INVESTMENT RETURN

Typically early entry into emerging markets offers the highest return on investment but, in many circumstances, this is also associated with different levels of risk.

It is therefore essential for the investor to understand the entire purchase procedure from start to finish, including exactly what funds are required and at what stage of the purchase, allowing for accurate cash flow analysis and maximum financial leverage.

Advisors can help with all aspects of your investment and recommend our professional financial partners to work with investors on strategy calculations. However we insist that every investor looks at an investment in detail and seeks advice where needed to ensure it is completely suited to their individual investor requirements. If a market is expected to offer continued growth, it is important that as an investor you understand what the "market drivers" are for this growth. Some common "Market Drivers"

Market Drivers

Location

This is always a major factor with any property investment. The location of an investment is directly linked to the return on investment an investor can expect from both capital growth and rental yields. We recommend that investors look at current property and rental prices in the direct and surrounding areas of any proposed investment to gain first hand knowledge of pricing and, where possible, they should personally visit the area.

Cost/Value

A property purchase is only an investment if it is purchased at the correct price, allowing for its value to appreciate and/or generate solid rental returns in proportion to its cost.

Economy

The economic condition of the country should be taken into account because a country or region that relies more heavily on tourism will be prepared to invest more into the infrastructure of the area to promote construction and tourism. The down side may be that too much planning consent may be allowed.

Nature of The Location

Needless to say that in the investment is primarily for summer holiday makers then the climate needs to be warm and sunny.If the investment is primarily for skiers then good prolonged snow fall is needed. Do not forget investments for businesses. Currently there are some emerging areas which have significant business attraction. E.g. Businesses looking to invest in an area by relocating production facilities due to lower labour costs etc. In these areas buy and hold strategies may be very rewarding.

Logistics

To be attractive the area must be easy to reach! Look out for new low cost airline routes, nearby airports, good road infrastructure.

Infrastructure

An excellent sign of an investment property hotspot is when there are considerable infrastructural improvements being made to an area. Generally this includes local attractions, services and amenities, but also, and often most importantly, additional airports, ports and roads, as well as secure signs of growth and firm commitment by a local government to help improve an area.

Natural Factors

These are often the most obvious "market drivers". Many locations base their bid to increase tourism and property demand on the fact that the area enjoys excellent weather conditions and can offer stunning beaches, tropical views or are positioned next to a mountain ranges offering quality skiing conditions. These factors are obviously very important, but it is essential that other "market drivers" are also considered in association with these as follow:

Tourism

Tourism is the primary factor that enables many emerging property investment locations to create a successful property market. With increasing low cost flight destinations and the world becoming effectively smaller, the door is open to many relatively unknown destinations that are beginning to offer new and exciting holiday destinations to tourists around the world. Today's tourist is after all willing to try new places after experiencing the same traditional locations for too many years.

Political Stability

With terrorism around the world on the increase and many political, religious and legal implications to consider it is essential that the stability of an investment location is considered prior to any investment. Political stability of a location can act as a very strong investment market driver.

The Financial Mechanisms for The Property Investor

Mortgages

When considering a medium or long term investment, mortgages are an extremely efficient mechanism for the completion of the purchase when the roperty has been finished.

In financial terms the process of borrowing funds to purchase property is often described as GEARING. When a property is highly geared this simply means that there is a large mortgage secured against the asset.

The Main Advantages in "Gearing" an Investment

• Allows financing when the investor does not have enough liquid funds.
• Avoids tying up significant cash into one investment therefore.
• Allowing further investments to be made simultaneously.
• It is easier on cashflow to fund the mortgage repayments than to fund the initial purchase price.
• The ability to take advantage of different interest rates in differing countries.
• The ability to take advantage of specific mortgage products to reduce risk such as interest only and fixed rates.
• Possibility of tax advantages depending on the country.
• Negates exchange rate risks and differences upon sale.
  

The Main Disadvantages for Gearing

• The investor must finance the mortgage repayments.
• Financing may not yet be available for non residents.
• The investor may need to demonstrate their ability to repay the loan.

