Keeping an Open Mind on Overseas Property – Part 2

In the first part of this article, we considered a European league table of buy-to-let yields, published in May 2016 by the international currency firm, World First. It revealed an interesting pattern in which many of the EU’s strongest economies – including France, Germany and Britain – appeared towards the bottom of the table, whereas some of Europe’s more volatile economies were listed near the top.

One reason for this is likely to be the comparatively high price of property in some of the stronger economies. Higher property prices make high yields difficult to achieve, whereas yields tend to look much healthier when the initial investment costs are low.

However, property prices may sometimes be depressed for a reason. An ailing economy will certainly tend to have a deflationary influence, and political uncertainty can sometimes have the same effect. Consequently, a league table of yields can, on its own, give a misleading impression of where the best deals are to be found. The challenge facing the property investor, of course, is to see past the headline figures and focus on the detail.

When the Chancellor George Osborne announced that he was going to raise Stamp Duty by 3% on the purchase of second homes or buy-to-let properties, many investors were prompted to look at the financial details very closely indeed. After a number of years during which property investment felt like a very safe bet, they were suddenly required to do some careful maths to ensure that new acquisitions could still be made profitable.

Many simply opted to buy sooner, promoting a flurry of new purchases that set all sorts of monthly records in March 2016. Others – particularly those at the lower quality/lower margin end of the spectrum – considered this a blow to their confidence and began to talk about selling out. Others still – including those who owned some investment property but had no intention of expanding – decided that margins could be maintained and that any future cost increases could be passed on in the form of higher rents.

However, another very significant group saw the tax rise as an incentive to consider new purchases overseas.  According to the estate agent, nearly a quarter (23%) of all UK property investors are now actively considering acquisitions outside the UK. The three most popular destinations were listed as France (23%), Spain (18%) and Italy (11%).

Those choices might seem to be at odds with World First’s league table of buy-to-let yields, in which France appeared in 28th place (second from bottom) and Italy managed only one place above. Spain did rather better – appearing in mid table at 15th place – but on paper, none of the three would look to be natural picks.

To reconcile this seeming contradiction we must recall one of the most important facts of property investment, which is that national averages count for almost nothing. The success of buy-to-let investments depends entirely on the performance of specific properties – real bricks and mortar buildings on real streets in real neighbourhoods. Here in Britain, we all know very well that a property in central London will deliver a very different yield to one in Humberside or the East Midlands. Prices differ; monthly rentals differ; local rental demand will differ. The likely differences are obvious, and that’s the point: focusing research right down to the most local level is as important for overseas investments as it is when making purchases in Britain.

Spain, for example, is a country that has seen enormous disparity between its local property markets. In some over-developed towns and resorts, a huge oversupply of new property led to plummeting prices and stalled construction projects. A few years ago, it was a headline-making disaster. However, at precisely the same time, canny investors were still regarding certain up-market opportunities with real enthusiasm. A glut of cheap hotel rooms represented no competition for the luxury property market and so prices were more resilient. True, a general loss of national confidence suppressed price growth to some extent but today, those who bought high quality properties at affordable prices will now be feeling exceptionally pleased with their investment.

Spain is the second most popular tourist destination in the world, and with a strongly recovering economy, it is seeing its tourist industry thrive. The years 2013, 2014 and 2015 all set new Spanish records for visitor numbers – and the trend shows every sign of increasing. In 2015, tourist visits exceeded 68 million – a rise of nearly 5% on the previous record-breaking year.

However, this is merely an illustration. The point is that headline figures and national averages are almost invariably misleading. A country can be faring very poorly – it can sometimes even be in the midst of a deep recession – and yet, at the very local level, careful scrutiny can still reveal outstanding investment opportunities. What is needed is diligent research and an excellent understanding of all the legal, contractual and financial mechanisms that will determine whether an investment can be made secure, profitable and reliable. Invariably, that means seeking expert help – either directly from a number of specialists, or through an experienced property investment house that can perform all the necessary checks and investigations on your behalf.

The detail matters and before committing to a property investment, it makes sense to seek the best information you possibly can.

If you’d like to consider a property investment, whether in the UK or overseas, please get in touch with a Solomon adviser.