Forking out for sunshine holiday homes has burned property investors as house price plunged in the recession, according to a damning new report.

The idea of opening up to the masses what was once a luxury exclusively available only to the wealthy has proved to be an expensive mistake for hundreds of thousands of Brits who dreamed of a place in the sun, say property consultants Savills and HolidayRentals.co.uk in their study.

They say the holiday home investment model is ‘broken’ and actually doubt the market existed.

The market took off in 2000, when UK-owned properties abroad were valued at £10bn.

By 2007, estimates put the number of UK-owned overseas holiday properties at 500,000 with a value of about £58 billion with markets in Spain, Florida, Cyprus, Bulgaria and Dubai taking the bulk of the money. For Bulgaria and Dubai, property prices have fallen through the floor by up to 75% and the banks have stopped lending to foreign investors.

With plunging prices, little hope of locals buying homes on holiday developments and lack of rental income, few investors have any hope of recouping their losses by selling at the bottom of the market when most owe more than their properties are worth.

At the start of the boom, 80% of the UK’s second-home owners financed their overseas property from their own wealth.

The research shows that by the market’s peak in 2007, cash buyers had fallen to 20%, with 80% of buyers taking advantage of overseas mortgage markets.

To make matters worse, many holiday home purchases were funded by taking equity out of UK homes, leaving the investors facing debt problems on both sides of the Channel. Under EU laws, creditors in other EU countries can pursue their losses through UK courts.

A lack of regulation in the property sales industry is also blamed.

Buyers speculated with borrowed money, believing that capital rising property prices would allow them to sell at a profit while rental income covered mortgage payments. Unfortunately, the recession has killed off the model as holidaymakers stayed at home rather than spending out on airfares and apartment or villa rental.

The market, according to the report, was fuelled by low cost airfares, too much liquidity in the mortgage market and that investors took little or no heed of professional, independent advice before signing contracts – and in some cases have not even visited the country where they bought property.

“Even where developers guarantee a gross income yield for a period of two or three years, the net yield is often swallowed by high service charges. In many instances, a net income yield of less than 2% is not uncommon,” said the report.

“There is an average price premium of 37% for property that is served by low cost airlines. Medium distance destinations from the UK, such as the Canary Islands and Cyprus, show the strongest link between house prices and the accessibility of low cost airlines. While this has opened up many new opportunities for buyers, it leaves destinations served by single carriers particularly exposed to the withdrawal of that service.”

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