Keeping an Open Mind on Overseas Property – Part 1

Many British investors naturally favour the UK market when it comes to deciding on a buy-to-let purchase. After all, they are more likely to be familiar with the prevailing market conditions and they will probably have a better understanding of all the various laws and taxes that apply.

It’s an understandable leaning but for serious investors looking for the hardest-working properties, it’s important to keep an open mind. Too tight a focus on British property can leave landlords blinkered to better opportunities elsewhere.

To illustrate the point, let’s consider a report published on May the 16th by the international currency firm, World First. It conducted research across Europe to determine the countries which, on average, deliver the best and worst returns on buy-to-let investment. It found that average yields in the UK were 4.28%, which leaves it in 21st place amongst a field of 29. That’s a very modest result that puts Britain well below economies such as Ireland, Denmark and Portugal.

An interesting feature of the table of results is that many of the stronger economies – the UK’s included – tend to appear lower down the rankings. Germany was placed 22nd, Austria at 25th, and Sweden bottom of the table at number 29. By contrast, the top 10 included countries such as Bulgaria, Hungary and Turkey – economies that have not exactly been noted for their stability in recent years.

However, the reasons for this apparent inversion are hardly a mystery. Remember that what we are measuring here is yield, which, in simple terms, equates to the rental income that a property delivers, divided by the cost of the investment. In other words, yields will very often be higher in markets where property prices are low.

At the top of the table, for example, is the Netherlands, where investors can expect an average rental yield of 6.57%. That impressive figure is largely due to its comparatively low house prices. World First explains this with some useful numbers. It notes that in the Netherlands: “the average one bedroom apartment costs just over £110,000 and a three bedroom house costs around £211,000. In the UK, the average price of a one-bedroom apartment is £179,000 and a three-bedroom house is £343,000.”

This highlights a constant challenge for property investors who are looking to build their portfolios. Capital appreciation is a great way of building wealth and long term value, but the more that prices rise, the more expensive it becomes to expand one’s portfolio and the harder it is to achieve a high yield.

In any event, it is worth noting that yield and the prospects for capital growth are not the only criteria by which an opportunity should be judged. The sustainability of local rental demand is also crucial, as is the reliability of the market as a whole. At Solomon, we always make strenuous efforts to emphasise that property investment must be regarded as a long term business, so the stability of any market should always be high amongst a would-be investor’s concerns. In volatile economies and at times of political unrest, some overseas markets can become dangerously unpredictable; hastily introduced tax changes or new legislation can severely damage profitability and leave investors in a very difficult position.

Striking a balance is therefore important. On the one hand, investors will ideally be looking for low purchase costs, good yields, dependable demand and credible prospects for capital growth. On the other, they will normally favour countries that are economically strong and politically stable. Unfortunately, these don’t always go hand in hand. In stronger economies property prices are often higher, so the investor is left to weigh his or her priorities and make a judgement accordingly.

In part 2 of this article, we will look at some overseas buy-to-let markets that do seem to offer a healthy balance, and the reasons why British investors are becoming increasingly interested in them.