Buying Property

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New Star Logo

New Star’s new international property fund will be the only UK onshore investment fund to include Asia and the Pacific Rim in its remit. With the significant exception of the United States, the fund’s investments will be worldwide*; it is being marketed as Eurasian. An added attraction is that the fund’s holdings will be directly in real estate rather than in property companies.

The New Star website lists five properties that it says are indicative of the kinds of property it will be bidding for. Three of these are European (in Amsterdam, Berlin and Munich), one is Japanese and the fifth is in Sydney. The fund brochure also lists properties in Hong Kong, Singapore and Melbourne in this context. The fund’s remit is exclusively commercial property. The fund won’t actually be able to invest in any of these properties until it’s launch phase target of £200m has been reached but with the base rate at 5.5% this could be said to be a good time for launch phases. The retail offer period closes on 4th June. Eventually, the fund aims to be 80% invested in particular properties. The balance will be held in (property) shares or REITs.

Permission for UK Real Estate Investment Trusts (REITs) to launch in January 2007 was one of a series of changes to the property investment scene brought about by the UK Treasury in the last few years. It follows the change in unit trust rules in March 2004 that allowed unit trust funds to be 100% invested directly into property. In December 2005 these funds were opened up as an option for ISA purchasers.

Investors have had to wait over three years since Gordon Brown first announced that REITs were being considered in order to give savers another way of investing in commercial property. Last year the Chancellor made a last minute decision to exclude direct investment in property from the new self-invested pension plans (SIPPs) with the exception of halls of residence and property syndicates above a certain size.

When looking at alternatives to direct investment in property the field is now looking fairly full and it’s helpful to distinguish between the different species and sub-species and their different strengths and weaknesses.

Property Investment Companies

First in the list are property investment companies. Share price services such as Thomson Datastream show that there about 50 property companies listed on the LSE main market’s property sector with a further 90 quoted on the AIM market. Some of the leading UK property companies (10 of them by mid-February) had metamorphosed into REITs but, confusingly, they still appear with as property companies of the share price pages in the newspapers.

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Overseas residential property-buyers beware! When you buy in Europe, you can pay up to 25% of the purchase price in round-trip costs, i.e., legal and other fees.

Punitively high round-trip transaction costs are incurred in Russia (25%), Bulgaria (24.9%), Italy (17%), France (16.3%), and Greece (15.5%) (i.e., the total cost of buying and selling a property, including all taxes and fees). Purchasers of new property often incur even higher costs, with additional VAT of 20% payable in some countries, according to a report released this week by the Global Property Guide .

UlaanBaatar-Mongolia

Sandwiched between Russia and China, there lies a gold mine of resources, profit and growth known as the country of Mongolia. With a healthy economy and expanding wealth inside the country, Mongolia is rapidly becoming an investor’s ‘hot spot’ in the global arena. Much of this potential wealth arises from an ideal mixture of supply and demand. An incredibly high demand for city housing  primarily in the capital of Ulaan Baatar – combined with a shortage of land supply in the prime city areas creates the ideal investment return. Most importantly in this gigantic economic reaction lies the catalyst mining.

The mineral resources in Mongolia are enormous, providing rich supplies of copper, coal, gold, and possibly even oil. The country became the most prolific copper provider on the globe with the discovery of the world’s largest copper mine, which is expected to provide over $100 billion of ore over the next forty years. With China just to the south, exports of these natural resources are boosting the economy, creating a rising GDP (Gross Domestic Product) each year.

This rising GDP is primarily the result of high copper prices, which rose a whopping 250% since 2002, and the production of gold. Mining is responsible for nearly one fourth of the GDP, three fourths of the country’s exports, and 67% of the industrial outputs. Not surprisingly, some of the world’s largest mining companies such as BHP, Rio Tinto, Ivanhoe, and Centerra Gold are taking advantage of resources by moving in and planting their shovels into Mongolia’s rich soil.

