Emerging Markets Sub-Prime Safe Havens

By James Gonzalez, Market Analyst

With the stock markets taking yet another heavy blow this month, can we be sure that the sector is lucrative enough to make any money at all this year? Is it just sub-prime fuelling the withdrawal of investment funds or are investors taking their money elsewhere?

The latest downturn came after news that the US Investment Bank, Bear Sterns, required emergency funding from the Federal Reserve to cope with its vast debt. JP Morgan Chase strategically moved in and bought out the bank at a fraction of its original value. To further calm investors’ nerves, and of course sweeten the deal, the Fed stepped in to take over $30 billion worth of the bank’s assets, therefore reducing the financial risk to JP Morgan.

The FTSE 100 share index took one of the biggest knocks ending 3.9% down on the back of the Bear Stern news, fearing that the credit crunch had reared its ugly head yet again.

With this long-winded, drawn out uncertainty comes a deep seeded lack of confidence in the markets, and as players are repeatedly burnt it is only a matter of time for them to call it a day and hang up the mobile, close the laptop and say goodbye to their long-term friendship with the Bloomberg ticker.

So where are investors resting their laurels? The price of gold has certainly increased sharply, which may provide investors with some much-needed breathing space. However, hand-in-hand with price increases comes a decrease in demand as jewellery manufactures lean towards recycling old stock as opposed to buying new, high priced material.

Over the long term, research shows that gold does not perform as well as the stock markets. Therefore, with the yo-yo markets and a drop in gold imports, what is left for the investor to lay low and wait for the storm to blow over?

But there is another option – Property - why? For the same reasons why I got into the business all those years ago and why I remain within the sector. Property, I can safely say is my investment option of choice and also how many millionaires got to where they are today.

Over the last 50 years, property has beaten the FTSE in terms of providing consistently stable profits. Within this same period, property’s worst performing five-year cycle still grew by 16%, whereas stocks showed a huge deficit of -22%.

The fact is property prices may fluctuate somewhat, there maybe price corrections to ensure a stable secondary market, but the truth is the bottom will not fall out of the property markets.

Firstly, governments across the globe have enough practical understanding to ensure that property prices remain buoyant and will therefore adjust inflation levels and interest rates accordingly. And secondly, people will always need somewhere to live or play. Therefore, there will always be a buyer and there will always be a seller - whatever the conditions may be.

Emerging markets not only offer the best overall returns, particularly if investors enter the market early, but they are also shielded heavily from the nightmare of cross border lending that has affected our lives and local investment markets.

For example, last year Bulgarian property realised a 34% property price growth with a projected 15% to 20% for 2008. Investment is in fact pouring into the country. Infrastructure funding from both private and public funding is opening up new areas, and commercial development is springing up around the country’s cities following the influx of large blue chip companies relocating to take advantage of lower operational costs.

Plans for eight new shopping malls are to be unveiled this year alone, a major €64 million business park is to be developed near Plodiv and several US companies, including BPO specialist Sutherland Global Services will spend over €12 million on a relocation plan. Airports across the country have also confirmed an 11% combined increase in traffic.

Brazil is widely viewed by international investors as a safe haven from the sub-prime mortgage world. Since 2002, the world financial markets were convinced that Brazil was to follow Argentina down the road to default. However, the global financial markets are now in complete awe of the economic stability, which has rolled into the Brazilian housing market. Obelisk client, Alan Roberts, purchased off plan in Brazil in 2007 and said recently, "I considered going into buy-to-let in this country (UK), but was concerned about continued good returns. I think the recent sub-prime crisis shows that my fears were well-founded."

The discovery of oil reserves in the country ensures that Brazil can in fact stand on its own two feet and the MSCI's emerging-markets index has now rated the Brazilian stock market at the number one spot.

It is certainly no wonder why investors are turning to more lucrative property investments. As long as you research the areas you are interested in by checking the financials, legalities, political stability etc. or alternatively source a company who is able to do all this for you. As Obelisk client Ian Lane says, "Obelisk do everything for you. I just basically invest my money and they put it in the best place and give me the best returns. It takes all the hard work out of investing abroad.”

Obelisk Client Talks to The Sunday Times

Acclaimed property editor, Peter Conradi, recently reported on the latest trends in property investment with first hand experience from an Obelisk client.

