Infatuation with buying homes overseas over - for now

BUYING ABROAD:. . . but there is still momentum in the market, driven by long-term planning for retirement Investing via your pension, writes DIARMAID CONDON

THE COMMON consensus these days would appear to be that the overseas property market has collapsed entirely. Quite apart from the usual “recessionary economic conditions”, the overseas industry has suffered a plethora of catastrophic events.

Most of those companies that have not been sued for one reason or another at this stage appear to have filed for bankruptcy. No one would really be surprised if the overseas market was fatally wounded.

The new wariness in foreign property is prompted by a long list of sound reasons including: the sometimes high-profile collapse of so many Irish-based companies selling investment properties in countries ranging from Dubai to Bulagaria, Cape Verde to Spain; the current economic environment; people struggling with properties overseas they now don’t want or can’t afford and the continuing lack of regulation of the property market.

However, this would appear not to be the case – there is still some life in the market.

It seems there are a number of factors making certain types of overseas investment still look attractive, principally: a loss of confidence in the pension market, the Government’s approach to the Irish property market, an inability to raise finance at home and the current strength of the euro.

There is still interest in overseas property, but only to a limited extent. The infatuation with holiday homes in obscure locations for investment purposes has, apparently, come to an end – at least for the time being.

What little momentum there is in the market appears to be driven primarily by long-term planning for retirement, whether through pensions or via direct investment.

Despite there being a significant appetite for UK property at reasonable values, the difficulties with, and expense of, organising finance, particularly for Irish buy-to-let investors, is currently proving a significant barrier.

The UK market is, of course, still suffering from the glut of apartment properties brought to market by so-called “buy-to-let investment clubs” during the peak of the boom, which has made UK banks very wary of the buy-to-let sector as a whole.

In the US, however, it is still possible to raise finance at reasonable rates as long as a valid set of figures can be produced. Clear Sky Capital, which promotes yield-driven property investment in the north-east of the country, raised over 200 enquiries at recent seminars and is confident that it will engage in more than 20 viewings in the US at the end of the month. This certainly puts paid to the view that the overseas market is totally dormant.

The UK and US are traditional havens in turbulent times at home, but what about other countries that could be monitored with a view to longer term investment? In the current environment investors want to stick with countries with a long tradition of freehold property ownership and, preferably, also a tradition of long-term rental.

Apart from the US, distance also seems to faze investors at the moment. The two standout candidates on that basis would have to be Germany and Sweden. Both are stalwart members of the EU (although Sweden does not use the euro, which is actually somewhat of an advantage for purchasers at the moment) and both look to be gradually bringing their economies back to some semblance of normality.

Sam Roch-Perks of Swirish, a Swedish/Irish investment company based in Waterford, says that following a considerable lull period, there are signs of some traction in the market again, particularly for long-term and retirement planning, whether through pensions or otherwise.

“Sweden is ideal for this,” he says, “as yields are reliable and there is no unrealistic expectation of huge capital appreciation.” It has also been relatively unaffected by the past year’s global real estate collapse, particularly in the smaller cities and their satellite towns.

He says yields of 6–7 per cent net of all costs are quite common in Sweden and borrowing is attractive as the Swedish base rate of 0.25 per cent is a full 0.75 per cent below the euro rate. Loan-to-values (LTV) of up to 80 per cent are, he says, also freely available depending on the product. The euro has been strong against the Swedish krona of late, giving investors some extra buying power. The krona has typically ranged around 9-9.5 krona/€1, but is currently just under 10.5, having reached just under 11.2 in March 2009.

Germany, the largest economy in the EU, has also proven attractive for longer term, yield-driven investors. During the boom years across Europe, Germany bore the cost of integrating the old GDR, consequently its property prices remained quite sane, often under the cost of construction.

Finbarr Flahive, MD at Youngfields OCP, a Dublin-based firm with offices in Cork and Stuttgart, says his company has recently seen a significant increase in demand for commercial property investments through pension funds.

“People are unhappy with the current investment strategy of their pension providers, such as over-exposure to volatility in stock markets and managed funds,” he says.

Flahive believes that post-Nama, current attractive Irish bank deposit rates will drop significantly leaving risk-averse investors with no option but to consider investments outside the country.

Germany is the world’s largest exporter and its third largest economy and has, according to Des Quigley of Louth-based Off-Plan Investments “proven its resilience to the downward price pressures being experienced in other markets”. He says that investors who were sold the promise of high potential capital gains have run into problems as they do not have the backup of a solid, mature rental market, which is where Germany wins out over many other countries.

“Prices are realistically valued on actual and historical rental income and German banks remain confident in financing overseas investors on a non-recourse basis, with a loan-to-value (LTV) of around 70 per cent for well-located residential properties which can return up to 8.5 per cent gross,” Quigley maintains.

Current lending rates are around 4.25 per cent for five-year fixed and 4.88 per cent for 10-year fixed – fixed rates are the preferred option with German banks.

He concludes that Irish investors are also steering away from “trophy” type properties because of lower yields; everything is returns-driven these days.

Why overseas investments can still be attractive

THERE is a perception in the marketplace that traditional pension funds simply aren't performing as they should. These funds thrived in the good times – but it is widely felt they didn't exhibit the foresight for which fund managers are paid. Now people want to know in what, exactly, they are investing, and many aren't prepared to pay large fees to allow someone else to plan their investment strategy.

The second factor is a lack of confidence in the Irish property market, particularly from investors. Not alone do they feel that there is not sufficient upside in the investment market here, the new second home property tax has been taken as a snub to the property investment community. Despite the fact that nearly every country has a property tax of some description, the potential for dramatic increases in the Irish tax is the obvious concern. There is certainly a feeling among investors that there are other countries with better prospects for short-term economic recovery than Ireland, where investment in property is still welcome.

The third factor is an inability to raise finance in Ireland. Although banks claim to be "open for business" it is apparent to anyone who has had any dealings with one recently that this is patently not the case.

In any case, property has rapidly moved from the most desirable asset class to a virtual pariah – hence Nama.

The last thing Irish banks want on their books at the moment is more property.

The final factor is the current strength of the euro against a number of currencies, particularly sterling and the dollar. The US has proven particularly attractive of late as it is possible to borrow for investment grade property product with proven yields; such investment is proving far more difficult in the UK, although this is a market with which the Irish have traditionally been very comfortable.

Investing via your pension

PROPERTY in overseas jurisdictions may be included in self-administered pension schemes such as a Small Self Administered Pension Scheme (SSAS - for company directors) or a Self Invested Personal Pension (SIPP - for self employed and professionals).

There are a number of restrictions, such as the inability to purchase your principal private residence (PPR) and a necessity for the transaction to be at arm’s length from the pension recipient (for instance, the property cannot be let or sold to the intended recipient).

Essentially, a self-administered pension scheme allows the pension owner to control their pension investment decisions without the assistance of a third party insurance provider. A trust is set up and administered by the appointed trustees, one of whom is required to be a revenue approved “pensioner trustee” (see www.pensionsboard.ie).

Fund investment is entirely up to the pension recipient, as long as these comply with Revenue rules.