Buying a property and then selling it so that the difference in price covers all costs and brings profit, the strategy looks very simple, but this simplicity is deceptive. Real estate can grow in price due to the general rise of the market, local infrastructure development, as a development project is implemented or in connection with the improvement of characteristics during reconstruction. However, the value of real estate can not only rise, but fall.
Why is the foreign real estate market attractive to capital gains investors, what risks and features does it have?
Crisis to crisis discord
Investors' concerns are now largely related to the decline in business activity caused by the Covid-19 pandemic. The biggest blow fell on the industries related to tourism, the beauty industry, entertainment, the restaurant business and some sectors of trade. At first glance, the real estate market can also be expected to decline, as it was during the financial crisis of 2007–2010. However, almost two years after the start of the pandemic, it can be concluded that the current economic downturn of 2020 differs from the previous ones.
In the early 2000s, there was unprecedented growth in the residential real estate market in Europe and the USA, it reached its highest point in 2005-2006. Low mortgage rates, an insignificant down payment, coupled with soft requirements for borrowers, have opened the real estate market, including foreign, for a large number of buyers. The British were especially active, as a rule, buying resort properties in Mediterranean countries, in the hope that over time it would become their second residence. At the same time, the loan was secured against the main housing in the UK, and the purchased housing was rented out, which to some extent compensated for mortgage payments. This model has become so popular that by 2007 the amount of debt owed by British consumers exceeded the country's GDP. In other European countries, the situation was not so critical, but the high debt burden of the population was noted everywhere.
The mortgage crisis that broke out in 2007 in the United States dealt a significant blow to the global real estate market, but it had the most negative impact on the economies of countries directly connected with the American credit and financial system. Unsurprisingly, it hit the UK the hardest. Floating interest rates on loans, depending on fluctuations in the Bank of England refinancing rate (BBR), also played a role. The increase in the BBR led to an increase in the cost of loans, borrowers were forced to get rid of the purchased housing. This brought down the real estate market. In addition to the UK, the fastest rates of price decline were observed in Ireland, Norway, Austria, Finland, Spain. The liquidity of real estate has also sharply decreased.
Today, the reasons for the economic downturn are completely different, and the real estate market feels confident. Immediately after the lifting of the strict quarantine, the number of transactions in the housing market of most European countries has increased significantly, and there is an increase in the cost of housing.
According to the Global Property Guide, according to the results of the 3rd quarter of 2021, out of 60 key countries, the cost of housing increased in annual terms in 54 countries and decreased only in six. Demand has increased in almost all European countries. A strong jump in housing prices occurred in Montenegro (+32.4%), Sweden (+17.97%), Australia (+16.08%), the Netherlands (+15.33%).
The UAE housing market also shows a steady rise (+7.71%). Residential real estate prices in Dubai are growing rapidly by 20-25%, which is the best indicator since 2014.
Asian housing markets, although showing slow growth, for example, in Thailand it was only 0.44%, however, according to experts, the potential for increasing the turnover of Thai real estate is quite high. After the covid calm in 2020, the recently growing activity is particularly noticeable.
It is expected that these trends will continue over the next two years, contributing to further price growth, Deloitte experts note in the review of the European residential real estate market. Now, in a situation of general uncertainty, real estate remains one of the most reliable and attractive investments.
How to assess the prospects of real estate
In addition to global crises, there is a danger of local downturns in the real estate markets in individual countries or regions. Economic and political fluctuations are forcing investors around the world to be more balanced about potential acquisitions.
In order for a novice investor to navigate the global market, experts recommend applying several evaluation criteria.
First of all, you should pay attention to the ratio of the yield from the rental of real estate to its price (R/P). The higher it is, the higher the price growth potential. A simple rule applies here. A high level of rental yield compensates for the cost of a loan for the purchase of a real estate object, thereby reducing interest costs. This means that servicing a loan in a bank will be cheaper than renting similar housing. This situation stimulates the demand for the purchase of real estate and pushes prices up.
An acceptable level of rental yield ranges from 3% to 11% of the cost of housing. If the yield falls below 3%, then investing in such real estate is undesirable. Raising it to 11% is a sign of significant growth potential.
There are exceptions to this rule on a wide scale of the world market. For example, in countries with an underdeveloped mortgage market, this pattern will be violated.
This rule does not fully apply to regulated markets either. If we take the example of European countries, then housing prices are rising here, despite a modest rental yield of 4-7% per annum. By the way, the cost of rental housing, according to Deloitte estimates, jumped by 10-28% in 2020, but rather strict regulation of the rental market, a number of restrictions and high taxes eats up part of the rental yield.
In addition, there are promising locations in which the rise in real estate prices is due not so much to economic factors as to the development of infrastructure. These may be newly built-up areas or depressed areas with a low level of profitability from real estate today, but with development plans, thanks to which the cost of square meters will increase.
Another evaluation criterion is considered to be the cost of real estate construction. When housing prices far exceed the cost of its construction, it signals a likely decline. Low construction costs encourage developers to create new square meters, and an increase in supply is known to reduce prices.
