Overseas Property Interest Rates v Rental Yields

Hello and welcome to the Someplace Else Blog.

I’m writing this weeks note from Romania, and with property prices in Ireland, UK, Spain and the US all falling, it’s a relief to spend a few days in a country where the market is booming and locals are full of optimism for the future.

This week I’m going to briefly discuss the relationship between capital appreciation, interest rates and rental yields. Many of those reading this will be experienced investors who won’t learn anything new from this note and who may even disagree with me (the blog is up there if you want to do so publicly), but perhaps others might appreciate a couple of paragraphs cutting through the hype and spelling out the fundamental investment factors in plain English.

Basic factors to consider
At the risk of sounding like a simpleton – if your annual rental income is higher than your annual mortgage repayments, management fees and property taxes, then your property won’t cost you anything to maintain and you can sell it whenever you think it has reached a point where the equity can be better spent elsewhere and you have found a buyer to take it off your hands. Needless to say, you should always independently verify facts and figures on the above given to you by agents and developers.

Rental Income
For some properties annual rental income means income received during the summer holidays from local or foreign tourists, with little or nothing outside peak season and for others, you may have a long-term contract with a tenant paying a fixed monthly amount. The amount of rental income you will receive mainly depends on the market demand versus market supply of your particular property. For an person who feels cash flow is very important, my advice would be to purchase in a city and rent to a local paying all year round where the present and future supply and demand can be more accurately forecast than a seasonal resort.

Mortgage Repayments
The amount of your annual mortgage repayments depends on the value of your loan, the term of the loan and the interest rate. Value of loan varies from bank to bank and country to country. In Romania foreigners can get up to 75% (of the value on completion, not purchase cost), in Bulgaria it is about 70%, in Germany its difficult to get more than 60%, in Montenegro 50%. The term of the loan mostly depends on the purchasers’ age. Banks generally don’t want people over the age of 70 owing them money. If their net income is sufficient, a 35 year old shouldn’t have a problem getting a 30-year mortgage, but a 50 old would not get more than a 15 or 20-year mortgage. Of course, the monthly payments on a 15-year mortgage will be a lot higher than those of an equal 30-year mortgage.

Interest Rates
Interest rates are more complicated and you could fill a 3-bed villa from floor to ceiling with books on how the various types of them function (there are 3 types that affect the euro area). However the interest rates of your overseas mortgage will mostly depend on what their central bank fixes the rates at. Some central banks are worried about a possible recession and will lower interest rates dramatically to encourage consumer spending (like the Federal Reserve), while others are more concerned with inflation and are therefore extremely reluctant to lower interest rates at all (like the European Central Bank).

Bear in mind that a high interest rate will only be a problem for an investor if it is proportionally higher than their rental yield i.e. a 5% mortgage interest rate with a 4% rental yield is worse than a 7% interest rate with an 8% rental yield.

Capital Appreciation
Owning an apartment with a positive cash flow makes it easier for you to save up for a deposit to buy another one, and so present and future rental income needs to be carefully considered. However your long-term focus as an investor should always be capital appreciation. We sell in a very diverse range of emerging markets (you’ll see two very different ones described below) some of which provide great rental income and others which provide little or none. Either way, the first factor we as a company always look for when researching our next project is potential capital appreciation.

Finally…
Sometimes your personal circumstances will mean you can only purchase a product that that generates a steady income (city apartment), while others will have cash savings that they would like to invest in a pure capital growth product (land).

In conclusion, buying a property that suits your specific circumstances isn’t always as simple as estate agents make it out to be. However, we have products that suit investors of all types and we’re always happy to discuss further with those who’d like to learn more.

Kind Regards

Colin Murphy
www.someplaceelse.ie
investments@someplaceelse.ie

Never been a better time to invest outside of Ireland

Good afternoon and welcome to the Someplace Else Blog.

Well, it’s been another manic week for the Someplace Else Dublin office and another depressing week for those reading Irish newspapers. “Economy Set to grow at slowest rate for two decades” is the headline in today’s Irish Times. “Growth to Plummet as Economy Slows” reports the Independent. The Examiner leads with poor Bertie struggling to explain how €50k got into a bank account he forgot to tell us about. You’d think the journalists would at least try to find something to put us in a good mood for Paddy’s weekend.

Never been a better time to invest elsewhere
In fairness to our business writers, they’re a moody bunch, but they’re usually right. Growth is down, inflation is up, property prices are flat or falling, unemployment is rising, the weather is terrible and our Toaiseach is a crook. Let’s look at this another way – there’s never been a better or more appropriate time to get your investment money out of Ireland and into a country with more optimistic growth prospects.

My colleagues and myself could talk to you all day (and we’re happy to do so) regarding countries that are heading in the opposite direction to Ireland, UK, Spain and the US. Emerging markets have now gotten so big and powerful that they no longer need a strong United States to grow their economies. Domestic consumption in emerging economies is now rising three times faster than consumption in the developed world. Investment is even better according to HSBC, with capital spending up a massive 17% in emerging markets compared to 1.2% in rich countries.

