Buy-to-let investors over the last few years have associated the word property as a bi-word for fast investment profits, extraordinary investment returns and stories of individual investors going from rags to riches over night. With house prices booming in the UK; up by 300% in 10 years, more and more UK landlords have looked to replicate their investing success in other parts of the world where they perceive that there could be rapid asset price growth potential. The so called; ‘fly-to-let’.
Readers of Property Hawk can rest assured that Property Hawk will remain FOCUSED on UK buy-to-let and the needs of UK landlords unlike many other landlord websites that have branched out into selling investment property in obscure parts of the globe. However, with the meltdown currently being experienced by some UK quoted property shares we thought it only right to highlight to landlords how they might diversify their property investments away from UK property all from the comfort of their own armchair.
Wearing my multiple hats of town planner, surveyor, landlord and equity investor I travelled around Eastern Europe and the Baltic States of Latvia, Lithuania, Estonia in the early part of the Millenium. I was convinced as a landlord that these beautiful countries with grand and neglected cities were going to experience an economic boom and off the back of that a thriving property market. However, I resisted the temptation to buy residential investment property in an emerging economy for very practical reasons.
- Language barrier
- Not understanding the legal & planning system
- The practicalities of not understanding the areas of a city or town, which are the good areas to buy a residential investment property and the places to avoid
- The difficulties as a landlord of remotely managing a foreign buy-to-let investment property. If a boiler goes in this country it is difficult enough for a landlord to sort out but at least the landlord can always pop round and check that the plumber really has installed a new boiler at the buy-to-let property and not billed the landlord as such but then just replaced a part. If this happened in Poland or Estonia it could be many years if ever before the landlord realised that they had been paying for work to their buy-to-let investment property that was never done
All these factors meant that as a landlord I never felt comfortable enough to invest in Eastern European residential investment property although I was convinced of its’ potential.
New buy-to-let industry for international property investors
In recent years there has been an explosion in a whole new industry catering for western landlords wanting to invest in international buy-to-let. English speaking agents, letting agent, even companies building purpose built buy-to-let accommodation ready to be bought and let out. All this should indicate to a landlord and UK property investor that the real investment opportunity has gone.
As a landlord I would have willingly bought a beautiful but shabby apartment or house in the old part of town because that was going to be the Kensington or Chelsea of the revived country. I’m not interested in buying a non descript box in the equivalent of the Isle of Dogs. To invest in a residential investment property I would only want a property trophy asset , however these residential investment properties would now come along with a trophy price tag.
Wall of money
The result of the wall of foreign investment money flooding the residential investment market of these emerging countries is that often their residential property markets now have values that are on a par and in some cases, like Estonia are more expensive than their western neighbours. This has occurred at the same time that their real economies whilst growing fast still only afford their people a fraction of the wealth of neighbouring western economies. According to the Economist Intelligence Unit in late 2006: Croatia GDP per head was $11,050, Estonia $14,120, Slovenia $21,260 & Bulgaria $4,820 compared to the UK’s $42,430.
This all begs the question if the western landlords stop buying these residential investment properties because landlords can’t get the money from their banks, or decide that international property investment is a bad idea, then in purely local valuations these residential investment properties particularly the non descript boxes are only worth a fraction of the price at which they were sold. This is exactly why in the end as a landlord I decided not to invest directly in foreign residential investment property.
There is however a much better way of UK landlords diversifying their property investments away from the UK residential investment market and thereby benefiting from the undoubted growth prospects of the emerging economies and property markets of Eastern Europe and the Baltic states.
How to become an international property investor from the comfort of your own armchair
Having been a landlord and property investor in the UK residential investment market for over two decades there are still practical difficulties in direct investment in residential investment property and this is compounded where the investment is remote from the landlord as in the case of direct residential investment.
However, a landlord and investor who buys shares through a stockbroker in companies that own commercial property avoids all these practical difficulties and the potential residential investment property bubble that may be developing in these countries whilst obtaining exposure to the high growth potential of these emerging economies.
The Stock Exchange has in the last couple of years seen a barrage of property investment companies listing which invest in a range of commercial properties in Eastern Europe and the rest of the world. A landlord who picks wisely can buy shares producing a hassle free dividend income as well as potentially benefiting from the capital appreciation of the underlying property portfolio through an appreciating share price.