However, in those jurisdictions where the construction of new housing is limited by law, low costs for the construction of real estate to a lesser extent will play down. So, Europe is replete with building codes and restrictions, but this does not entail a decrease in housing prices, despite the fact that they are usually much higher than construction costs.
Another criterion for assessing the real value of real estate is its accessibility. Moreover, high prices do not always indicate a weak growth potential. As well as low cost does not necessarily promise an increase. It all depends on the indicators of the standard of living in specific countries or regions.
Firstly, it is important to pay attention to the income of the average resident of a city or other area whose real estate is interesting. This is especially true if we are talking about expensive squares in large cities. For example, the capital of Belgium is clearly undervalued. The country has a fairly high level of income, but the cost of housing is comparable to the prices of Eastern Europe.
Secondly, it is necessary to take into account the level of the country's GDP per capita, namely the ratio of the cost of housing to GDP. The lower this indicator, the less overvalued housing is, which means there is potential for growth.
In order to minimize risks and the most reliable assessment of the attractiveness of real estate, it is better to consider these criteria comprehensively, taking into account currency risks.
How to make money on the natural growth of the market
When purchasing real estate for the purpose of further resale, it is necessary to take into account its liquidity, that is, the possibility of an operational sale. It is the high liquidity of housing in such European cities as Vienna, Geneva, Paris, Amsterdam, London, Berlin, Munich, Frankfurt, Rome, Milan, Barcelona that makes them attractive for investment.
Today, experts note an explosive increase in housing prices in Amsterdam. In a few months, the average cost of apartments in the city center soared from 350,000 to 500,000 euros. There are few offers, so sellers arrange auctions, as a result of which prices sometimes rise by another 100 000 euros. On the outskirts of Amsterdam, the situation is calmer, here you can find apartments cheaper from 350,000 euros. Beyond the capitalThe Netherlands is followed by Rotterdam, with less intense, but still steady growth. Further price increases are forecast for another 1-2 years, so investors still have a chance to jump into the last car.
The purchase of real estate in many European countries remains a profitable investment. However, you should not count on a quick resale. High taxes on income from the sale of housing, reaching 70% in the first three years after its purchase, eat up a significant part of the increase in the value of the object. Therefore, the acquisition of real estate for resale in Europe is a long game. At least five years will have to wait. In this case, you also need to think about the operation of the purchased housing, taking into account utility costs and current taxes. Most often, such real estate is rented out or provided for use by their friends or relatives. Often, housing is purchased for children entering European universities, at the end of which the apartment can be sold at a higher price and without huge tax payments. However, these are special cases.
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Man-made income
According to European real estate experts, today the most interesting option for investment in Europe is considered to be the reconstruction, modernization or repair of buildings and premises. To find an object in poor condition, but in a good place (including a promising one), make improvements and sell it much more expensive is the strategy of a successful investment. For example, an apartment purchased in Vienna for 160,000 euros after the repairs made in it is already being sold for 360,000 euros. Experienced investors are hunting for such real estate, so it stays on the market for no more than two weeks. These objects need to be searched for and be ready to purchase them promptly.
Some objects are purchased for the purpose of reconstruction. For example, in Berlin, a five-room apartment on the ground floor was divided into five separate objects, each of which has a bathroom. Investments amounted to about 1 million euros: 500,000 the cost of the apartment and about the same amount was spent on reconstruction and cadastral registration. On the sale of individual objects, you can earn up to 50% of income.
Investments in new buildings
Today, according to experts, Europe is of little interest from the point of view of buying real estate in development projects under construction in the hope of quick earnings. The price increase during construction is small, and sometimes even absent. In fact, the cost per square meter of a new building is growing at the pace of the general housing market.
Some eastern markets are now considered more attractive. One of such states is United Arab Emirates with great development prospects, impressive growth rates, and a good rental yield of 8%. Despite the pandemic, the country holds a grand exhibition EXPO 2020, receives about 6 million tourists a year, dispenses with lockdowns, without entering QR codes and without limiting the number of visitors to restaurants and hotels.
The real estate market of the Emirate of Dubai is the most developed, and the largest number of development projects are being implemented here. It is more profitable to invest in the early stages of construction by choosing reliable developers. These are usually large developers, such as Emaar, Dubai Properties, Nakheel. Any developer, as well as his project, can be checked on the website of the Dubai Land Department.
Real estate in development projects can be purchased in installments. Payment is made during the entire construction period, and in some cases even after its completion for several years after the project is completed. The initial payment depends on a number of conditions, usually it is 20% of the cost of housing.
With the construction of a new residential complex, the cost per square meter increases, the infrastructure of the district improves, its prestige increases. At the same time, the Dubai real estate market itself showed significant growth in 2021. Most of all, projects with access to private beaches, such as The Palm Jumeirah, Bluewaters, Emaar Beachfront, are growing in price here. Complexes of villas and townhouses are very popular, respectively, and they grow in price faster than other real estate. For example, in the new popular Dubai Hills area, the cost of a 3-bedroom townhouse starts from 760,000 USD. A detached villa in the same area will cost 1 370 000 USD. As for apartments, a studio in a residential area, for example, in Jumeirah Village Circle, can be found for 150 000 USD.
