Just a few weeks ago, in early 2008, I was back in Romania for two reasons; firstly to give myself a first-hand update on the property market, and secondly to look for new opportunities. Given the sub-prime crisis in the USA and the ripples that have adversely impacted the property market in the UK and elsewhere, this was an opportune moment to take stock.

Once again, as I left the airport at Otopeni and drove (by taxi  - the drivers are lethal here!) into the city of Bucharest, I was overwhelmed by commercial activity and continued building activity. One quick count revealed 22 large cranes within sight, each one on a major construction site.

And the roads – amongst the beat up old Eastern European cars are now a significant number of large new shiny 4×4’s. VW Toureg, BMW M5, Toyota LandCruiser, Mercedes ML and more. You could be forgiven for thinking you were in central London.

I’ve always been critical of Romanian hotels and the cuisine – at best it’s been barely satisfactory, at worst a trial. But on this trip I noticed more and more international hotel brands with superb service and great food in many new restaurants.

Basically everwhere I went, in Bucharest and in Brasov, you could get a palpable feel of the energy.

What About The Credit Crunch?

Frankly this has not impacted Romania in any significant way. Demand is still intense and will remain so. Most of the local banks are either Romanian or from Greece or Cyprus. All are awash with cash and did not take part in the massive mortgage securitisation market for the simple reason that there weren’t any mortgages in Romania and they didn’t need to buy parcels from other banks.

I spoke to a number of banks. They are lending aggressively for both land purchase and development – that indicates their confidence in the local market.

They are also continuing to develop the mortgage market. It’s only just started here and is so small that there is no question of a cut back. In fact I believe it will continue to grow strongly for many years – maybe ten or more.

Most importantly, Romania is seen as a property market for local people. Of course foreign investors are buying, but the bulk of sales are to Romanians. That’s critically important and a huge difference from many other countries such as Bulgaria where sea coast property sells at inflated prices to foreign investors with virtually no local buyers.

How Can Romanian’s Afford To Buy New Property?

I often get asked this very important question, given that Romania is still a pretty poor country. I will answer again now because it’s so important to understanding the Romanian property market.

There are four reasons for Romanians purchasing new property:

The result is a massive local demand for new property, which at current construction rates will take at least another five years to satisfy.

In the meantime, we are seeing price increases of 15%-35% a year depending on location, quality and competitiveness of the starting price.

At Axis, our target growth for an emerging market is at least 15% for at least three years. We expect Romania to comfortably beat that – as has been recognised by other commentators who have placed Romania as the Number One property investment destination in Europe over the next 10 years!

Are You Too Late?

It’s a funny world. Go to a third world country that is yet to modernise and the biggest question is “am I too early”. Go to a country that has just started the process, as Romania has, and the biggest question is “am I too late”.

So what do I really think? The first point is that you have to separate the real estate markets in Bucharest and that in the major second cities.

New property development in Bucharest started barely 4 years ago, and with most project taking 2-3 years to complete that means we have only seen a tiny handful of project actually finished.

The price rises on these has been astonishing. Many have doubled in price in two years. From €900 psm to €1800psm is fairly typical. In high end locations we are seeing property reaching €3,000psm to €4,000psm with local agents saying that they now think property in the most expensive areas could reach €10,000psm. To give you an idea of what that means, a 75sq m two bed apartment could cost €750,000 or £600,000. Still cheap by central London standards, but a 250% price rise even to get to this amount!

Advice for Bucharest

It’s clear that some developers have taken advantage of the massive demand, and have started pushing prices higher than can really be justified. Others have gone to market with one specification, and then during the build lowered the specification to deliver and inferior product.

So my message is ‘buyer beware’ – there are still projects to be had in Bucharest with excellent growth prospects – maybe 20%-30% a year for the next three years, but you need to choose wisely. Good locations, good value for money, competitive pricing. With these three you stand to do well.

Take care to avoid overpriced developments in poor locations.