How about this one - the four biggest emerging economies, which accounted for about 40% of global GDP growth last year, are the least dependent on the USA. Exports to America account for just 8% of China’s GDP, 4% of India’s, 3% of Brazils and 1% of Russia’s.

Unfortunately you don’t read these kinds of articles in Irish newspapers and you certainly won’t hear about them in the RTE evening news; you’ll have to look at something like The Economist.

Where might you want to look?
So, if any of our readers are interested in investing their money outside Ireland, but not too far away, then you could do a lot worse than spend a few hours this weekend studying Romania. It is easily our most popular destination, and is in my opinion the most exciting market in Europe at the moment. Would you like ten reasons why?

1. A stable financial system and 75% LTV mortgages available for foreigners
2. Realistic rental yields of 7-7.5% - your rental income is higher than mortgage payments from year one.
3. Annual capital appreciation of 20-25% for years to come
4. Little exposure to global credit defaults (2-3% of their GDP is mortgage debt compared to 30-40% in Ireland/UK/US)
5. A booming economy - 7.7% last year
6. Attracting billions of euro of high value jobs - the country is home to most of the major multinational technology companies
7. €31 billion of EU infrastructural development funds in next 5 years
8. 4.6% unemployment (compared to 17-19% in Poland)
9. Huge gap between the supply and demand of new residential and commercial property
10. A stable and ambitious government who realise their country is exhibiting all the signs of a tiger economy.

What can countries do if the developed economies continue to slow?
If the worst happens, Someplace Else investors may be comforted by the fact that most emerging market economies now have large current account surpluses and large foreign reserves, meaning that for the first time ever, developing markets can make full use of monetary and fiscal policy to cushion their economies if the developed countries economies continue to slow.

Unfortunately for Mr. Cowen, our Finance Minister who is in charge of our large current account deficit, our tiny foreign reserves and who has little or no control over our monetary and fiscal policy, no such get out clause exists. Who can blame the poor man for heading off to Kuala Lumpur for the weekend; he’d be too depressed by the headlines if he stuck around.

Enjoy the bank holiday folks.

Colin Murphy

Property Exhibitions and Property Hotspots

Hello and welcome to the Someplace Else Blog.

This week I'm going to talk a little bit about property exhibitions and how property hotspots can come and go so quickly.

I’ve attended at least 10 exhibitions per year for the last 5 years (I know, I should get out more) and I’m constantly surprised at how quickly a country can become a hotspot and fade away again. In the early days of property expos, at least 70% of all exhibition stands were Spanish companies, now it’s closer to 10 or 15%. Even though France has always been the 1st or 2nd most popular destination for UK & Irish buyers, it has been very poorly represented in the main shows, possibly because there are 1000s of tiny companies selling properties who only have the budgets to attend France only shows, if any.

I remember when Someplace Else first promoted Brazil in May 2005 in Earls Court, London – most people thought Brazil was too far away. The following September we had visitors queuing up at the stand to speak to us about it. Or take Bulgaria - there was an explosion of interest in 2005, which seems to have peaked about 8 months ago. Now interest in the coastal resorts has dropped off dramatically and companies are struggling to diversify in order to survive. How about the tiny group of islands off the coast of Senegal which is difficult to get to, is poor in natural resources and prone to drought came that out of nowhere to storm up the emerging market charts in 2007. It is called Cape Verde. Will it still be a hotspot in 2009? Time will tell.

Panama is another interesting one. Visitor statistics from the Sunday Business Post Expo in September 2007 in the RDS showed that it was the 32nd most popular country out of a list of 36. In the February 2008 show in the same venue with the same list, it was 5th most popular. What an unbelievable turnaround. Someplace Else Ireland was very pleasantly surprised indeed, as we’re about to launch a range of commercial and residential investments there. If you’d like to be in the pre-launch client list, please let us know asap.

Thankfully, the biggest change I’ve noticed over the years is the ever-increasing knowledge and persistence of the visitors attending these shows. In the “good old days” agents and developers could take reservations on the spot from people intoxicated by the thought of a dream holiday home investment just a stones through from the beach/golf course/new airport. Nowadays exhibitors are bombarded with questions like “What is the capital gains tax?” “What are the GDP and employment figures?” “Does this country have a dual taxation agreement with Ireland” “How does the financing work and which banks are providing it?” “What is the track record of the developer?” “What are the closing costs?” etc etc.

All of which is absolutely fine by me and by other agents and developers who have been supplying clients with this information all along and who encourage them to do their own research before committing to a purchase. Those still working in the industry who can’t answer these types or questions or who couldn’t be bothered to find out won’t be around for much longer.

In conclusion, there’s no doubt in my mind that the opportunities for investing in emerging markets have never been better for those prepared to do their research.

Hope you enjoy the rest of the newsletter, and please keep in touch.

Kind Regards
Colin.