International Buy-to-let market attracting huge investor interest

We have seen an unprecedented level of demand recently from property investors seeking value in markets across the world from Florida (one of the most popular) to Thailand, Brazil and many European cities such as Berlin and Prague.  I thought I would, therefore, examine some of the background to this market shift at a time when one might have expected everyone to be battening down the hatches.  

Investors in buy-to-let property have become a major feature of the UK economy over the past couple of decades.  Rising house prices in the UK and increasing demand for rented accommodation have underpinned this rise in the sector and now those same investors are hunting ever farther afield for quality property to generate income.

The UK stock market is more than 20% down this year, mortgages are harder to find than rocking-horse droppings and over 90% of estate agents across the country are reporting house prices declining rather than rising.  In such conditions it is hardly a surprise to find investors are looking beyond the shores of the UK for their next buy-to-let property investments.

A recent report by Professor Michael Ball at the Henley Management Centre (The Modern UK Housing Market – Origins and Prospects) points out that the private rented sector in the UK is already the largest investment class at over £500bn – much larger than the privately owned commercial property sector.  If one were to add in the substantial levels of finance that buy-to-let property investors have ploughed into markets overseas this sum would most likely exceed £600bn – and it is still growing at a pace not seen in the domestic market.

The fundamental cause of the hike in demand for good rented accommodation both at home and abroad is that rising affluence is being crushed against static housing supply as standards of living double every 25 years, provoking more demands for space and privacy, the report claims.  There appears to be no reason to expect this situation to change materially in the near future meaning that the demand for high quality rented accommodation wherever people wish to live, work or holiday will continue to grow.  Rents will also grow as they have in the past at rates far above inflation.  To some extent this has been masked by the tendency to measure yields rather than absolute rental income levels – buy-to-let property yields have fallen back largely due to the increases in housing values which have far outstripped the rises in rents.

So where to invest?

Well, the US currently represents outstanding value with prices at their lowest levels for many years and the dollar exchange rate also at a historical low.  For as little as £60,000 it is possible to buy a substantial Florida family house in parts of Florida although the seasoned investor will quickly appreciate that such low value generally means the ability to generate worthwhile rental income from the house will be constrained.  Nevertheless, relatively modest sums in the context of UK house prices can buy extremely attractive homes to let or prestigious beachside condos – ideal for holiday letting.

Thailand is becoming increasingly sought after by investors.  The country is rapidly emerging as a business hub for the booming Southeast Asian region and as a leading player in the fast-growing retirement and second home market. Thailand’s unique, gracious, culture, world-class infrastructure and health care, renowned cuisine and spectacular tropical landscape have proven irresistible to legions of the prosperous middle aged baby boomers seeking affordable luxury for their retirement and semiretirement years.

With the country restored to democratic rule after elections in 2007, the temporary slump in property values seen after the coup in 2006 is looking more and more like a fortuitous entry point for alert investors: the new government is moving rapidly to adopt a pro-business stance and restore investor confidence, and demand for property is already accelerating. We expect to see further acceleration and rapid appreciation in both property values and rental demand for select Thai properties in the next 3-5 years.

Brazil cannot be ignored since it is one of the fastest growing economies in the world at present and yet remarkably good value in rental real estate terms – a beachfront property can be snapped up from as little as £50,000 and land is being bought in bulk by savvy investors the world over.  The country’s enduring popularity with US and Portuguese holidaymakers supports a long term rental market that has too little available accommodation at present.  

If Europe still feels somehow more familiar and hence “safer” then look at buy-to-let rental properties in Berlin or Prague – frequently these can be bought with sitting tenants already providing a secure and predictable revenue stream.  Berlin is one of the most visited cities in Europe and is experiencing quite dramatic growth following the relocation of Germany’s government and central administration from Bonn.

The UK rental market is far from dead but I would be saying to any investor at the moment that spreading your risk across different economies and into places where the fundamentals are driven by different economic factors would make sense – Asia and South America, for example, are less susceptible to the Anglo-Saxon world’s ups and downs.