This influx of mining organizations, combined with the already-high amount of international trade with countries such as China, is inviting countless expatriates, ambassadors and executives to the city causing much of the demand in high-end city housing.

When turning to the need for top quality housing, current figures show prices to be within the $900 to $1,300/sqm range. High-grade living rental profit is upwards of $17/sqm per month, causing average rental returns of about 21%. Profit yields from residential accommodation are the highest in all of Asia, coupled with a tremendously high 30% yearly real estate appreciation growth rate.

In addition to the constant flow of foreign business executives, half of the country’s population is dispersed throughout rural areas of the country causing a constant flow of real estate buyers from outside the city creating an unequal displacement of land ownership in the city. This, in turn, has increased demand and limited supply.

Conservative economy predictions based on previous trends can be used to demonstrate the enormous cash return possible five years in the future. Assuming that there is a 5% salary increase per annum, interest rates drop 0,5% per annum, and a conservative 20% yearly capital appreciation, a $100,000 investment would yield $362,762 five years from now a total profit of $262,762.

One concern for foreign property owners, taxes, is discounted by the surprisingly low taxes placed on property owners in Mongolia. There are no property capital gains tax and no withholding tax. Real estate purchase costs are hardly noticeable. Freehold ownership is practised in Mongolia, meaning the purchaser owns not only the property, but also the land it stands upon. This results in making an investor’s ownership rights not only the highest, but also the most secure. With no restrictions on foreign property owners, an investor is free to do nearly anything, whether it be pledging, selling, or leasing the property.

The economic future of Mongolia appears bright as more of Mongolia’s natural resources continue to be discovered, collected, and sold, and the country’s economic growth continues to rise. As the demand for high-end accommodations in the city increase, and supply decreases, investment returns will continue to climb bringing untold amounts of wealth both to the country, and to those prepared to take advantage of the growing economy.

For more information on buy-to-let real estate developments in Mongolia’s capital, Ulaan Baatar contact UK-based Property Frontiers.

YouTube

I came across an interesting article on CNN Money titled “The ‘YouTubing’ of real estate”. It talks about a new trend in the US by home sellers who now incorporate professionally produced ‘news style’ video streams on their websites to promote their property.

According to Charlie Young, the vice president for marketing at Coldwell Banker, “we were telling all our brokers about the need to put more [still] photos on their Web sites. Today, if your site doesn’t offer virtual tours, mapping technology, neighborhood guides and a video library of buying and selling tips, it’s nowhere.”

This trend can be connected to the YouTube phenomenon in the States, where virtually everybody makes and posts their own videos online. The website on focus was the Peninsula on Indian River Bay development in Delaware which is hosted by a male and female “news presenter” cost the project’s developer about $50,000. In my opinion the cost is a no brainer for property developers but should be dramatically scaled down for individuals selling their homes. Maybe its an opening for small time film makers to team up with estate agents….hmm

The problems of first-time buyers have been extremely well documented so the results of a recent survey from the Bradford & Bingley Building Society come as no surprise.

In it, 2/5 potential first-time buyers are holding down two jobs, 42% are receiving help from their parents and 43% have even thought about giving up buying altogether.

In this current climate, buyers are having to come up with ever more innovative ways of getting on the first rung of the ladder, and an increasing number are buying their first property abroad. A recent survey from YouGov found that nearly half of 18 to 29-year-olds plan to buy abroad and that for two thirds of these it would be their first purchase.

There are two main strategies for buying abroad. Firstly, the so-called jet-to-let schemes in which buyers purchase a home abroad at prices far below the UK’s, and use the rental income to pay for a mortgage on a home-based property.

Another more recent phenomenon is ‘overseas and sell’. This is when first-time buyers purchase properties off plan, without viewing them, and sell on completion for high returns.

As in the UK, buying a property off plan can reap significant rewards. Often, particularly in property hot spots, prices can rise significantly between the foundations being laid and final completion of the house or apartment. If you sell promptly once the building work is finished, you only have to fork out a deposit, rather than the full amount. The returns made can be significant and sufficient to buy a house back here.

