Hunting for property bargains in the eurozone
Despite record high prices, property remains a British obsession. We’d be wiser shopping on the continent, says Matthew Partridge. here, he picks some of the best places to buy.
Despite hitting record high prices, property remains a British obsession.We'd be wiser shopping on the continent, says Matthew Partridge.
The past few years have been great for property owners in the UK, with house prices surpassing pre-recession peaks. London prices rose by up to 20% (depending on the index you use) in the first nine months of 2014 alone.
As well as the capital gains, rental income has also made property attractive to investors in an era of rock-bottom interest rates. So it's no surprise that a survey in March by Lloyds revealed that property is still Britain's most-loved asset class, with a 43-point gap between those who think prices will rise and those who think they will fall.
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But property has been a victim of its own success. Sky-high prices have made large swathes of London, including once-unfashionable parts, unaffordable for buyers. Some sort of correction seems imminent, if not underway.
The latest forecast from the Centre for Economics and Business Research think tank (not known for being especially bearish) suggests prices in the capital will fall by 3.6%. Prices in up-market areas, such as Kensington and Chelsea, have already dropped. For those still eager to invest in "bricks and mortar", one obvious option is to buy in a less expensive part of the UK.
However, while London property is more expensive in absolute terms, there are now many areas where affordability is nearly as stretched as in London. One recent study found that, while the average property in Greater London goes for 8.75 times gross annual average local earnings, properties in cities such as Winchester and Oxford are going for over ten times.
While this gap between earning and prices is exceptional and we are increasingly tempted to look more closely at areas likely to benefit from the government's desire to boost regional power the UK as a whole regularly tops tables of the world's most expensive property.
Cheap houses in a recovery economy
But you don't need to go far to find much more affordable property there are plenty of bargains in the eurozone. While the Bank of England and the UK government have thrown billions at our housing market, via interest-rate cuts and schemes such as Help to Buy, eurozone property markets haven't until very recently benefited from such an accommodating central bank, while governments in many areas are too broke to subsidise collapsing property markets.
According to The Economist, properties in Greece and Germany offer rental yields that are currently above the historic average, while Italy and Ireland's are roughly in line with their long-term trend. This is amazing, given that eurozone interest rates are currently far below the long-term average. Even though France and Spain aren't quite as good for landlords based on this measure, they are still both less overvalued than the UK.
There's another factor not directly related to house prices that has made eurozone property a lot more attractive to foreign investors. That's the sliding euro. Until a few months ago, German concerns about inflation had kept the European Central Bank (ECB) from trying to stimulate the eurozone economy via quantitative easing (QE).
This kept the euro strong, despite slow economic growth. But in January ECB boss Mario Draghi finally announced that the ECB would buy up more than €1trn-worth of bonds in the region with newly minted money. As a result, the euro has slid against sterling this year, meaning your pound goes a lot further.
Meanwhile, there are tentative signs of a recovery. While some countries are still suffering Greece in particular looks grim France surprised expectations by growing at a quarterly rate of 0.6% in the first three months of this year (equivalent to yearly growth of 2.4%). And Spain did even better, growing at 0.9% in the first three months of the year alone. Even Italy grew at 0.3%, the same rate as the UK. In all, Capital Economics expects the eurozone to grow by 1.5%, a big improvement from last year's 0.9%.
Where to buy
Of course, each eurozone country has its own unique property market, some more attractive to investors than others. Perhaps the easiest market for British investors to understand is Ireland's, given the common language, similar legal systems and geographical proximity.
It also has the most dramatic backstory, with a construction and house-price boom in the decade leading up to 2007 followed by a spectacular collapse, which left empty housing estates scattered through the Irish countryside and saw prices fall by 50% inside just two years.
Yet in the past two years there has been a definite recovery, with prices rising by around 20%, with Dublin the focus of the biggest gains. This has led to fears that another bubble is inflating. However, this is overly pessimistic. The recovery has been underpinned by strong growth and a substantial drop in unemployment. Real (after-inflation) Irish GDP grew by an incredible 4.8% last year, and is expected to grow by 3.5% both this year and next.
And despite the recent jump in prices, they are still 40% down from the peak eight years ago. In fact, real house prices are actually still lower than where they were 15 years ago. It's also worth noting that in Northern Ireland while obviously not part of the eurozone prices are still far more influenced by those in Ireland than in the UK, and remain 45% below 2007.
The complete opposite of Ireland's boom-bust-recovery story is Germany. The economic problems associated with reunification in the 1990s, alongside a culture of renting, meant that until very recently house prices in Germany had stagnated.
Another factor restricting growth was that the creation of the euro saw investors move their money out of Germany and into riskier countries, like Greece, that could deliver higher yields (for what they believed would end up being the same level of risk so much for that theory). This drove up interest rates, and so increased borrowing costs, for German consumers. As a result, strip out inflation, and German house prices haven't moved in 25 years.
However, this is changing. That's partly because prolonged price stagnation has discouraged developers from building more houses. In turn, this has led to a property shortage in many German cities. Meanwhile, demand is being stoked by the fact that Germany's population continues to grow, partly fuelled by immigration from the rest of the European Union and Turkey. German consumers are also increasingly taking advantage of low interest rates to take out mortgages, instead of renting.
While the ECB's monetary policy may be suitable, or even too tight for economies in crisis such as Greece, it's arguably far too loose for the relatively healthy German economy and a property boom is the near-inevitable outcome.
Berlin is one of the cities seeing the biggest impact, partly because prices are still lower than in other German cities, even though they have already risen by 40% since 2007. PricewaterhouseCoopers notes that these relatively low prices have caught the attention of foreign investors.
