Overseas Living - Romania - Opportunity knocks

Opportunity knocks

07/02/2007

Overseas Living

For those embarking on a resolution to invest overseas, the prospect can seem daunting

The Baltic States may be touted as hot prospects for 2007, but is that the appropriate place to begin building a property portfolio? The challenge with many emerging property markets is that with the potential high returns come high risks. As an example, Thailand has been regarded as an attractive market, however with the recent coup and foreign exchange controls put in place, some investments have been trapped, even if temporarily. Croatia has shown interesting returns, but according to the President of the Croatian Real Estate Business Association this market has already peaked. So where is the correct place to start?

Thorough research is critical. An assessment should be made of the strengths, weaknesses, opportunities and threats of the proposition. Assess the national financial, economic and political landscape. Assess the regional infrastructure, transport, leisure and education facilities, local attractions and amenities and regional development plans. If buying off-plan, check the developer's track record, reputation and development plans as well as other completed developments.

The important consideration in building a portfolio is to ensure that the foundation is stable and low risk. This does not mean giving up good returns. Clients of Fuel Investments buying in the Orlando market saw close to a 20 percent increase in value in the last year. Clients buying in attractive developments on the Costa del Sol and Costa Blanca achieved similar returns. These markets offer a good balance to investments in the UK. Orlando offers exposure to the largest single vacation market, where 85 million visitors went last year, and Spain, where demand for housing by permanent residents and holiday makers continues apace.

As opposed to more speculative markets, these areas and others such as Germany are safe, stable, have good transport links, offer a resale market founded on both local and foreign purchasers and are proven rental markets. These are critical in ensuring that hard earned savings are not dissipated. Once these elements of the portfolio are in place there is room for the secondary markets: Cyprus, Portugal, France and Greece. Thereafter, consider more speculative markets which are characterised by poorer infrastructure and immature resale and rental markets.

After identifying the investment opportunity, raising the finance is almost as important. Many financial markets are not as flexible as the UK. The costs of switching lenders or increasing the loan amount are higher abroad than in the UK.

Borrowing limits are lower than typically available in the UK buy-to-let marketplace. Although lenders in Florida and Spain recognise that the property will be let for some or all the year, affordability rather than income multiples are the principal lending criteria. In Spain lenders will usually allow 40 percent to 50 percent of net income to spend on mortgages. Some banks will look at gross income with a threshold of 35 percent. Proof of income is generally required, self-certification is not available in many markets. In certain cases demonstrating sufficient net worth rather than income is acceptable to financial institutions.

Lenders will typically advance between 70 percent to 80 percent of the valuation of the property if the affordability criteria are met. Since many purchases in these markets are off-plan, the value may have increased between exchanging contracts and completing the transaction. If the value has grown significantly the lender may cap the advance to 85 percent of the purchase price. Lenders will always look to see that the borrower has invested their own money into the deal. If the mortgage broker used has financing consultants on the ground in Spain or the US they will often be able to persuade the lender to be more flexible with affordability or valuation ratios. Specialist intermediaries experienced in working with Britons investing abroad will help through the transaction.

Borrow as much as is available initially. Closing costs are high in Spain. Expect the upper end of 12 percent to 15 percent of the purchase price. These costs include a purchase tax, the mortgage deed fee, the lender's fee, the legal fee and the notary fee. Further advances are typically not available in Spain or Florida. Increasing the loan amount requires a complete re-mortgage. In the meantime personal circumstances may have changed, reducing flexibility. Early redemption fees are very common. In Spain these are usually payable, however long the mortgage has been in place, on the mortgage balance outstanding. Re-financing is not trivial and is expensive.

Foreign nationals need to be scrupulous in paying the mortgage on time. In Florida lenders typically want to see a balance in a local account to cover up to six months mortgage payments. In Spain, one missed payment will allow the lender to repossess the property. The dates on which the mortgage payments will be taken out of the local account are specified at the completion meeting. Ensure the local lawyer attending the completion communicates these details immediately after, so that the appropriate arrangements are made in time.

The developer may recommend a local lawyer to represent the investor in the transaction. Be wary of using such attorneys, since if the developer is disreputable it may well be that the recommended adviser does not have the investors' interests at heart. Many purchasers will give the local lawyer power of attorney to complete the transaction on their behalf. The proceedings will typically be in the local language, so a privately arranged interpreter is useful.

It is important to ensure that the transaction can be completed financially. Unlike the typical situation in the UK, the contract to purchase in many jurisdictions is personal and not assignable. So if the lender's affordability criteria are impaired, because of ill-health or other intervening circumstance after exchange of contracts and before the off-plan property is completed, not only is the portfolio strategy impaired, but the deposit and any interim payments are jeopardised.

When considering all the risks, take into account the possibility of losing the ability to earn. An income protection policy (permanent health insurance) may be advisable so that the lender's affordability criteria can be met. Since this benefit is paid until retirement age, it would also be wise to consider not only the monthly household outgoings, but also any monthly savings allocation. If the investment is to fund retirement, the plan may be impaired by the loss of earnings.

The simplest - and often the cheapest - option is to buy a term-life policy covering the principal earner. The policy is typically best bought in the country of residence rather than where the asset is located. The UK insurance market is widely considered to be the most efficient and sophisticated in the world, and therefore the best value.

As a minimum, consider the policy as insurance on the deposit. Electing to cover the entire purchase price of the second home or investment, including the associated legal and completion costs, should be considered to protect both the deposit and the investment opportunity at the same time.

In managing the downside, this leaves the family with the option of using the insurance proceeds to complete the purchase or withdraw from the transaction without financial loss. It is also wise when putting such an option in place to seek inheritance tax advice.