Property Investment Articles

Cool approach to property hotspots

The Yorkshire Post. July 9th 2005

Careful analysis is critical if you are not to burn your fingers in investing in hot spots, be they at home or abroad, says Dominic Farrell.

So, what is a hotspot? A hot spot occurs when demand for property exceeds the available supply and prices are pushed higher, above the average, by those wanting to buy; a simple case of demand exceeding supply.

The hotspot will remain hot until demand is exhausted by rising prices or when the supply of property is increased to satisfy the excess demand,

The astute property investor, following a strategy of investing in emerging hotspots, will look for demand-side factors which may ignite property prices.

At the local level, an investor is looking for special events which will lead to an increase in wealth and prosperity. Examples may be the Olympic or Commonwealth Games and the European Capital of Culture award.

Additionally, new infrastructure in the form of roads, airports, marinas, schools, hospitals, shopping malls and transport links are all multiplier effects contributing to a growth in prosperity. It is this prosperity that then leads to a subsequent rise in property prices.

On the supply side, investors are seeking areas where there is an “inelastic” supply of property or where the property stock cannot be expanded quickly in response to rising prices.

Islands are a good example of this, for instance, where a limited amount of land is available to develop on a beach. A beach property has scarcity value as no more can be built and so supply is almost inelastic.

Investors use many different property investment strategies with the aim of arriving at the same results – profits. We are all different, with different goals and expectations, different personal and financial commitments and different tolerances to risk.

I am a great believer in investor profiling. This profile assists in the selection of a strategy tailored to each individual. We do this because a generic “one size fits all” investment strategy does not actually exist.

Many investors have a strong appetite for risk and there is an accepted correlation between risk and return, with a greater degree of risk associated with a greater return. That is not to say that one should be cavalier in the search for higher returns, but to remember that a thorough analysis including a risk assessment of emerging markets or hotspots can reap handsome rewards.

The most significant event impacting property investment in recent years was the accession on May 1, 2004, of 10 countries to the European Union. Many of these countries have experienced significant economic growth and property prices have risen accordingly.

With increasing globalisation, many investors are as comfortable investing in Lithuania as they are in Leeds. Additionally, many of these countries’ property markets are less mature as the UK and present many opportunities for solid returns for years to come.

One such country attracting significant investors is southern Cyprus. Cyprus acceded to the EU as the wealthiest new entrant in terms of GDP per capita or income per individual. With an all year round sunny climate, low crime rate, widely spoken English and as a member of the Commonwealth, Cyprus has always been a favoured destination for British retirees and holiday makers, Now property investors are moving in, having spotted the prospect of a sustained rise in property prices. Why?

Firstly, interest rates are plummeting. Since February 25, 2005 Cypriot interest rates have fallen by 1.25 per cent. Cyprus joined the Exchange Rate Mechanism 2 (ERM2 in early May 2005 as a pre-cursor to joining the Euro by the middle of 2007. What does this man? Well interest rates in the Eurozone are only 2 per cent. which means that interest rates in Cyprus must continue to plummet from 4.25 per cent today to match those of the European Central Bank in two years time.

This will have a major impact both on the economy and on property prices as historically there has been an inverse correlation between interest rates and property prices, i.e. when interest rates fall, property prices rise, as seen recently in UK, Irish and US markets.

On the demand side, unemployment is 5 per cent, inflation is low at 2.4 per cent and GDP is forecast to grow by up to 4 percent. Additionally, demand for property is increasing at 20 per cent per annum (FT World Survey), the legal and the banking systems there are based on the UK model and there is now a significant investment plan by the Cyprus Tourist Organisation to build new golf courses, marinas and casinos across the island – thus making it a highly attractive place to invest.

On the supply side, Cyrus is an island where only so much development can take place and the strict planning restrictions have contributed to a shortage in supply.

Once you have made your investment overseas, you must be certain of your exit strategy. Who will buy the property from you when you come to sell? Cyprus has a large retirement and second home market. When retiring, UK nationals can receive their pensions free of UK withholding tax and then pay only 5 per cent tax to the Cypriot government.

There is no inheritance or wealth tax and if you invest through a limited company, corporation tax is only 10 per cent. These factors, combined with superb climate that attracts tourists all year round ensures there is a ready secondary market for investors.

I have used Cyprus as an example because I invest there myself and thus have expert knowledge of the market. The level of knowledge that an investor has to gain before venturing abroad is significant. It is astonishing that some novice investors buy properties from agents in the UK without ever having been to the particular country or even being able to point it out on a map. One or two Eastern European countries spring to mind.

It is important to analyse all the information available on the internet, property investor magazines and newspapers to determine what key events in the future will present opportunities to invest in an emerging hotspot. You also have to balance the risk versus the likely return.

Dominic Farrell
Bewarethesharks.com