Investment outside Bucharest

With land prices in Bucharest reaching astronomical prices, there is an increasing trend for developers to look at the major second and third tier cities, like Cluj, Brasov, Arad, Timosoara and more. Development here is not so well developed as Bucharest, with the possible exception of Cluj which is experiencing massive activity.

Most development has only started in the last year or two, which means that very little has actually been delivered to market. The demand is huge – most cities have levels of demand many times that of current planned and built developments.

As an example, In Brasov there are approx 4,000 units either under construction or planned. Not all will be built, so let’s say 3,000 finished units. The town council estimates current demand at 10,000 to 15,000 new units – or between 3-5 times current supply.

This massive imbalance will rectify itself over the next 5-10 years, but in the meantime we will see substantial price rises.

One result of the demand is that prices in the second cities are not necessarily any lower that Bucharest. The primary cost is the construction, which is very similar wherever you build. The land price may be cheaper, but that is a relatively small amount of the final price.

So we have, in Brasov for example, typical apartment prices of €1,400 psm up to €2,200psm – already at Bucharest levels.

But even at this pricing, it’s easy to see-  particularly if you visit and check the reality on the ground – that an apartment at €75.000 could easily be €175,000 in a few years. Again, 20% - 30% annual price rises for the next few years are going to be commonplace.

Summary

I came away from Romania with these conclusions:

It’s a wonderful scenario. Axis will continue to search for good value propositions. If you are specifically interested in Romanian property and/or Romanian land deals, please register by clicking here, right away, as you will be the first to receive details of new investment opportunities in Romania.

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Over the last six months you could be forgiven for thinking that the UK property market has fallen off a cliff. Unmitigated doom and gloom, pretty much all written by newspaper hacks who haven’t a Buy To Let property between them and think that the more outrageous their headline the more papers they will sell.

Time, I think, to look hard at the facts and see where that leads us. As professional property investors we know that there could be a right or a wrong time to be buying. The big question is about right now. Should we, or shouldn’t we, be in the market.

To get a perspective on this, lets look at a variety of facts and consider what is actually happening in the market.

Finance

This is the big bogey man. Yes, there is a worldwide credit crunch, caused no by those august institutions that tell us all the time how to manage our money – the banks! They’ve been packaging up bundles of risky loans and selling them off as ‘mortgage securities’ to each other. Only they weren’t so secure as the risks became apparent.

Now the banks don’t want to lend to each other, in case the other bank has bought a load of the rubbish securities and then gets into trouble and then can’t pay the loan back.

And because most of the banks don’t want to declare the real extent of their losses (or maybe don’t even know!) it makes lending to them a dodgy deal.
Hmmm! If we ran our affairs like the banks, then we would be told we were crazy, immature, taking huge risks and didn’t know how to run a business. But because it’s a bank… draw your own conclusions.

The big issue is what all this means, and how long it will go on.

You will have seen the UK government in recent days offer to pump up to £100bn of OUR money back to the banks in exchange for these dodgy mortgage securities. That will undoubtedly help, as will the passage of time.

My best guess is that it will be 12-24 months before there is reasonable fluid availability of funds again.  In the meantime the market (in the USA and UK at least) will remain tight and potential sub-prime borrowers are going to find raising loans extremely difficult.

The era of cheap and easy money is over… at least for now.

But here are some interesting facts about the world’s money supply. Not every country in the world is caught up in this. For example, the Middle East is awash with money. Even some eastern European countries like Romania haven’t been affected. Why? Because they never had a big mortgage market so they didn’t need to package up and sell their securities, nor did they need to buy them from other banks because they are making good profits in their core business.

And in countries like Brazil, there still isn’t a significant mortgage market so again they haven’t been touched by this scandal (and it IS a scandal!).

Bottom line – many countries in the world have loads of money available for various projects, property and commerce.