When considering Mortgages and Gearing it is important to consider all the options available, that is to say that it may not be the best option to look for a mortgage in the country in which the investment is being purchased.For example if the interest rates are very high in that particular country and there is another property in another country with low interest rates, then logically it would be more advisable to borrow where the interest rates are lower. In this respect it is always advisable to speak with a professional finance consultant who has experience in the countries you are considering investing in.

Less Sophisticated Finance Market

In northern European countries such as the UK, Ireland, etc the financial market place can be described as sophisticated, with a stable political, economic and property environment allowing banks to be more adventurous and confident in their lending policies. Loans of 80% to 90% of the value of the property are available usually on an interest only basis as the lenders are aware that investors will use equity release for financing further investments but feel comfortable because their loan is secured against a stable asset.The key factor is the affordability of these loans. Set up costs can be very low and as the loan is on an interest only basis the monthly repayments are also as low as possible, making this form of funding truly accessible to the majority of home owners.For existing buy to let investors this allows rental income to cover the mortgage payments leaving a self funding asset appreciating each year until the equity is released.In addition there is a greater number of self certification and non status finance products allowing equity to be released easily and quickly.Please remember that your property is at risk if you fail to maintain the mortgage payments each month therefore consider the monthly repayment carefully.

Sophisticated Finance Market

In many emerging markets and even established markets such as Spain and Italy there is or has been a level of instability in the past which means that banks and lenders are more cautious in their lending policies often limiting the amount that may be borrowed or the purpose for which it may be borrowed. In the case of new emerging markets finance may not be available for non residents yet.Many investors have purchased property abroad over the past few years and have discovered the value over that time has increased significantly, potentially allowing equity to be released.This is ideal when considering the next investment, however please be aware that equity release is a product seen in more sophisticated financial markets as already mentioned, therefore you may not be able to release as much from the property or as easily as you would have hoped.It is important to obtain professional financial advice from an experienced mortgage of finance consultant to establish what is achievable.

Alternative Finance

Other than using mortgages for investment there are alternative methods of financing available to you, the other options to be considered are:

Cash

• Buy to let
• Company Purchases
• Shared Investments
• Pension Schemes
• Investment fund purchases
  

Cash

An obvious and simple way of financing an investment if the funds are available. In general terms however it is better not to use your own funds when someone else’'92s is available i.e. a bank. This is simply because by investing only a small amount into each investment and financing the remainder by debt then more investments can be made and therefore potentially greater return can be achieved.

Buy to let

A popular source of raising finance in many countries, this is the raising of finance through the rental income that will be generated. In other words the lender assesses the rental income achievable and lends an amount based on that rental income. Lenders will be conservative in their estimates so it is unlikely that 100% funding will be possible. In addition please bear in mind that many emerging markets do not have sophisticated financing products so this type of product may not be available.

Company Purchases

Some investors will have their own company and may consider using the company for the purchase of an investment. This can make a great deal of sense if set up correctly as an investment company, however the investments will all become commercial assets of the company and careful tax planning is required to ensure there is no double taxation incurred when trying to extract profits from the company. Those investors that have trading companies may legally use their company to invest in a property and this often appears attractive as the company may be able to raise funds more freely than the individual, but this does bring a great deal of tax issues that could affect the profitability of the trading element of the company and means the asset is at risk from the normal trading creditors, therefore it is not normally advisable to use this mechanism if an alternative is available.

Shared Investments

Quite simply this implies buying with a relative, friend or group of friends. This is often a good entry method into investing in property as it reduces the amount of cash investment required by each individual, making the opportunity more feasible to a greater number of people. When investing with others there may be disagreements and disputes therefore it is important to make an initial contract between all the investors detailing the amounts invested, the percentage returns each investor is eligible to and the mechanism of agreeing decisions. is an even number of investors which can lead to split decisions or when parties have invested different amounts.

Pension Schemes

Some pension rules allow for the investment in residential property abroad. Not all pension providers are likely to choose to allow such investments in their main fund so it may be necessary to seek out a specialist pension fund manager.Pension schemes are strictly controlled by law and taxation regulations, which differ between countries, however investing in a buy-to-let property through a pension can be attractive as there are often significant tax advantages regarding the contributions into the scheme, income generated from the investment and capital gains upon sal These are specialised investments therefore it is vital to take independent financial advice from a qualified advisor on the selection of appropriate investments.

