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Holiday homes hit by market slide

Jim Pickard, Financial Times, 28 September 2007

Inside Track, a UK “property investment club”, has long been urging members to invest in off-plan (unbuilt) apartments in Florida. “The cost of living is low and housing is cheap”, its website boasts.

Florida real estate certainly is cheaper than it used to be – as thousands of second-home owners have learnt to their cost.

With prices in some resorts down by more than 10 per cent in a year, those who arrived late to the bubble are now nursing huge losses.

Many are from outside the US – particularly from the UK and Ireland – and bought property in the sunshine state as an investment, a holiday home or a place to retire. The market downturn has delivered them an unwelcome surprise.

Questions are being asked as to whether the credit crisis of the last two months will act as a brake on the growing trend of Europeans buying second homes in other countries.

Most buyers used to restrain themselves to familiar, well-established destinations. Now, however, many are seeking out properties in increasingly exotic locations such as Bulgaria and Croatia or even Morocco, Brazil and Cape Verde.

Savills, the estate agent, believes that up to 400,000 overseas properties are owned by British investors alone.

It estimates the total value of this real estate has soared from £7bn in 1994 to £52bn ($105.7bn, €74.4bn) today through a combination of house price inflation and increased ownership.

Elsewhere in Europe, hundreds of thousands of buyers from Germany, France, Ireland and Benelux, are piling into hotter countries.

“Two or three years ago, the majority of buyers, over 95 per cent, were British and Irish,” says Mihail Chobanov, chief executive of developer Bulgarian Properties. “This trend is now shifting . . . we are seeing a vast number of Russian buyers, as well as from Spain, Ukraine, Czech Republic and Poland.”

For the British, at least, the most common motivation is “investment”, according to a survey by Savills. The use of the property – for a holiday home or to retire – is often a “secondary consideration”.

In many cases, they have been buoyed by TV programmes and newspaper articles encouraging property speculation. The US experience demonstrates the potential pitfalls.

Spain, likewise, used to be the darling of property speculators. It is now seeing a sharp downturn in its coastal second home markets – amid rising interest rates and several property-related corruption scandals – with many estate agents going out of business in areas such as Alicante on the Mediterranean. Prices in most resorts are now expensive on an historic basis. In the past five years, annual rises have averaged 31 per cent in Croatia, 21 per cent in Italy, 16 per cent in Bulgaria and 11 per cent in Greece and Spain.

This has been good for local economies, providing jobs in construction, tourism and ancillary services.

Real estate purchases in Bulgaria in the first half of 2007 exceeded €1bn and accounted for about 50 per cent of total foreign direct investment since the country joined the European Union last January.

The trend is also resulting in damage to landscapes and environments. The influx of foreign money has encouraged some unscrupulous developers, particularly in Bulgaria and Spain, to erect blocks of flats without permission in areas of natural beauty.

There are also growing concerns that bubbles are appearing. “I’m very worried about people losing their shirts in places like Bulgaria,” says one senior London estate agent.

Many holiday home buyers have taken equity out of their primary residences to invest in second or third homes abroad. As a result, they are even more exposed if prices stop rising and if central banks tighten interest rates further.

Buyers should also be aware that new homes can depreciate rapidly as they do not remain “new” for long. “The resale markets in some less developed locations are yet to be fully tested,” says Richard Exton, head of Barclays Buying Abroad.

For property investors, the “yield” they can get on a holiday home – rent as a proportion of costs – is a crucial benchmark.

Net yields, which account for empty periods and running costs, vary wildly from one destination to another.

The average figure ranges from 5.8 per cent in Croatia to just 1.8 per cent in Italy and 2 per cent in Cyprus, according to Savills’ research.

For now, however, the trend shows no signs of losing momentum. Last month saw a property exhibition at London’s vast Excel centre – dedicated to Bulgaria alone. “With prices so low the market will soon explode,” the exhibition promised.



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