The really big issue for the UK (and for parts of the USA), is that money is the oil that enables the wheels of property purchasing to move smoothly. Most people need to borrow money to buy. So if the money supply gets more difficult, then some people are held out of the market. And that has a knock on impact on Demand.

Is A Tighter Money Supply A Bad Thing?

On a recent television program one person was interviewed about the problems he was experiencing in getting a mortgage. At 34 he lived at home with his parents and had saved up precisely zero money towards a deposit. Now he was upset because he couldn’t get a 100% mortgage.

I actually think this is a good thing. One of the basic lesson of investment, whether for your own use or for Buy To Let, is that the investor should have some ‘skin in the game’. By that I mean a personal stake that would be painful to lose. With a requirement for a 5% or a 10% deposit that’s exactly what you end up with. It’s more conservative lending, but maybe it’s the right thing for all of us.

The Government has been telling us for years to stop spending and start saving. If you have to save 5% or 10% towards your own property, then perhaps that’s the strongest reason of all to save.

In the UK we are fortunate in that we have a thriving rental sector, as well as owner occupiers. In many countries, like Germany, most people are happy to rent for their entire lives. It’s a good choice for them. Owning a property here is not a right – it’s a lifestyle choice that may mean some sacrifices elsewhere. One thing is for sure. You won’t want your home to be repossessed if you have £20,000 of your own money in the deal!

Has The Increase In Interest Rates Killed Buy To Let deals?

Look back over historical Buy To Let interest rates. They were rarely below 5%. Now we are at between 6% and 7%. Say 1.5% higher. You could take the view that it’s terrible. Or you could look around the world and realise than in many other countries, eg the Caribbean, rates of between 8%-10% are the norm.
Borrowing in the UK is still comparatively cheap, and if it means that marginal investment deals fall by the wayside, then I’m all for that. I only want to pick the best!

What’s Happened To Supply and Demand

Let’s go back to basics for a moment. The driver for property price increases over the last 10 years and more is absolutely fundamental. There are not enough properties to meet demand.

Of course demand has been driven by cheap money and financing to 100%. But it doesn’t alter the fact that there are more people than properties available. That’s why this government gave a pledge (looks rather weak now!) to encourage the building of an extra 100,000 homes a year. Easy to say, much more difficult to accomplish.

Where has all the demand gone? Nowhere. It’s still there. All that has happened is that the tight money supply, combined with the requirement for a small deposit, combined with the doom and gloom in our press, has frightened the living daylights out of most first time buyers, and a good number of property investors as well.
But the demand will come back – because the fundamentals haven’t changed.

And when it does, what about the supply side? Well, last week Persimmon, one of our largest builders, announced plans to stop ALL new projects. Hmmm! This replicates what’s happening across the UK. Builders are selling off existing stock any way they can (spot an opportunity here?) and are cutting back or stopping new projects.

So far from encouraging an extra 100,000 properties a year, 2008 and 2009 are likely to see the lowest new housing starts for a generation.
And as we work through the credit crunch and demand starts to revive, all those buyers are going to be fighting over even less property. Where are prices going to go then? That will be the start of the next cycle of capital growth.

Do You Buy On Strength Or Weakness?

I find it difficult to understand some investors. Here are three questions?

Guess what – some investors have a reason not to buy for every one of these scenarios. Investors? Give me a break. These guys need to understand they are in dreamland.

When is the right time to buy? If you are building a portfolio, then ALL the time is the right time to buy. Subject, of course, to finding the right deal.
And when is it easiest to get the best deal? When the market is weak – AKA NOW!

Discount And Yield

Here’s what’s actually happening in the market for Buy To Let properties as I write this at the end of April 2008. Developers need to clear stock and frankly we are their best bet.

Valuers, instructed by the Building Societies, are downvaluing property like you wouldn’t believe. Not based on any comparables, just because they have been told to take a conservative view. So one view of the market is that the building societies are actually creating price falls, specifically because of their instructions to valuers.

Interesting point, but on with the story.