Investment Fund Purchases

In basic terms these are individuals who come together under the umbrella of a financial advisor or fund manager to invest in real estate sector.

Equity Release

When considering financing the deposit and stage payments for an off plan purchase or the completion in an emerging country that is not offering mortgage facilities then equity release could be a viable option.Using the term in its broadest sense it is the release of the equity that is locked in an existing property either because it was originally purchased in cash or it has accumulated in value over time.

Although in some countries the term equity release may indicate a specific type of product the principle remains the same, i.e. releasing equity.

In a rising property market the latent value inherent in the property could be considerable and this makes it ideal to be released and utilized for the next investment.

Many successful investors have used this principle to build property portfolios over previous years.This is done by either a re-mortgage (because there is an existing mortgage in place) or a new mortgage (on a debt free property) then using the cash released to finance the new investment.

Equity Release Formula

Current value of property - current loan commitment = Accumulated equity

Case Study

• A property was purchased 10 years ago at a value of $100,000 with a mortgage of $60,000.
• Today the property is valued at $225,000 and the existing mortgage is now $50,000.
• Therefore the accumulated equity has become $225,000 - $50,000 = $175,000.

There is potentially $175,000 available to invest in another property or properties if creating a portfolio. This simply means investing in a number of properties rather than just one. They do not all need to be in the same development or even country so it allows the investor to spread the investments

Across different market places, thereby taking advantage of different growth rates and spreading the risk of those investments. In other words the investor is not relying solely on one development to be successful. Using the example above:

Case Study

Our investor releases 80% of the $175,000 equity available = $140,000 for further investment.

4 properties are identified :

• Properties A and B in Hurghada are priced at $125,000 each and require a deposit of $25,000 each
• Property C in Cape Verde is priced at $101,000 and requires a deposit of $20,200
• Property D in El Gouna is priced at $230,000 and requires a deposit of $57,500
• In total the investment is $581,000 but the initial cash paid is $127,700. The balance of funds is used to cover initial legal costs.
  Whilst the properties are being built the investor can choose to either hold on to all the properties and finance the balancing payments at completion by say a mortgage or put them up for sale and take advantage of a short term investment strategy.
• The profits gained by the sale or sales could be used for another investment opportunity or fund the completion of one of the other properties. When creating a portfolio of investments in this way it needs to be actively managed to ensure there is always sufficient cash to fund the next stage of the investment.

Investment Strategies

There are a great number of potential investment strategies available dependent on the property investors' objectives be it short, medium or long term, differing levels of complexity, as well as the investor's attitude to risk. This page provides information regarding the strategies available.

For illustrative purposes the two most common strategies are described below.

• Short term - (18 – 24 months (this is also known as a Flip strategy)
• Medium term - (3-5 years (also known as a buy to let strategy or buy and hold strategy)

It is important to be clear what the investment is trying to achieve AND by when it must be achieved. In this way it helps focus the investment decision. For example if the objective is to double the investment within 2 years then a flip strategy would be favoured. Provided the investment has been chosen wisely it is more likely to produce the expected return than a buy and hold strategy in the chosen time period. More experienced investors may start to look at portfolio investments across different areas or countries in order to spread the investment risk and achieve a more balanced return.

Short Term Investment Strategy

This strategy involves purchasing an off-plan unit i.e. a property that has either not commenced construction or is currently under construction and then selling the property prior to completion. In reality this is not a property purchase as the property has not been completed but is a purchase and sale of an option to purchase the property. A key factor is the time taken to identify the investment opportunity as this is critical to the strategy's success.

Key Opportunity

The opportunity to purchase a property at a low initial price or in the case of a new country at potentially an extremely low initial price before market forces lead to significant capital appreciation. Then sell the option whilst demand is increasing, taking advantage of normal supply and demand economics which means the price is increasing as more people want to buy.