Eric Potts from West Sussex began his quest for property investment in the UK before moving into the overseas property investment market.

During his interview, Mr Potts told The Sunday Times that since picking up his first buy-to-let property in London’s Docklands, back in 2002, he has amassed a portfolio of 41 properties, in Britain and abroad, with an estimated value of well over £8 million.

Mr Potts funded most of his purchases after selling a family run website - Jobsite - in the UK and now owns property in countries such as Latvia, Turkey, Brazil, Northern Cyprus and Bulgaria.

Mr Potts said, "My fiancée keeps a spreadsheet showing how many properties I have and what their status is. It’s very reassuring every couple of weeks to take a look at it. It makes you feel good and you sleep well. There is always money in property; you just have to feel in your stomach that it’s a good deal."

Peter Conradi of The Sunday Times reported, "Potts' portfolio, bought largely through Spanish-based Obelisk International, is considerably larger than that of the average property investor. But his journey from Britain and then on to the emerging markets of central and Eastern Europe and beyond is a familiar one."

Looking at both the overseas and domestic UK property markets, Mr Conradi’s article showed that even the yield tables from Knight Frank and Hometrack clearly indicate that overseas property investment far out-weighs the UK property market.

Mr Conradi highlighted, "Since the introduction of specialist buy-to-let mortgages by British lenders in the mid-1990s, hundreds of thousands of investors have turned to bricks and mortar as an apparently safe and easily understandable alternative to pensions or other financial investments.

According to the Association of Rental Letting Agents, the buy-to-let market in the UK is now worth at least £150 billion. Investors have also become far more adventurous; as the market in much of the UK slowed in 2003 and 2004, many looked abroad in search of the capital gains and yields no longer achievable at home."

Liam Bailey, Head of Research at Knight Frank commented, "It’s very hard to find easy money in the market in the UK. You’ve got to search areas that will outperform the average, since the average won’t be good enough for most investors. It’s like picking stocks rather than buying the index. You have got to look for a place where the local market dynamic is changing dramatically, perhaps because of regeneration or improvements in infrastructure."

Further extracts from The Sunday Times article showed many overseas countries and cities are indeed performing well. Knight Frank’s global property price index confirmed that many parts of the world "are still rising at a considerable rate and, in some cases, have even been accelerating."

Mr Conradi adds, "…the list is headed by Bulgaria, where prices rose 34% last year, compared with 17.4% in 2006 — although the sharpest growth has been not on the Black Sea coast or in the mountains, both of which are suffering from oversupply, but in Sofia, the capital, where property inflation reached 50%."

Spain Still No.1 Property Destination

Spain has reached the top spot yet again as the British number one overseas property destination for 2007.

Figures compiled by the Association of International Property Professionals (AIPP) have shown that the majority, over 25%, of all overseas properties purchased in 2007 by British buyers were in Spain. The statistics give a clear indication that the Spanish market is still going strong. The report also confirmed property investment in Italy for 2007 grew by nearly 1% on the previous years figure.

The AIPP top ten destinations report included emerging markets Bulgaria and Turkey, showing them as firm 2007 favourites, largely attributable to the very low entry costs and overall property prices on offer.

A spokesperson for AIPP confirmed, "The figures show that around 30-35% of the money spent on overseas property is in emerging markets and the prices in many of these destinations, as an average, are lower than the established markets."

Bulgaria accounted for 6% of the total property purchased abroad by British citizens in 2007, leading to a 30% property price increase in the country. Sofia is tipped to be the country's top earner for 2008 due to the influx of multinational companies relocating to the area and the emergence of a new luxury property market.

Turkey's coastal areas have proved to be a hit with lifestyle and fly-to-let purchasers. Big resorts such as First Choices' Holiday Village and the construction of new aqua parks have added to the attraction. The country’s capital, Istanbul, is seeing increased inflows of investment with a number of new resort style developments incorporating every known facility possible.

James Gonzalez, Market Analyst at Obelisk comments, "Comparing figures to 2006, the average spend per property in 2007 equated to £99,200 - an increase of £1,034 or 1%. This confirms that developers are still selling at competitive levels even though many countries have seen very high growth levels."

Reports from the Office of National Statistics (ONS) shows that 207,000 British citizens left the country in 2006 and approximately 200,000 properties were purchased overseas in the same year.