Let’s say Axis finds a property at £150,000. We do our own due diligence and believe it is a fair price. The valuer comes in and says “£135,000”. Guess what – we go back to the developer, show them the report and then renegotiate the deal. Sometimes we can, sometimes we can’t.

If the developer says OK, then our new benchmark market price is £135,000. Less the completion reward we negotiate for our investors – typically 25% now. So the final net price is £101,000 on a property we believe to have a genuine market price of £150,000.

Please read the line above AGAIN. It’s just so important. We haven’t seen deals like this EVER, and they will only be available for as long as developers have current stock to shift. In fact at this level of price, some developers are now keeping stock and renting it themselves  - it’s just too much of a loss for them to take. Remember that their loss is your gain.

Now let’s see what’s happened with the rental yield. Suppose the yield on the full market price was 6%. That would be £9,000 a year on a price of £150,000. But we are buying for £101,000 – and can still expect the same £9,000 a year. What’s our yield now? 8.91%. Pretty astounding.
Most investors don’t get this critical point. As the price falls the yield rises. So even if you pay 7% interest instead of (say) 5.5% a year ago, who cares with this level of yield?

An the best is yet to come. Interest rates are probably around the top of the cycle now. So take a two year deal, and by 2010 when it’s time to renew, you can realistically look forward to a lower rate. Add in a couple of years of rental growth (it’s strong because people are renting not buying!) and you could be at a yield of around 9.5% with mortgage rates back at (say) 6%. That’s a pretty healthy cashflow.

Summary

I can’t believe I’ve written so much. Hope you enjoyed reading this and have some food for thought. If I were to summarize this into a few key points here they are:

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The North west London property ‘kicked off’ 2007 with a consistent demand for buying properties in St Johns Wood, Maida Vale and surrounding areas. Demands for lettings were also very high during 2007.

Sale prices peaked in the summer due to a high demand from buyers. The market changed dramatically for a period of about 5 months (February-June): in most cases, there was more than one potential buyer for each property and prices were soaring. Buyers were outbidding each other. Estate agents introduced a sealed bid system to identify the highest offers. The news for potential buyers came as a shock with a 15.6 per cent rise over the past 12 months, pushing the average price of a property in NW London up to £350,000

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Property Management – Services Breakdown

When you buy a property for buy-to-let you have a few options open to you with regards how you manage the property, either you pass the property over to a letting agent or property management company and let them deal with the property on a day to day basis, or you take on the property management for yourself. Both of these solutions have their merits and drawbacks, within this article we will examine what the property management companies offer in terms of the general services. Property management companies are service providers and they will give you a full service for your property from the tenant search, everything in between, to the tenant move out. Unless you are a full time landlord, manage properties and have the time then most likely you will be looking to instruct a third party to undertake the day to day business.

So what services are provided by a property management company?

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I have been investing in property for a big chunk of my life and I still get a buzz out of it. I have taught property investing to thousands of people from all over the world and it never ceases to amaze me that people still don’t really think about what they are doing or how big a risk it can be when property investing.

I buy from all over the world and invest in many countries but there are still key steps to take when investing in the UK or abroad.

Here are my 10 key strategies for investing in property

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Mandatory Deposit scheme

In April 2007 the government made it mandatory for all landlords and agents to keep a deposit taken in from a tenant in one of the tenancy deposit schemes. There are two schemes which landlords and agents have to be a member of; these are the Custodial Scheme or the Insurance Based Scheme. To briefly break these down the custodial scheme is run by a third party and the bond is given other after collection from the tenant. Any disputes that are brought up by either party are then run through the alternative dispute resolution or ADR. The Insurance Based Scheme is where the landlord or agent will pay a fee to the third party but still hold the deposit themselves; again any dispute can be run through the ADR. The process should be seamless to the tenant and no charges are brought to them, and they should be able to get their deposit back within ten days.

Fears of the Tenancy Deposit Scheme allayed

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