Timescale

Typically the time period involved will be between 18 to 24 months, although this is dependent on factors such as the stage of construction of the development, the speed of construction for that particular country, etc... Level of Complexity This strategy is attractive to the investor because of its simplicity, the low initial investment typically 10% to 20% of the purchase price and some basic legal fees. The short payback period allows the investor to recover their cash relatively quickly for reinvestment in other developments. In addition the investor has not been left with a long term liability that needs to be serviced such as mortgage payments.

Key Risks

The critical element and therefore the highest risk element to the success of this strategy is the sale of the property prior to completion otherwise the investor will be forced to complete on the purchase with all its associated legal and financial consequences. The investor must be clear on the mechanisms available to resell the option, whether that be privately through an existing database of buyers, a private advertisement, a website or through more commercial means such as estate agents, website portals etc.

Return

This type of investment is a speculation of capital appreciation and therefore returns can fluctuate greatly dependent on how popular the country, the area and even the development becomes. A good investment based on an annual growth rate of 10% could lead to returns of in excess of 50%.

Case Study:

• An off plan investment is made at a purchase price of $150,000
• The deposit required is $30,000 with expected legal costs of $500.
• Completion is expected to be in 24 months.
• The area has shown a growth rate of 10% pa.
• The initial investment will be ($30,000+ $500) = $30,500.
• When the option is sold in say, 18 months (i.e. prior to actual completion) the price is ($150,000 * 10% growth) = $173,250.
• Therefore the gross profit is ($173,250 - $150,000) = $23,250.
• Gross Return $23,250/$30,500 = 76%

As the property is under construction and has not yet been completed, it therefore cannot be legally registered. It has still to pass all the relevant planning directives and licence requirements and as such does not provide adequate security for the lenders and therefore it is not possible to raise a mortgage upon it. The initial investment will have to be raised from the investor's own sources be it cash funds or by releasing equity from an existing property by way of a further advance or re-mortgage or alternatively bridging facilities may be available. Taxation rules are very different country to country, therefore specific expert advice should always be sought regarding the subject.

Medium Term Investment Strategy

This strategy involves the purchase of either an off-plan unit or resale property, completing on the purchase and holding onto the property for a period of typically 2 to 5 years although it could be longer, before ultimately selling. During this period the property is rented either on a holiday rental or long term rental basis in order to generate income. When considering this strategy it is important to be clear as to whether income generation or capital appreciation is the key objective and tailor your investment accordingly.

Although possible, it is extremely difficult to achieve a high return for both income generation and capital appreciation with the result often leading to average or below average returns. It is usually better to focus on one specific objective in order to maximise the return. Typically investors look for capital appreciation and use any rental income to negate the cost of financing and maintenance. Avoid emotional purchases as this type of strategy is a medium to long term investment which requires careful analysis of the returns and critically the investor needs to be able to afford the cost of maintaining and financing the investment.

Key Opportunity

The strategy is to either maximise the possible capital appreciation by holding the investment until market conditions change, i.e. sell at the highest possible price. Alternatively, maximise the income generated by the investment via rental means at perhaps the expense of capital appreciation. Additionally the property may be available for the investors own holidays!

Timescale

The time period for holding the property is typically 2 to 5 years in order to ensure there is sufficient capital growth to cover the initial purchase expenses, such as taxation, legal costs etc.

Level of Complexity

Fundamentally this is a normal property purchase therefore a very simple concept; however please bear in mind the need to maintain a second property in another country involves more management than a property close to home. There will be physical, economic and legal requirements to adhere to, ranging from basic maintenance of gardens, pools etc, rental administration, perhaps financing mortgage payments, community charges, annual legal returns and taxes.

Key Risks

Depending on whether income generation or capital appreciation is chosen one of the two key factors is the identification of a property which will be attractive for that particular strategy.

For example if the rental strategy is chosen then the type of property will determine the type of tenant. One bedroom apartments will appeal to younger singles or couples, should be located near to lively nightlife locations, bars, nightclubs etc. The rental for this type of property will be lower than a three bedroom property attracting families but they require different facilities such a proximity to beaches, supermarkets, children's amusements etc. Also the type of tenant will become a factor when considering the quality of furnishings to be purchased and importantly the condition the property is left in following a rental. The location of the property is always important as it will determine the amount of rent achievable and the level of capital appreciation achievable, however please remember that the initial price of the property will also reflect this.
Secondly is to continually monitor the market to ensure that when the property is sold it does not happen during a market downturn such as a change from a sellers market to a buyers market, which would of course reduce the sale price. Please bear in mind this is more difficult to achieve when the investment is in a different country.

