Black sea gold rush

A RELIABLE formula for buyers of overseas property used to be something along the lines of: cheap property + sun + sea = happiness. Now there is a new breed of buyer subscribing to a different formula: cheap property + growing economy = tempting investment returns.
Eastern Europe is currently the focus of these investment-driven buyers with its spread of markets from the Baltic to the Black Sea.
The fast-growing economies of Estonia, Latvia and Lithuania arrived on property buyers’ radar when they joined the European Union in May, and Bulgaria hopes to follow suit by 2007.

Bulgaria may not yet be served by cheap flights, and its restrictions on foreign property ownership mean that to buy property with land necessitates establishing a limited company, but clear changes are under way. British buyers can now get a mortgage on Bulgarian properties, and house prices are expected to increase there by about 30 per cent this year.

Typically the new European markets have followed two distinct phases, according to Simon Hill, chief executive of Letterstone, a property investment company. The first involves an influx of foreign investment and workers, which stimulates demand for new properties. The second is the development of a stronger local market. “As affluence increases and the economy grows, you see the emergence of a professional middle class, which is what has happened in countries such as the Czech Republic and Hungary,” he says.

The opportunities presented by the new Eastern European markets have drawn two types of buyers: those looking for city-centre buy-to-let properties and those attracted by holiday properties with letting potential. Bulgaria offers both opportunities, but is still in the first phase of growth. Property prices in the capital, Sofia, are about half that of Prague, Simon Hill says. “Sofia is three or four years behind Prague in the growth curve,” he adds.

The factor common to all buyers is a desire to find better returns than are currently available in the UK stock market or in the British buy-to-let market, where average yields (annual rent expressed as a percentage of a property’s value) have fallen to about 5 per cent. Younger investors now see Eastern Europe as a chance to make a quick profit and thus provide a way of getting on to the British property ladder, some lettings agents report.

Ben Mason, from Someplace Else, a new property investment company focusing on emerging markets, tips Latvia as one of the best opportunities in Eastern Europe. Property prices there are rising by more than 30 per cent a year. One-bed city-centre flats in Riga start at about £40,000 and produce rental yields of 6 to 8 per cent.

New-build properties currently being marketed off-plan to UK investors in Sofia include Park Residences, a city-centre development scheduled for completion in November 2005. Typical annual rental returns on city-centre flats in Sofia are between 12 per cent and 15 per cent, according to some real estate agencies.

The attractions of Bulgaria’s fast-growing Black Sea resorts such as Sunny Beach and Sozopol, plus skiing centres such as Bansko and Borovetz, are also proving a strong draw for investors. The sales have been strong at the new developments in Bansko, where prices start at approx. £39,000 for a one-bed flat. Many such new developments come with rental management packages and in some cases with a minimum guaranteed rental yield.

However, not all buyers are driven solely by rental returns. Village houses in rural locations are also being bought with a view to modernising and making a capital gain on their resale.

Promising returns should not blind buyers to the risks involved in buying in emerging economies. Investors should check whether any controls exist on developments; a de luxe apartment may not be so attractive as a resale property in five years’ time if there are half a dozen others being built on its doorstep. Europe’s eastern promise has also spawned a large number of eager property investment businesses offering services in a largely unregulated market. Seek independent legal advice on the property you are buying, not least on new-build projects, where it is important to look carefully at what safeguards are in place should a developer go out of business before the project is completed.