. The geographical proximity of India makes it an increasingly attractive sector for property developers in the UAE to contemplate. India itself is an emerging and credible market that boasts many international conglomerates and high-net worth investors with whom we are keen to meet and conduct business with.”

In 2007, Indian Nationals spent AED 4 billion on real estate in Dubai, and over the past 10 years, Indian Nationals have spent a total of AED 6.5 Billion on the Dubai Real Estate sector. While the majority of these buyers were Indians living within the UAE, 10% of them were living in India or otherwise, proving the existence of a substantial demand for Dubai real estate from outside the UAE.*

Dubai Properties was presented in the luxury event by Shorex Ltd. the award-winning London-based wealth management event specialist.

For quality bargain properties please click here.It seems that when property buyers from all accross Northern Europe choose to buy a property in Spain, almost a quarter of them used to decide to buy in the Autonomous Region of Valencia.But that seems to have changed recently as foreigners are leaving the Valencian market in droves, according to a recent article on Levante-emv.com.  The article shows that new figures from the Valencian College of Notaries (a service one must use to transfer deeds) home sales to non-residents plummeted by 44% in 2009, whilst sales by foreigners leaving the Valencian region accended by 45%.  To surmise; last year there 4,291 foreign vendors, compared to 2,939 the year before and 5,631 foreign buyers compared to 10,040 the year before.  Remember that there are a lot of properties on the market that may not have sold so they wouldn’t have entered in the College of Notaries figures.  Spain as a whole dropped 21% last year.  This obviously affects the Valencian region more than any other and could in part be due to bad press concerning Valencian property laws where they can appropriate ones property or part of one’s property to build urbanisations or multi-dwellings.  Understandable that people are reticent to invest.This all bodes well for Marbella and Costa del Sol Properties where, although property sales have dropped in numbers, there is now a slow increase as foreign investors are purchasing bargain properties at hugely discounted rates.  We at PropertyPointMarbella think time to invest some money is now.For more information on bargain properties please visit: http://www.propertypointmarbella.com

With the property markets now under-going correction from their highs in 2006-2007 across most of the developed world, and savings rates at an all-time low, cash-rich investors are seeking returns on their capital like never before. Gone are the days of investments baked with the expectation of capital growth, investments now need to “stack up” in terms of cashflow from day 1. That’s not to say capital values are being ignored, far from it. Investors increasingly seek stable investments that provide a measurable and regular return. So markets should be in some sort of equilibrium in terms of supply versus demand, and capital values holding steady. In many ways then, conditions are back to normal in many respects for serious portfolio landlords.

So where are yield investors looking today? Working on the ProVenture team, we get to talk to yield investors every day from across the world and it is interesting to pick up on trends in their strategies. We hear about where investors have placed their hard-earned cash in the past, and where and why they are looking to invest in the coming years. Inevitably, many of the investors we speak to are focused on Germany as a place to invest for the coming years as this is our main area of operation as property consultants. But increasingly, we discuss investments in eastern Europe, other parts of western Europe and the USA as viable investment locations.

Let’s look at some different markets and find out what is drawing investors to them at this stage of the economic cycle.

USA

What an interesting market to look at, as we write this piece in August 2010. The USA is the home of raw capitalism, and this harsh approach applies to the property market in much the same way as the money and equity markets. Despite the assets in question being people’s homes and security, they seem exposed to harsh write-downs more than other countries, and this brings sorrow and hardship for those shielding loses and inevitable opportunities for investors.

Taking a historical perspective on the market, we see that the USA has typically had an average level of owner-occupation between 1960-1990 of around 60%. Home ownership was a realistic aspiration for many, but not an imperative like in other markets such as UK or Spain where owner-occupation rates have been as high as 85-90%. This led to, in most locations, a stable market to invest within and a ready supply of short to longer term tenants. The credit bubble of 1996-2006 changed all this.

During the period of low interest rates, sectors of the population who up until then could not aspire to home ownership at their stage of life, if at all, entered the market on “teaser” loans, affordable for the first few years of the loan but become crippling as the loan rates reverted to usual market rates or higher. This greed on lenders parts, and their shocking lack of due diligence into individual’s ability to pay, had a now famous global effect. Currently, 14% of the population are behind on mortgage payments or are in foreclosure. This is an average, and some markets have double this rate. That’s 9 million homes in trouble, double that are households sitting on negative-equity. So where are we now, and is the USA a place worthy of investment research? It is safe to say, the market is still largely bereft of confidence and sharp declines have been felt pretty much across the board. But are there areas that have suffered steeper declines than are justified?

Well, the USA is a huge market. Let’s focus on one city, Orlando [Florida] as a case study.

The Orlando region derives much of its economic power from tourism, business conventions, medial and hi-tech research and the “grey dollar” or those retiring to the warm climes from more northern states or from abroad. The property market has grown with the huge rise in population, up 30% in the last decade alone. Typical in this region have been gated developments and condominiums growing mainly to the south of the city and spreading at an alarming pace in the empty land. The city or downtown area is well-established with some property dating back 100 years or more, broken up only by the high-rise developments which seemed viable during the credit bubble.

Construction of property can be standard construction, or more rapidly built units from pre-fabrication section. Use of wood in structural elements is often seen.

During the credit binge, Orlando was front and centre, financing and constructing homes to service both the local and tourist market. Depending on location and subdivision, property soared 200-300% from 1995-2005, unheard of growth rates in this market which has no scarcity value and seemingly limitless land in which to develop. Commercial development went just as mad. Business plans for “strip malls”, small malls by the road side took off. Some areas of the city boast 10 Taco Bell franchised outlets in a 1km radius. All sectors of the property market, even in downtown locations, could be said to be very over supplied.

