Why buy in Eastern Europe?
The first thing to understand about the Eastern European property market is that it's really a collection of largely independent property markets in the key countries. In this guide, Turkey has been included as part of the Eastern European market because it displays many similarities in terms of its market dynamics.
There are some generalisations. With the exception of the Czech Republic and Hungary (both of which were discovered a considerable time ago) all of these are 'new' markets as far as the overseas property buyer is concerned. For example, one medium-sized developer in Turkey sold 10 properties to foreigners in 2002, all of whom were British. In 2003 he sold 99 properties. At the time of writing, in 2004 (mid-October), he has sold over 300. Next year his target is 1,000.
By definition, all of these markets are immature. The leading estate agency specialising in international real estate sales in Croatia has been established for only 18 months, while the premier estate agency dealing with international real estate sales in Montenegro has been established for only six months. Some are more immature than others. For example, in Slovakia, foreigners have only been allowed to buy since 1st May 2004, when Slovakia joined the European Union. Before that, the only way for a foreigner to own property was via a company incorporated in the country.
In Montenegro, you'll probably find that you're the first foreigner that a lawyer or official has ever dealt with, and consequently there will be more dead ends and unexpected detours along the route. That is part and parcel of being a pioneer, and many would see it as part of the attraction of being involved in a new market.
Price and performance
Not only have these markets exploded in volume, but they are also exploding in price. In our office we have plentiful examples of people who have bought only six months ago and are now selling at a 20 per cent profit. Accurate prices are difficult to come across and it's difficult to give any solid figures for appreciation in these emerging markets. Nonetheless, it's clear that prices have been going up substantially. For example, in Dubrovnik, prices have gone up by about 50 per cent over the last two years, and in many parts of 'tourist' Turkey, prices have gone up by 30 to 40 per cent. The big question is whether these price rises will continue.
In my view, in most cases they will continue for at least the next three or four years. The reason I believe this is that, as a general statement, these markets are all priced too low by international comparison. Take Bratislava, the capital of Slovakia, as an example. Prices in Bratislava have been increasing by something like 15 per cent a year, despite the fact that foreigners weren't allowed to buy there until 1st May 2004.
The increase in prices has been fuelled by a very successful local economy that has succeeded in attracting large amounts of inward investment. The result of this success is that local people have more money and, as an ex-communist society, when you have more money the first thing you do is buy a nice car and the second is to get somewhere better to live. Not only do local people have more money but inward investment has generated a lot of ex-pat business men who are now living in Bratislava and who push the price of property upwards.
Bulgaria is another good example. It's an attractive skiing destination that has high-level resorts with lots of snow and travel times aren't excessive. Bulgaria is applying to host the winter Olympics in 2014, but whether or not it gets them is largely irrelevant. The mere fact that it's attempting to host them indicates that it has excellent winter sports potential. That message is slowly dawning on the rest of the world. You can currently buy an apartment 'off-plan' in one of Bulgaria's premier skiing destinations for about ^50-60,000.That same apartment in a ski resort in France or Italy would cost dramatically more.
Of course, tourists going to ski in Bulgaria will expect it to be cheaper than a skiing holiday in France or Italy, but will they expect it to be a third of the cost? Thus the percentage yield on rentals is likely to be better than that in France or Italy.
Choosing a market
In each of the markets, the dynamic is different. Some, in my view, have much longer legs. Some are being over-hyped and over-developed to such an extent that there's a danger of boom turning to bust. Before deciding to make an investment in any of these markets, getting professional investment advice from someone who is entirely independent (not from the estate agent who is trying to sell you the property and who makes a large commission by doing so) is likely to save you a fortune.
Each of the markets is likely to perform differently in 2005,2006 and beyond. In my view, all of them are likely to outperform most of the traditional markets, such as Spain or France, with a few very notable exceptions of hotspots in those countries. The difference between the best and the worst-performing of the emerging markets will, however, be enormous. The immaturity of these markets makes them vulnerable and dangerous to greater or lesser degrees, but many are only slightly more dangerous than the old established favourites; some of them markedly more so. People accept this slightly increased risk in return for the substantially greater potential for reward. However, you can do yourself a favour by spreading the risk and diversifying into several markets.
You should be aware that in each market, one particular property type is likely to outperform all others. In some markets, the best option is a one-bedroom apartment. At the moment this is probably true in Slovakia. In most markets, over time, the preference moves towards two-bedroom property so you can have guests or use an area for work. This has already happened in Prague. In other places, the best rewards, both in terms of capital growth and rental yield, are likely to be reaped from larger properties. Before making investment decisions, you should make sure you're aware of these market differences and, again, seek professional advice.
Reasons for buying
So why would you want to invest in Eastern Europe instead of Western Europe, the United States, Africa or some other location? This depends on why you're buying a property. If you're buying a holiday home, the overwhelming answer must be because you like the area and it doesn't matter whether the property goes up in value. Obviously it's nice if it does, but your primary concern is enjoyment.
If you're buying a place to retire to, the same considerations apply, but there are additional factors to take into account. Are there first-class medical facilities? Is there the infrastructure to do what you want to do? Is it accessible for family and friends?
Assuming it passes those criteria, the greatest advantage of Eastern Europe is that it's cheap to live in most of the countries. The Gross Domestic Product per capita in Turkey or Bulgaria, for example, is less than a third of the equivalent figure in the UK. This doesn't equate directly to a cost of living that's only one third of the level in the UK, but it's a good pointer as to the way things go. A person earning £5,000 a year there is well paid and so your pension will allow you to live well.
If you're simply looking at property as an investment and your primary motive is capital growth then Eastern Europe has the twin benefits of being relatively accessible and giving predicted high levels of capital growth for a number of years.
Obviously, this doesn't mean that you can buy any property in Eastern Europe and make a profit. There are some properties for sale that will never make you any money. They will struggle to rent sufficiently to cover the interest on the money that you've invested, and they will grow lethargically in value. This is because you've bought the wrong type of property in the wrong place. Of course, others will perform brilliantly and picking the winners is key to success.