James Gonzalez adds, "The ONS data is believed to be rather conservative as the information is largely down to the property buyer declaring their purchase. Nevertheless, the ONS data along with the information provided by local and international agents has led the AIPP to estimate a 21% increase in overseas property purchases in 2007. The many thousands of holiday homes and the ever-growing overseas property investment market will sustain the growth in this well performing market sector."

Manchester United Football Veteran Visits Obelisk

The end of month meeting was the big highlight for the staff at Obelisk with a surprise visit from soccer ace, John Gidman.

John’s professional career spanning 18 years began with a football apprenticeship at Liverpool FC youth. During his time there, he admitted that he received more knocks than praise, which he believes gave him the vision and drive to succeed in his sporting vocation. To the amazement of the Obelisk staff, the football star produced his original Liverpool FC contract stating the small sum given to players at that time.

After his apprenticeship, John moved to Aston Villa where he spent his longest term of 8 years and where he was first spotted by England earning his first cap and scoring against Luxembourg in 1977. His next transfer came in 1981 to the much-revered Manchester United taking them to FA cup victory in 83’ and 85’. Gidman left the club the following year to play for rivals Manchester City, followed by Stoke City and Darlington respectively.

During his talk, John commented that he was astounded by the quality and professionalism of both the Obelisk website and the people behind the company. John remarked that the level of expertise emanates through the research provided to Obelisk’s current and prospective clients. He added that he believed that Obelisk was indeed a market leader in the property investment market. Select back office and consulting staff had the pleasure of being presented with high achievement and outstanding contribution awards, presented personally by Mr Gidman.

Montenegro Property Market Review

According to figures released at the beginning of the year Montenegro earns the greatest amount of foreign direct investment (FDI) per capita than any other country in Europe, with over £515 for each of its 650,000 inhabitants. Property investment alone accounted for €1 billion equal to 51% of the total FDI for 2007.

A large proportion of property investment comes from Russian investors and the Montenegrin government are clearly capitalising on this market. Montenegro’s capital, Podgorica, coined Moscow-on-Sea, openly welcomes the Russians with many advertising campaigns solely targeted at the ever-increasing Russian market. However, in terms of hectare ownership the Russians only just pip UK investors at the post.

The stunning scenery undoubtedly adds to the country’s attractiveness as a property investment and second home destination. Hotel and apartment developments are a key driving force for foreign ownership, which now equates to 1.52 million sq m of residential and commercial property, and over 19,000 hectares of foreign owned land is earmarked for construction works.

As the country moves closer to submitting its application to the European Union, the governmental reforms are coming to fruition. The government has pledged €131.3 million to ensure the country complies with strict EU regulations. This year will see a huge improvement to Montenegro’s infrastructure with much needed improvements to the country’s transportation system.

Foreigners have no restrictions to purchase property, although this does exclude the ownership of land, which currently requires an investor to set up a business in Montenegro. However, a new draft law, backed by the government will cut the red tape and allow foreigners to buy and develop land for both personal and commercial use. This law will also include the ability to finance a construction project locally, prior to completion.

Early predictions by the Central Bank suggested a downturn in Montenegro’s long running property growth for 2008. However, new laws, increased government spending and improvements to the country as a whole should hold Montenegro’s economic growth rate at a steady 7% year-on-year.

Montenegro is in fact trying to position itself as a high-end, south of France style destination, which reflects in the type and income bracket of the property buyer. Huge marble hotels and prestigious resorts are now commanding over €7,000 per sq m.

About James Gonzalez
James has a vast market knowledge and background within the world of property. Prior to joining Obelisk as Market Analyst, James worked for CB Richard Ellis (Hong Kong), Healey & Baker and Hamptons. James' key role at Obelisk is to research, analyse, and identify viable and profitable emerging markets.

About Obelisk
Our extensive research and analysis, whether it is through an Obelisk own development or via a developer partner, determines exactly where to build, what to build and when to build, from concept through to completion, making Obelisk unique within the property investment market.
Obelisk’s market leading, robust selection process ensures only the best financially secure property investments, safeguarding the future of our investor clients. All projects undertake compulsory due diligence making Obelisk the only overseas property investment company who provide clients with complete peace of mind.

For more information on overseas property investment, and to find out about Obelisk’s latest projects, contact Obelisk free on: 0808 160 0670 (UK) or 1800 932 514 (IRE)
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