Return

In holding a property for a longer period it is possible to achieve more significant returns as the example below demonstrates. This of course assumes that the market growth rate remains constant. In the example below capital appreciation is the objective therefore the rental income is designed to cover the annual finance and maintenance costs. Please see the example below.

• An off plan investment is made at a purchase price of $200,000 with completion in 24 months.
• The deposit required is $40,000 with expected legal costs and taxes of $24,000. A mortgage can be arranged for 80% i.e. $160,000. The total cash investment is ($40,000 + $24,000) = $64,000
• The area has shown a growth rate of 10% pa. Rental income is expected to cover at least the mortgage expense and annual maintenance costs When the property is sold in 4 years after completion i.e. 6 years after the initial contract to purchase, the price is ($200,000 * 10% growth * 6 years) = $354,312.
• Therefore the gross profit is ($354,312 - $200,000) = $154,312.
  Gross Return $154,312 / $64,000 = 141%

Financing

The investor must be prepared to finance the balance of the purchase either via their own cash resources or more commonly and more sensibly via a mortgage. Please be aware that some countries may not have an established mortgage market for non residents at the time of the initial off plan contract, although they may be expected to be offering mortgages to non-residents by the time the property is completed.

With this possibility in mind it is wise to be prepared to have to finance the balance of the purchase through other means, perhaps via an equity release or re-mortgage on an existing property in a different country.

The rental opportunity is highly dependent on location and may be seasonal in nature leading to high rental yields during the summer months and little or no rental during the winter months.

Some developments offer guaranteed rental schemes that alleviate this problem and more importantly remove the worry of finding tenants in the first place. If no guaranteed rental scheme exists there are specialist rental companies that will contract to rent suitable properties for at least 6 months of the year.

International Property Market Report 2007

Where did the British people buy in 2007?

Despite some people doubting its future in the international property market and some negative press coverage, unfair at times, Spain has yet again come out on top as the number 1 destination for British people buying property abroad in 2007, according to annual research conducted by the Association of International Property Professionals (AIPP).

25.4% of properties purchased overseas by British buyers in 2007 were in Spain. Further proving the enduring attraction of the established names, France was again the second most popular country, taking 17% of the market. When you add in the 3rd most popular, the USA, at 9.7%, it is clear that once again the established destinations are holding up well against the huge number of emerging markets (these 3 alone taking 52.1% of the market).

‘This is such an interesting time in our market,’ said Paul Owen, Chief Executive of the AIPP. ‘We have Members across 26 countries and they are selling in approximately 45-50 countries. The choice available to the buyers is vast but big markets, even fast-changing ones like this, are relatively slow to make enormous shifts. When we add in other established markets like Italy, Portugal and Cyprus, nearly 2/3rds of property purchases last year were in established, familiar markets.’

The sands of time are ever-changing though and the rise of new markets does threaten the status quo. Bulgaria has almost been the sole significant trailblazer as far as the concept of new markets becoming established is concerned. 6% of purchases by British buyers were in Bulgaria last year according to this research.

‘Bulgaria had almost a free ride as the ‘emerging market’ for 2-3 years,’ continued Owen. ‘It certainly made the most of it as it quickly grew market share. What is interesting in the figures for 2007 is that it has held up pretty well in the face of so many new entrants in the ‘emerging market’ category.’

The figures collated by the AIPP are for completed property transactions, not for deposits paid. Does this make them out of date?

‘We have said from the beginning that we will publish figures that can be verified,’ explained Owen. ‘The only true indicator of purchases is the number of completions; it is at this time that owners take the deeds to the property. Our job is not to predict but to report on the market and reflect on it.’

The rest of the top 10 destinations for British buyers is a combination of new and established markets. The most noticeable new name is Morocco (in 5th place) with 4.9% of the market, very slightly ahead of Dubai at 4.8% (in 6th place). The final emerging market (in 10th place) is Turkey with 2% of market share.