First-time buyers are being targeted by a growing band of property experts who claim that anyone priced off the ladder in the UK should consider buying cheaper houses abroad, in locations such as Poland, Turkey or even India.

A new website, www.from55k.co.uk, from Parador Properties, one of the biggest British-owned property companies in Spain, promises aspiring homeowners the chance to buy a new two-bedroom apartment abroad for as little as £55,000. Another website, www.newskys.co.uk, also offers first-time buyers an overseas service.

A survey by YouGov, the polling company, shows that nearly half of 18 to 29-year-olds plan to buy abroad, and two thirds of these say that this would be their first property purchase.

The idea is alluring. This week the Royal Institute of Chartered Surveyors reported that some European housing markets enjoyed double-digit growth last year despite interest rate rises. An added bonus is that a plush flat in a sunny location could also bring rental income from holiday-makers, as well as providing a getaway destination.

Jonathan Burridge, of Quantum Mortgages, the mortgage broker, says: “This is still a relatively new concept and, as a pioneer in new territory, you can expect to meet bagmen and cowboys. However, there is gold to be had for the wise and the lucky.”

But experts advise that buying overseas carries a host of unpredictable risks and costs. Ray Boulger, of John Charcol, another mortage broker, says: “I am not surprised that overseas consultants are targeting first-time buyers – the low prices look appealing. But for most first-time buyers, buying abroad is wrong for so many reasons that it is difficult to know where to start. The biggest mistake is assuming that the overseas market will perform in the same way as property in the UK.”

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British investors are finally cottoning on to the holiday developments in France that offer exemption from VAT, providing savings of nearly 20 per cent.

These holiday complexes, known as residences de tourisme, are built by a developer who then sells the units to investors. They, in turn, lease them back to an operator who does all the hard work – including furnishing, letting, cleaning and general maintenance.

To encourage the building of tourist accommodation, particularly in the South, the French government exempts leaseback residences de tourisme from VAT on the purchase price, currently 19.6 per cent. Irish investors have known about leaseback for years, says Laure Baldacchino of Chesterton International, but it is now catching on in the UK. “The best capital appreciation is in the Alps and the South – growth has been about 10 per cent a year,” she says.

It pays to plan ahead if you’re buying overseas. Stephen Pritchard tells you how

For some holidaymakers, browsing estate agents’ windows is as much part of a break as soaking up the sun or touring the cultural attractions of a foreign city. But a growing number of people go further, and put in an offer to buy an overseas property.

Just under a third of Britons are interested in owning a property abroad. A fifth of all remortgages taken out in the UK are in order to fund an overseas property. Often though, would-be buyers do not consider the finances until they have already put down an offer. This can leave buyers struggling with two problems: arranging the right type of mortgage, in the right currency, and transferring what can be a substantial lump sum overseas for the deposit.

In many overseas markets property transactions take significantly longer than in the UK, so any delay in organising the finances could put the purchase at risk. “Usually buyers have not thought about the timescale or the length of the process,” says Neil Burns of mortgage brokers Mortgage Maestro. “They might have dealt with lenders in the UK where you can submit an electronic application in minutes. In Spain or Portugal you need to allow 10 to 14 weeks.”

Ideally, anyone looking to buy an overseas property should take independent financial advice. Lenders in continental Europe often require substantial deposits: 30 per cent is common. Mortgage terms are usually shorter, too. As a result of the complexities of raising finance abroad, UK home owners buying properties overseas often do so in cash, or by remortgaging their UK property.

Remortgaging here is straightforward enough, at least for buyers who have sufficient equity in their home. But it brings two risks: they could lose their UK property should they fail to meet the new, higher mortgage repayments. And the finance is only available in pounds sterling.