The credit crunch throws up some property income investment gems
The impact of the global credit crunch on property companies share price has been severe. Markets have responded to the anticipated lower growth in capital values by knocking 40 50 60% of the value of these companies in only a few months. The result is that it is now possible for landlords to buy shares in property companies investing in growing Eastern European economies at big discounts to their underlying asset value and also yielding 8%+ on existing and planned dividend payouts.
Which companies should landlords buy?
Property Hawk has used research provided by our new blog The Income Monkey focused on tips for generating residual income ,to identify property shares that are particularly attractive to a landlord who is looking to diversify their property investment and also wishes to obtain a healthy dividend income. These yields may look particularly attractive to UK landlords, especially when comparing them to yields currently available on direct investment in UK residential property of between 5-6%.
Dawn Day Carpathian
Company admitted to AIM in July 2005 with the intention to invest in a diversified portfolio across 6 countries in Central and Eastern Europe. The intention is to pay a dividend of 10p for the financial year ending December 2007.
High 135p low 98.25p CURRENT 100.50p market cap
Projected dividend 10p Yield 10%
This company is a great play on the fast expanding Russian economy. One thing that any expanding economy needs is warehousing with which to serve the shops and businesses. The Russian economy has a massive shortage of this space. Raven Russia aims to provide A grade warehousing facilities by funding the developments with a local development partner. It then buys the completed development at a pre-agreed price. It is currently forecasting an ungeared yield of 12.4% which means that it can afford to pay out big dividends. It is expected to yield just over 5% paying a dividend of 5.5p for this year. This dividend the company expects to rise to 9p when the development portfolio is fully let giving rise to a yield of just over 8% at the current share price of 107.75p.
High 126p low 88.5p CURRENT 107.75 market cap £460m
Projected yield 8%
Equest Balkan Properties plc
Equest Balkan Properties plc is a commercial property investment company focused on South Eastern Europe but primarily Bulgaria and Romania. Its’ objective is to invest principally in a range of income-producing; commercial, retail and industrial property opportunities in or around the major cities of Bulgaria, Romania, Albania, Bosnia & Herzegovina, Croatia, FYR, Macedonia, Serbia & Montenegro and Turkey, where it considers investments have potential for capital appreciation. The Company may also invest in development projects where it expects high rental yields. It may also invest selectively in land acquisitions.
High 132.5p Low 85.5p CURRENT 85.75 market cap £120m
Projected yield 8.75%
Prospect Epicure J-REIT value
For those investors that are looking for high yielding investment opportunities outside the EU then they should look at Prospect Epicure J-REIT value. This company is an Isle of Man registered company which was set up to invest in the exciting opportunities represented by the Japanese real estate market. It intends to do this by investing in Japanese property REITs. The Japanese property market has been in a massive slump since the 90’s but with the general recovery in the Japanese economy is showing signs of recovery. It is targeting a 7% yield on its offer price of 100p which at its current price of 85.25p equates to a yield of just over 8%.
High 135.25p Low 74.5p CURRENT 85.25p market cap £86.10m
Projected yield 8%
Investors that still have faith in the UK property market want to have a look at Mapeley. This share has slumped from a high of just over £40 early this year to currently trading at a little over £18. This puts them on a massive yield of 9.6% forecast to rise to 10.4% next year. With a rock solid set of tenants including the Government and Abbey National and several large outsourcing contracts their income seems assured. The market seems to be marking them down savagely because of concerns over the future of the UK commercial property market. With the shares being valued at a discount to the net asset value of £745million at a discount of 27% the value of UK commercial property would have to fall off a cliff for investors to be holding a share with less value than that of the property it owns. With interest rates set now to fall in the foreseeable future income investors may not see yields like this on a property investment for a very long time. It’s clear that investors should fill their boots before sanity in the investment market returns.
High £40.30 Low £18.30 CURRENT £18.41 market cap £542 million
Yield 9.6% Prospective Yield (08) 10.4%
The Income Monkey verdict
Income junkies want to hold onto their nerve with the current uncertainties in the investment property market caused by the credit crunch. Property prices across the globe are fully valued and are likely to fall. However, those wise investors who can see past the short term investment market worries and who buy these property stocks can afford to ride out any dip in the capital values of these shares with the sound knowledge that they are receiving a strong dividend income backed by a secure and rising rental stream. In time growing economies and a stabilising property investment market means that capital values will rise and investors will also benefit from appreciating asset values and rising share prices.
Combined with the potential financial investment rewards may like the cache of telling their friends at their next dinner party that they are not actually a financial control clerk in an SME but that they are actually a budding international property investor.