The economic outlook for many parts of the world including the US and large parts of Western Europe has deteriorated markedly since the middle of 2007. The sub-prime loans crisis exported across the western hemisphere by our friends in the US has given us all cause to hold our breath a little and consider what we should be looking to do next.
Should we hang onto cash? Invest in platinum and gold? Or just be more judicious in where we invest?
There are plenty of opportunities at times like these
For those who haven’t given up entirely and retired to some cave in the wilderness these are the times when shrewd investors make their best gains. Bargaining and haggling becomes much more acceptable, cash is king and supply massively outstrips demand, pushing prices lower and making deals so much easier to come by.
So where should you be looking if it’s property investment that you’re after?
It may seem obvious to say that the US is off-limits for the time being but it is worth emphasising that the signs are very poor and likely to remain so for some time. House prices there have plummeted and show no signs of improving with stocks of unsold houses remaining well above levels seen in the past 10+ years.
The Federal Reserve may have loosened interest rates with 300 basis points shaved from its rate in recent months but this has not fed through to the corporate and consumer lending markets where spreads have widened considerably to take up the slack.
The implications from all this are that the worst is not yet quite over and price falls could continue for much of this year. Soon, though, property bargains in places like Florida will start to emerge as they have already– delinquency rates in all types of mortgages have grown in the past six months, the only exception being, unsurprisingly, the fixed rate mortgages in the prime sector.
Latin America and the Caribbean look sexy
The first thing one notices on reviewing the countries in South America is how shielded they have been from the problems besetting their northern neighbour. The banks here generally have strong balance sheets after years of healthy internally generated profits and their exposure to the sub-prime lending crisis is minimal. Interest rates here are still higher than in many other countries (Brazil for instance enjoys interest rates of around 12%) but their stability throughout the past 12 months is testimony to the robustness of the local economy.
High yield spreads (the difference between the government rate and the high yield bond rate) in the US have risen 5 times as much as the equivalent spreads in Latin America.
As commodity prices have risen – especially oil which Brazil now has in abundance – so wealth and domestic demand have increased. Almost all economies in the region are showing deteriorating balance of trade positions but in the main this is being offset by increased inward investment. This strong inward investment is anticipated to continue into 2009 and beyond:
The region is growing fast – 5.6% last year alone – and will continue to grow further in the coming years. The only real cloud on the horizon is the likely reduction in tourism from the US but as many of the countries in the region are fairly self-sufficient with the majority of the growth coming from natural resource exploitation and domestic demand this drop in tourism is unlikely to have a major impact.
For those looking for good places to invest in property the Latin American countries offer the prospect of rapidly increasing demand for housing pushing prices up from their very low levels at the moment. A beachside apartment on the north Brazilian coast can still be bought for as little as $50,000. Look at countries like Costa Rica, which has seen property price inflation of 400%+ in recent years, or Nicaragua, Panama and Paraguay and the opportunities become obvious. These places, long the back waters of the world, almost 3rd world in parts, are rapidly growing to rival many western economies.
The Caribbean offers exciting scenarios
In truth, the Caribbean is a huge and diverse area covering more of the world than all of Europe and incorporating many different languages, cultures and economic territories. However, within its confines there are plenty of exciting areas for the property investor and new ones coming on stream all the time.
Despite the news of hurricanes much of the area is outside the hurricane zone and benefits from outstanding climate and spectacular natural scenery. Economically, too, the region is booming with growth of 4.75% in the period 2006-2007 and forecast growth rates of 4% going forward. Not all the figures paint a rosy picture – budget deficits are high and the region is more dependant than South America on tourism. However, the consensus view is for a robust performance in the near future.
Like its Latin American neighbours the Caribbean banking system has studiously avoided embroiling itself in the sub-prime problems and is well-positioned to ride the global turbulence. Prices for property in the Caribbean remain highly affordable and the local banks are actively supporting foreign investment with competitive Loan-to-Value ratios on mortgages.
Europe continues to grow and with it so do the options for property investors
Within Europe it would be fair to say that the traditional areas of Spain, France, Portugal and Italy are probably going to experience lower economic and therefore property growth in the next few years. The exception within this group may well be Portugal outside the Algarve (on, say, the Silver Coast) where property price inflation has lagged most of the rest of Europe recently.
However, the continued expansion of the EU opens up new territories for investors each passing year, it seems. And the economic indicators show the reasons for this:
In aggregate the emerging EU countries are expected to grow 4 times as fast as the established ones in the next two years – a key factor in any analysis of where property prices are most likely to rise faster. Already, since 2000, countries such as Poland have seen quite significant increases in property values and the trend more recently in Polish nationals who have moved abroad to work now returning home to live is only going to fuel such price rises further.
Prices in some of the established European economies – most notably the UK and Ireland – look high when measures such as the ratio of prices to income or prices to rents are examined. Many of the traditional measures used to value real estate are quite a bit higher than their long-run averages. This is less the case in most Eastern European countries and many show plenty of scope for upward revaluations in the coming years.
That said, even these economies do not stand sheltered from the global credit storm emanating from the US and confidence indicators, in particular, suggest the coming 12-24 months will prove tougher than the past few years.
To what extent the global credit squeeze will be felt in these emerging European lands and lead to slower house price growth is still uncertain as the reactions of local banks is not yet fully understood. To quote the International Monetary Fund:
“The foreign banks with the greatest involvement in emerging Europe have little (known) direct exposure to U.S. subprime mortgages; however, the heavy reliance of some of them on interbank loans for financing increases the risks of indirect contagion.”
The effect of credit availability and the effect of its withdrawal on house prices should not be underestimated as illustrated by the graph below:
Bargain hunting in established areas
Times such as these will generate opportunities much closer to home and sales of distressed properties (actually, in most cases it’s their owners who are distressed rather than the properties!) are already manifesting themselves in the expected places – the US, UK and Spain. It will not be too long before this cancer spreads to France, Italy and elsewhere. After all, the driver has little to do with local market factors in these cases and more to do with the plight of the owner who may well be based in one of the less benign economies and suffering problems at home.
These represent real opportunities for investors as the prices of such properties are frequently severely discounted. But beware – such transactions can sometimes be much more protracted than might be imagined and only the experienced or well-advised should enter this arena. It is not the place for uninitiated. In most cases the optimal mechanism for making such investments is through a pooled investment scheme run by a reputable and experienced firm or individual.
What about the rest?
Clearly, an article such as this cannot give an exhaustive run-down of the areas where investing in property can make you richer and places such as the United Arab Emirates, Malaysia, Morocco and Cyprus bear some analysis. The key is to focus on the facts not sentiment – there is no correlation between racehorses with nice sounding names and those that win!
The main factors to bear in mind remain:
• Benign economies – high and sustainable growth, manageable inflation and sovereign debt levels and good employment prospects;
• Benign regimes – encouraging inward investment and providing the environment for investors;
• Good travel links – pay particular attention to where the low-cost airlines are headed;
• Climate – although good returns can be made even without tropical weather patterns. Berlin, for example, is a City resurgent after decades of languishing in the shadow of communism and offers some attractive opportunities to the long-term investor.
