Buying a place for a rainy day

BUYING ABROAD: Laura Slattery examines the key elements in getting the most for your money, whether you are buying a holiday home or making an investment in property abroad.

Need a holiday in the sun or something a little more permanent? For an increasing number of people lucky enough to have the resources to buy a second home, the warm climate and healthy rental income potential boasted by overseas locations is an attractive combination.

Booking a place in the sun can mean more than just signing up for a package deal and getting up early to spread your towel over the best-positioned sunbed. For one-off holiday home buyers, it means taking viewing trips to find the perfect location for a bricks-and-mortar investment.

For investors looking to buy, sell and make a gain, growth in the overseas market has been fuelled by a changing tax environment for buyers of second homes in Ireland as well as an increasing number of new developments in traditionally popular tourist destinations like the Costa del Sol and Costa Blanca in Spain.

Its football team may have knocked Ireland out of the World Cup by just the narrowest of margins, but Spain is by far the number-one overseas destination for Irish property investors.

The Marbella area is particularly lucrative in terms of rental income because of the volume of tourists that travel there, according to Ms Noreen Hynes, managing director of Aquarius Properties, which markets property in Spain, Portugal and Florida.

"You can achieve the highest rentals per square metre on property there than you can in any other part of Spain," Ms Hynes says. The average would be between €1,300 and €1,400 per month for a basic three-bedroom apartment, "nothing luxurious", she says, while a two-bedroom apartment would attract a monthly rent of €1,200.

Home or abroad, location is everything. While many investors have no intention of using the property for themselves, some buyers may be taking family holidays into account or thinking ahead to their retirement years. Falling for the quaint charms of a remote Spanish village won't please the bank manager if the buyer is dependent on rental income to pay off the mortgage.

"There's no point buying an apartment that's three-quarters the way up a mountain. It's got to be near shops and facilities and reasonably near the beach and a golf course," says Ms Hynes. Being near a golf course can lengthen the rental season, as international golfers start arriving on Spanish shores around Easter.

Without that advantage, the rental season lasts as long as the sunshine. "Realistically, you can achieve about 20 to 25 weeks rental income a year. We tell people that anything else would be a bonus," says Ms Gwen Hourigan, sales manager for Sherry FitzGerald Abroad.

If investors look further afield than Europe, they may find a location with the potential for year-round rental income - Florida. "If the property is near Disney World and you actively advertise it, you can almost get full occupancy," says Ms Hynes. Other areas attract rental income for around 30 weeks a year.

"You just get a lot more for your money there," she adds. Aquarius Properties has properties in the Emerald Isle development near Disney World, where a three-bedroom townhouse sells for $145,000 and a six-bedroom house with "a huge amount of square footage" and a pool can be purchased for around $250,000.

Aquarius Properties is setting up a new website, propertiesflorida.com, solely for investors inquiring about holiday homes in the US state. "We feel that the market needs a separate emphasis," Ms Hynes explains.

According to Ms Hourigan of Sherry FitzGerald Abroad, the Florida market became "very quiet" when Americans cancelled their winter holidays after September 11th, but she believes business will pick up again.

Back in Europe, Sherry FitzGerald is also placing its faith in France, and will begin marketing properties there from September.

The advantage of France is that it is easy to access. Irish people can bring their cars if they travel by ferry. But in the north of France, where many British and Irish people often snap up cheap rural cottages in regions like Normandy, the weather is drearily familiar. "It's like being in Connemara," says Ms Hourigan.

Mr David Marriani, who brokers real-estate deals and manages and rents property in the south of France through his company Riviera Dreams, doesn't see the point in buying holiday homes in the drizzly north. "The south of France is really sunny and you can access Spain and Italy easily," he says. The problem with the French Riviera - the Côte d'Azur - is a lack of available sites.

"There is only a small amount of new developments so property prices are rising. The capital city, Nice, has a population of about a million, so it's a lot like Dublin. There are already people living and working there, plus there are people from the north of France who want to retire on the south coast," says Mr Marriani. Some 60 per cent of foreign visitors to the area come from nearby Italy.

Portugal is another destination where the number of new developments in key locations is low, at least compared to the level of construction activity in neighbouring Spain. It's also a more expensive market.

"You really need a bigger budget. For example, in Quinta de Lago you would need more than £2 million sterling for a 1,500 sqm residence - that's way beyond the reach of most people," says Ms Noreen Hynes. "For an apartment you would pay in excess of €300,000 in the Golden Triangle area."

Over the border, it is possible to buy a standard two-bedroom apartment in resort areas for around €180,000, and the good news for investors looking to sell for a profit is that prices in Spain are still rising. Last year, the price for a square metre of constructed land in Malaga rose by 18.5 per cent, with a 13.4 per cent rise in Torremolinos and Benalmadena. Over the past three years, some purchasers have made about a 50 per cent gain, according to Ms Hynes.

However, new investors might not make similarly dramatic gains over the next few years.

The introduction of the euro has brought transparency to the overseas market making it easier for potential buyers to judge an investment. But as Ms Hourigan of Sherry FitzGerald Abroad points out, the Government's U-turn on tax measures recommended by the third Bacon report on housing means many investors may well be re-examining locations closer to home.

In February 2001, the Government announced it would not be proceeding with the introduction of a 9 per cent stamp duty on newly developed second homes and a 2 per cent anti-speculation tax for the first three years on those homes.

"The last two years have been amazing, but people can invest at home again so what is happening is people who invested in a block of apartments in Marbella are maybe holding on to one and selling the rest, taking a capital appreciation of 20 to 25 per cent," says Ms Hourigan.

As the 9 per cent stamp duty still applies to the second-hand market in Ireland, the change has led to increased demand for newly built holiday homes from investors, who also benefited under seaside resort tax incentives.

Section 23 type relief allowed investors to offset their borrowings and rental income against tax, while with Section 48 properties, investors were entitled to interest relief on borrowings and tax relief against all income, including PAYE. The qualifying period expired in 1999.

Under the schemes, which only applied to developments in certain resorts such as Kilkee, Bundoran, Courtown and Youghal, the apartment or holiday home must be used for letting to tourists from April to October each year for a period of 11 years. The aim of the scheme was to attract more foreign visitors to Ireland.

"There were a lot of investors after the section 48s and 23s came in. The Government put the incentive there but they did expect the investorsto market the properties with no extra funding," says Ms Mary Power, managing director of Self Catering Ireland, which manages more than 2,500 self-catering units in Ireland. While 2000 was a "phenomenal" year, foot-and-mouth led to a huge drop in demand last year and difficult times for holiday home investors, according to Ms Power.

But it's not all bad news. "American tourists that used to go on bus tours stopping at hotels are now bringing their children with them and taking the self-catering option," she explains. There is also "huge loyalty" from Irish holiday-makers, with the domestic market providing an estimated 60 to 65 per cent of rental income. Buying at home means properties are easier to manage, says Ms Power. "From a security point of view, it is easier if you live in Dublin and can just drive down to West Cork. It can be difficult to control properties abroad, because you're depending on a management company that is far away."