Investors with more modest budgets should consider development projects in Thailand. By the way, there are a lot of investors from the UAE and Hong Kong. Russians and Europeans invest in Thai real estate. Traditionally, American capital is present here. And recently, the Chinese have been actively exploring the Thai market.
In this diverse country, the cost of a small one-bedroom apartment starts from 70,000-80,000 USD. Just like in the UAE, local developers sell housing under construction in installments. There are several programs for investors, the standard scheme is as follows. The buyer pays 30% of the value of the property, the remaining 70% is paid in installments. The final payment is made at the stage of obtaining keys, in some objects it is from 30% to 50%. You can resell the apartment at any stage of construction, then the remaining 70% will be paid by the new owner. The seller will earn plus 10-15% to his investments in the project. If you wait until the delivery of the object, then you can earn more.
Repurchase opportunities
For those investors who are not used to taking risks and would like to do with minimal time costs, buy-back programs are most suitable. They can be found both in European countries and in Thailand. In the latter, the amount of investment will be lower. The minimum cost of a one-room apartment within the framework of the buy-back will cost 90,000 US dollars. There are a number of developers in Pattaya and Phuket, with whom you can sign a contract from 3 to 10 years with a repurchase at a price 10-15% higher than the purchase price. Moreover, there are projects, when investing in which, in addition to buy-back, a guaranteed income is provided for the entire term of the contract, which is 7-9% of the cost of the purchased apartment.
Approximately the same scheme can be used to purchase real estate in the UK. For example, a guest house in a tourist complex in Scotland at the construction stage costs 140,000 pounds. When the facility is built, 240,000 pounds will be paid for such a house.
Investments in nursing homes are popular in the UK today. This is an atypical option for our investor, but this market is well developed in Europe. Here, too, a repurchase is provided after the expiration of the term stipulated by the contract - from 5 to 25 years. Depending on the term of the contract, the amount of the increase in the cost of the room during the repurchase also varies. In five years, the investor will be paid 115% of the value of the object, in 25 years - 150%. The scheme consists in the fact that the investor acquires a room in a nursing home (this is an independent object with its cadastral number), transfers it to the management company and receives 8% per annum from the cost of the object every year. The buyer has no right to settle his relatives there or to live independently.
When to hunt objects
The maximum increase with minimal investments can be made by getting to the pre-launch sale of a real estate object, the so-called presale . This practice is well developed in Thailand and is often implemented by local developers.
The price of the apartment purchased on the presale will be 50% lower than the final sales of the finished object. But, and without waiting for the completion of construction, a few months after the official start of sales, such real estate can be sold for 10-15% more expensive. The main thing in this case is to choose a reliable developer. If the company does not have completed projects yet and it does not have its own history in Thailand, then you need to ask if the developer has a certificate of ownership of the land, a construction plan approved by the government seal and an Environmental Impact Assessment (EIA). It is quite difficult to get the latter in Thailand, but the project will not take place without it.
It is worth noting that at the lowest prices the property is being sold just at the stage of obtaining documentation. Therefore, the main criterion for choosing in this case is the reputation of the developer.
30-50% below the market, you can buy a house at hot sale. In Thailand, this is not uncommon, there is a fairly large percentage of investment real estate with foreign capital. Economic problems that occur in certain countries often require fast money. This forces the owners of profitable real estate to urgently sell it, while making a significant discount to the buyer. The minimum budget for such a purchase is30 000 USD. Since these are mostly ready-made objects, a potential investor needs to have 100% payment for the cost of the apartment. You can resell such a property quite quickly from 1 to 6 months, while receiving up to 50% of income.
In Thailand, it is also worth paying attention to land plots , the cost of which is constantly growing. The supply on the land market is limited, there is little land, and the demand is quite large. Therefore, by buying a plot and waiting for your buyer, the land can be sold quite profitably. There is no single price policy in this segment, everything is individual. The cost of a plot for private development of 16 acres in size starts from $150,000.
In the UK, it is quite common private lending secured by real estate - a loan from an investor. In what cases does it work? If a homeowner urgently needs a certain amount of money, and there is no way to take it from the bank, he is looking for private creditors. Any natural person, including a foreigner, can act as such a creditor. For example, in London, a property owner needed an amount of 250,000 pounds to pay off debts. He was ready to take this money at 20% per month, while the property was valued at 700,000 pounds. A potential investor has concluded a loan agreement secured by this real estate through a law firm. In three months, he earned 50,000 pounds and, due to the non-repayment of the debt (which happens quite often), he received the right to sell a mortgage apartment, earning 150,000 pounds at the same time.
Thank you for your help in preparing the material:
Olga Barteneva, Real Estate Gallery;
Elena Nevsky, Adrionica;
Dmitry Strakhov, IMEX Realty
Elena Utyumova, INDOM.