In terms of pricing, let’s look at the price history of a high-end 2-bedroom apartment in the downtown district using the excellent zillo.com tool:

The graph shows that such a unit was being sold off plan in excess of $400k, now priced around $200k [or even cheaper navigating the foreclosure route].

In terms of rental potential, the downtown area enjoys solid demand. Around $1800-2000 should be expected per month, bringing a healthly 12% or so yield.

Why would you buy this? Well, the current low capital value is compelling, as is the location of the unit in the downtown area which enjoys some degree of scarcity value. It is an interesting proposition.

Why wouldn’t you buy? Well, considering the lack of confidence in the marketplace, finance will be very difficult for the first few years of the hold. It should be best considered a cash purchase, so the power of leverage is not as easy here. Additionally, it really is not clear where capital values will go, but for a cash investor looking for a sustainable yield, this is a strong option.

The German Market

Over the last 10 years or so, property markets around the world have experienced rates of capital growth typically between 200-300%, fuelled by cheap and plentiful credit. There are few exceptions to this trend, one of them being Germany. Due to re-unification some 20 years ago, the property market in Germany, particularly in the old east, has been operating out of sync with other markets. Speculation by mainly western German buyers fuelled a boom which ended around 1996. As investors were chasing rents that were not achievable, the German market gave way and went into decline from around 1996 – 2001. This was the same time that most markets around the world experienced their greatest growth rates. Prices have stabilised in most areas from 2001 and shown some capital appreciation in certain areas, particularly the good locations in the bigger cities such as Munich, Hamburg, Frankfurt and Berlin.

Market Features:

The residential market differs considerably from other locations, with more robust tenant laws and longer typical residence times. Typically, a residential unit will be offered for letting totally unfurnished, without kitchen units, light fittings or even flooring. The incoming tenant will provide all their own furnishings and stay for a longer period, typically on average about 7 years. Tenants sign contracts of a defined period but are effectively on a lifetime lease thereafter, only needing to move out if they are not regular with their payments or the landlord (or close family) which to occupy the unit. Tenants must give 3 month’s notice to quit and will repair and decorate the unit to a good condition when vacating.

Finance for Nationals and international buyers is usually set around 60-80% loan to value. The level of finance depending on the client’s income and the rental value of the property. Typical interest rates are fixed for 5 or 10 years and around 1.3% above the Euro 5 or 10 year swap rate. So at present rates are around 3% for a 5 year fix and 3.8% for a 10 year fix.

Typical Prices:

Property, both commercial and residential tends to be priced per sqm and not by room or bedroom number. Therefore, investments can be easily compared by size, price and location. Residential property can be purchased either on a single basis or by purchasing a complete block of apartments. Purchasing a complete block tends to reduce the price per sqm paid. Some typical prices per sqm in the major cities, depending on size and location:

Locations to the east of Germany (Dresden, Leipzig, Chemnitz for example) have properties in a good refurbished condition from 500 Eur psm. Remarkable value and the most undervalues market in the world according to the OECD. Location in terms of sustainability of rent is crucial in these locations.

As an example apartment block, below is a unit in Leipzig with 19 apartments. The purchase price is 420k euro and a yield of around 12% net is achieved.

Typical Yields:

In the same way that property is marketed for sale, rental property is priced per sqm. The rental is often broken down in to “cold” and “warm” rent, with the cold rent being the income to the investor and the warm rent covering all bills including ground tax and routine property maintenance. Cold rents start at around 4 Eur psm in the very cheapest parts of cities to the east of Germany with cold rents in cities such as Munich reaching 12 Eur psm and above in many cases. Yields range between around 5% for single apartments in Munich, Frankfurt and Hamburg to around 10-12% when bought as a block in cities such as Dresden, Leipzig and Chemnitz. Berlin offers the complete range of yields and is a very diverse market.

Running Costs:

Costs during ownership are transparent and are comparatively low. The majority of deductions to run the property are taken from the “warm rent” or ancillary cost and should not be included in yield calculations. This includes basic building maintenance, communal area cleaning, buildings insurance and property tax. From the net rent, apart from unplanned maintenance, the cost of letting management is the primary deduction. There are a variety of fee structures for letting management including a flat fee per apartment or a percentage of the rent collected. Letting management typically costs between 5-10% of net rents, depending on area and fee structure chosen.

Positive Investment Aspects:

Negative Investment Aspects:

View on Market:

Very good yields, underpinned by strong legal system and high levels of finance. Capital values very low in comparison with anywhere in the developed world. Truly unfurnished property allows for significant holdings to be built up in a relatively “hands-off” manner.

Where Next??

In terms of property in Europe, beyond Germany, yield investors have very few options. Markets are either stable but producing yields in the 3-6% range, or falling in capital value and difficult to predict the floor. Markets across the Eurozone and UK have a few years to run you would say before re-entering the market for yield and stability in capital value. Places that have experienced huge capital falls, but stabilise well in the coming years [with increasing wages as a key index] should be kept in mind. The following locations could be worth noting in years to come, with capital falls experienced in last 3 years:

The diligence here should include analysis of finance availability, interest rates payable and currency stability. No good getting a 10% yield when the interest rate is 12%, or if the currency weakens significantly during the period of your hold.

Good luck in your hunt for yield.