Sandwiched between these new names and taking places 7 – 9 in the top 10 are Italy (3.7% of market), Portugal (3.6%) and Cyprus (2.9%), all three showing an increase in market share from 2006.


How does 2007 compare to 2006?

‘With over 53,000 actual purchases in our survey, we’d expect the figures on the market share of each country to be accurate as well as the average spend on overseas property,’ said Owen. ‘What is devilishly difficult to estimate is the total number of purchases and, thus, the total amount of money spent by Brits on overseas property. However, the size of our survey and our knowledge of the market give us 2 very good indicators.’

Both Spain and France are down as regards year on year market share despite holding on to the top two spots: Spain had 31.6% of the market in 2006 (down 6.2% in 07) and France 18.9% (down 1.9% this year). Bulgaria is also a little down (7.7% of market 06 compared to 6% 07).

On the rise for market share is the USA (up by 2.2% to 9.7%), as well as all other top 10 countries for whom year on year figures are available: Dubai up to 4.8% from 1.5%; Italy up to 3.7% from 2.8%; Portugal up to 3.6% from 2.6%; and Cyprus up to 2.9% from 2.5%.
Size of the market
The average spend by British buyers on an overseas property in 2007 was £99,200, according to the AIPP research, up just 1% on the average spend in 2006 (£98,166).

‘We suspect that the wealth of destinations, many in ‘new’ markets with low entry prices, is keeping the average spend at a consistent level,’ explained Owen. ‘The figures show that around 30-35% of the money spent on overseas property is in emerging markets and the prices in many of these destinations, as an average, are lower than the established markets.’

As for the total size of the market in 2007, the AIPP estimates that there were approximately 242,000 completed purchases of overseas property in 2007 by British buyers, up 21% on 2006. With an average spend of £99,200, this means that £24 billion was spent in the market last year by British buyers.

‘Like all respectable attempts to calculate market size, we look elsewhere to corroborate our figures,’ Owen added. ‘Unfortunately, there are not many reliable, up-to-date sources. Each time we realise that, it provides the Association and our Members with another reminder of the market need for our research.’

The Office of National Statistics (ONS) reports that 207,000 Britons left the country in 2006. Unfortunately, more recent data is not yet available.

The AIPP did take these figures as some guidance, albeit qualified. Owen explained, ‘Despite the fact that the ONS figures are, by their very nature, provided retrospectively, they can still inform our research. Our figures showed in 2006, for example, that British people purchased 200,000 properties overseas in 2006 (the same year as the ONS figures quoted above). It is reasonable to conclude that the ONS figures support our figures.’

With 207,000 Britons moving overseas in 2006, many of those taking their retirement overseas rather their children, it is expected that between 60,000 and 70,000 properties overseas would be needed to house them all. Taking into account the many thousands of holiday homes and the ever-growing market of ‘investment’ properties overseas, 200,000 properties purchased overseas by British buyers in 2006 is probably, as the AIPP said at the time, on the conservative side.

The veracity of AIPP’s 2007 figures may be confirmed by ONS figures in the future though the data assessed by the AIPP differs considerably and the two are not necessarily inextricably linked.

‘Whilst we recognize the difficulty of correctly assessing the size of this market, there are few, if any, more reliable sources than the AIPP,’ concluded Owen. ‘We would expect other data, released retrospectively like the ONS, to support our research.’

Regular, reliable, independent reports
When AIPP was first set up in early 2006, there was a report on the international property market in the national press. The sources (all claiming to be definitive) gave figures ranging from 250,000 to two million overseas properties owned by British people. It was a very clear indication of a market in need of balance, independence and authority.

In a market devoid of authority or independence, the AIPP’s figures will become definitive and provide official market data that is long overdue.

‘The market needs factual data. The AIPP will not do predictions, conjecture, up and coming hotspots etc. Our figures will reflect what has happened each year and we will leave the crystal ball to others.

‘Previously, there has not been an official body with the time, knowledge and desire to produce the information; the AIPP fills that void,’ concluded Mr Owen.