As a result it is enjoying a mini-boom, with €2.9bn of property deals taking place in the first nine months of last year, and prices rising by nearly 8%. However, the boom is not limited to a few cities. Prices for Germany as a whole have risen by around 20% over the past four years, something that looks set to continue.
The final property market that looks attractive although perhaps the most risky of the three is Spain. Like Ireland, it was hit hard by the 2007 crash, with prices falling by a third after inflation is taken into account. However, there is plenty of evidence that things are bottoming out. Sales are starting to rise, while many foreign investors have been sniffing out bargains.
These include the "Sage of Omaha" himself, with Warren Buffett's Berkshire Hathaway setting up a Spanish real-estate firm in November. This seems to be feeding through into property values Spain's national statistics agency reported that in the last quarter of 2014, prices rose for the first time in six years.
The best ways to invest
The most direct way to invest in eurozone property is, of course, to buy a house, flat, or villa in the place of your choice. The hands-on approach can be fun for dedicated property fans, and "sharing economy" websites such as airnbnb.com have made it much easier to let places on a temporary basis.
However, there are plenty of potential downsides. For one, you are putting all your money into one very specific property you're not diversifying your risk at all. The fact that property is an "immobile" asset makes it a tempting target for cash-strapped governments. And you need to be sure of the property's status corner cutting is much more common on the continent than in the UK.
The Spanish government in particular is notorious for demolishing houses that have violated planning laws, or where planning permission was illegally granted, even if they were bought in good faith. Bengt Saelensminde outlines some of the pitfalls of being a continental landlord.
So what's the alternative? You could buy shares in a property company, trust or fund that is focused on European real estate instead. That avoids all the paperwork, hassle and fees associated with individual property transactions. Property companies and funds also diversify the risk over a number of different properties.
While European banks are still reluctant to lend money to individuals, property trusts enjoy much easier access to funds, especially with sovereign wealth funds eager to put money into real assets.
A final approach is to invest in companies that will benefit from a recovery in the eurozone property market. Construction companies are one obvious example, with the latest surveys suggesting that German construction firms are experiencing strong order growth.
Overall, the pan-European construction industry trade association estimates that the sector started growing again last year, with the pace of growth doubling to around 2% this year. European figures also suggest that furniture sales are growing at a solid annual pace. There are also signs that Irish consumer spending on DIY is recovering along with the housing market.
What you can buy
Ireland: 2 Synge House, Newtown Villas, Churchtown, Dublin
A renovated apartment in a building dating from 1871, with views towards the Dublin Mountains. 2 beds, bath, open-plan living area/kitchen, gated development with private parking.€395,000 Savills +353 1 663 4300.
Spain: Coto Del Golf Villa, La Manga Club, Murcia
This villa is set in gated grounds with direct access to El Coto Golf course. An open-plan living area leads onto a covered dining terrace overlooking the pool. 3 beds, 3 baths, open-plan reception, kitchen, cloakroom, garage, gated garden with pool, covered terraces. €399,000 Hunters International +34 968 175 087.
Germany: Friedrichshain-Kreuzberg, Berlin
A penthouse apartment near the centre of Berlin. It is set over twofloors with panoramic views acrossthe river; the living area has wood floors, a mezzanine area and a fully equipped kitchen. 3 beds, 2 baths, workroom/study, balcony, terrace,lift, underground parking. €850,000 Sotheby's International +49 30 88 71 71 800.
The six investments to buy now
If you're looking for ways to play the eurozone property market recovery without having to buy a home abroad yourself, then two UK-listed property companies with exposure to Ireland are worth looking at.
Kennedy Wilson European Real Estate Plc (LSE: KWE) owns a mixture of commercial and residential properties in Ireland and the UK. As well as expanding its portfolio of Irish properties, the company has recently bought a shopping centre in Madrid. It currently trades at just under ten times 2015 earnings.
Another is Hibernia (LSE: HBRN) while this is mainly focused on Dublin commercial property, it owns two blocks of flats in the Irish capital, with a total of 229 units. It currently trades on a forward price/earnings ratio of 11.
A purer play on the Irish property recovery comes from the Dublin-listed Irish Residential Properties Reit Plc (Dublin: IRES). This is one of the first property companies to take advantage of recent laws allowing real estate investment trusts (Reits) in Ireland.
The Reit owns several high-value apartment buildingsin Dublin, where the market is recovering quickly, and plansto add more. While it trades at a relatively pricey price/earnings ratio of 17.2, this may be justified by the fact that Irishproperty prices are rising quickly. Several brokers including Hargreaves Lansdown offer telephone access to the Irish Stock Exchange.
Taliesin Property Fund (Aim: TPF) invests in and manages German property, with a focus on Berlin, where prices are not only below the rest of the country, but are even lower than the cost of building a new property (in some cases by as much as 50%). Its policy of upgrading properties has boosted its rental income. Thanks to rising residential prices, it has been a solid performer, gaining 21% since we tipped in it in August 2013. It's still good value, on a forward p/e of 11.
Grafton Group (LSE: GFTU) is the largest builders and plumbing merchants and DIY store in the Republic of Ireland, and soshould benefit from a revival in the construction industry. It also has a significant presence in the UK and Belgium. Strong growth, through both rising store sales and acquisitions, mean revenues are expected to rise by a third by 2018, with profits nearly doubling during the same period. It trades at 16 times 2016 earnings and has a small, but growing, dividend of 1.3%.
Sacyr (Barcelona: SYV) is a Spanish property and construction conglomerate (with projects in Europe and South America too). It owns firms focused on general construction, residential development, rental property, utilities and even motorway service stations. Thanks to the recovery, earnings are expected to rise rapidly. It should also benefit from efforts to reduce the level of debt on its books. It trades on a 2016 p/e of 13.
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