For some buyers, a mortgage in the local currency they are buying in makes sense; in other cases the best way to finance a property could well be in a third currency. Some buyers in Cyprus, for example, are currently arranging mortgages in Swiss francs with Cyprus banks, in order to take advantage of the lower Swiss franc interest rates.

Whether such an approach makes sense, cautions Burns, depends on the buyer’s attitude to risk and how flexible their finances are. For someone with a large overseas mortgage and most, if not all, of their income in sterling, a mortgage in euros or another local currency brings with it exposure to fluctuations in the money market.

One area where it does make sense to think in local currency terms is the deposit and any transaction fees. By being prepared to convert money into the purchase currency ahead of time, buyers can increase the chances that exchange rates will work in their favour. The simplest option is to open a savings account with a local bank or a UK or offshore bank that operates foreign currency accounts.

Citibank offers its UK customers US dollar and euro savings accounts, and offshore branches of banks such as HSBC and Barclays have similar deals. Unfortunately interest rates, especially on euro savings accounts, are low.

As an alternative, a growing number of overseas property buyers are turning to foreign currency brokers, who can book currency ahead on the money markets, known as a forward contract. Foreign Currency Direct, for example, can reserve funds for up to three months. This has the advantage of fixing the exchange rate, but the funds can stay in a sterling account until the last possible moment.

According to Foreign Currency Direct director Robin Haynes, currency brokers can often achieve a far better rate of exchange than using a bank, especially for larger transactions. The exact savings will depend on how good the property buyer’s UK bank is: Haynes expects to save 0.5 to one per cent over a good bank commercial rate, but if the UK bank is only offering “tourist” rates, the saving could be as high as three to four per cent.

“In one case we managed to save a client US$30,000 on a dollar purchase,” says Haynes. “That could easily be enough to buy a swimming pool.”
Source: The Independent Online

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Most British investors are missing a trick by focusing solely on holiday lets when buying overseas. Assetz research reveals that much more reliable returns with a lot less work can be gained by investing in properties to let to the local market.

There is a common misconception that overseas property investment must mean holiday homes, with British investors competing fiercely over properties located close to airports, beaches and golf courses. Most of the rental income must be generated throughout the traditional holiday seasons when the properties are let to a series of holidaymakers for short periods.

While these properties can undoubtedly generate strong returns, especially in counties with a strong tourist industry such as France, the alternative route into overseas property investment through letting to local people is usually more reliable, is much more a hands-off investment and is often overlooked.

Local lets are usually considerably less hassle for the investor, as one tenant will probably last for a year or two, perhaps longer, compared to holiday rentals which change every 1 – 2 weeks, often with long voids in low season and a high cost of ‘changeovers’.

Property in city centres such as Saint-Brieuc in Brittany, Montpellier in the Languedoc (France) or Limassol in Cyprus, expensive than in tourist hotspots, meaning investors can access better quality property at lower prices.

Stuart Law, Managing Director of Assetz comments:

“Amateur investors in particular are driven by the desire to holiday in their overseas property once or twice a year, therefore focus on holiday destinations which they might ultimately choose to retire to. However, with the time taken to manage the holiday bookings and the hassle of arranging changeover/cleans between holiday let clients, it would make sense financially to consider separating the investment from any intentions for personal use and seek local let property.”

Assetz is selling locally let property in the Cotes-D’Armor near Brittany, France. This buy to let property is already occupied by tenants, so can be purchased as an immediately cash-positive investment. Where property in central Brittany is often inflated, smaller satellite towns surrounding the cities have an active professional market which demands quality rental accommodation, providing an ideal opportunity for investors wishing to access the local French buy to let market. The apartments cost from EUR88,500 (£60,561) and are yielding 5% rental incomes, managed by a top class management company.

Assetz also has one and two-bedroom local let apartments in Limassol, Cyprus, for £70,000 – £100,000 Sterling with 8% yields available and a fully managed local service available, making it an ideal hands off and profitable investment.

Source: Firstrung.com