The housing market: Is it still possible to make money from property?

'There is always money in property'

The property editor of The Sunday Times looks at the latest trends in bricks and mortarPeter Conradi
Click here for the best yeilds at home and hotspots abroad

If you believe the headlines, now does not seem the most obvious time to be investing in property: the market in the UK, as in much of the rest of the world, is slowing, if not actually falling; yields almost everywhere are under pressure; and the sub-prime crisis has put an end to the days of super-cheap borrowing.

Try telling that to Eric Potts. Since he picked up his first buy-to-let in London's Docklands in 2002, Potts, 45, has amassed a portfolio of 41 properties, initially in Britain and then abroad, valued at well over £8m - and he's considering adding a 42nd, a church near his home in Chichester, West Sussex.

'I am still buying, but I am a bit more selective,' says Potts, who has funded most of his purchases - ranging from Latvia to Turkey, Brazil, northern Cyprus and Bulgaria, from the sale of Jobsite.co.uk, a website he helped to set up in 1995 with members of his family. 'There is always money in property,' he says. 'You just have to feel in your stomach that it's a good deal.

'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.'

Potts's 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.

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.

Yet even on the most optimistic predictions, property prices in Britain will struggle to end this year much above current levels - most forecasters are looking for a rise of 2%-3%, which would mean a decline in inflation- adjusted terms. Fionnuala Earley, chief economist of Nationwide, Britain's largest mortgage lender, believes prices will not be rising at all by this time next year.

Nor is the picture much better overseas, with a distinct slowing in France, severe problems of oversupply on the Costas and other areas of Spain popular with British buyers and some price falls in parts of the former communist world.

So is it still possible to make a profit from property and, if so, where? According to Liam Bailey, head of research at estate agents Knight Frank, it is all about doing your homework. 'It's very hard to find easy money in the market in the UK or, increasingly, in Europe these days,' he says. '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, like new commuter routes. Narrow down your search to one area and get to know it really well.'

The best solution, Bailey believes, is often to buy not in a far-away city or an overseas hot spot, but in your own neighbourhood. 'It's about having your eyes open,' he adds. 'We always know about the odd house on a street nearby that has been badly looked after that would be quite a good buy. There is always something around with an angle.'

Stuart Law, managing director of Assetz, property investment advisers, is also convinced there is still money to be made, especially in the British market. 'There is a very good and sound argument to say that the UK is one of the safest places to be in at the moment,' he says. 'The United States is to all intents and purposes in recession, and central and eastern Europe are looking a bit wobbly. There are a number of countries where the market has overshot.'

Underpinning the long-term strength of the British market, Law believes, is our continuing inability, despite repeated pledges by the government, to build enough new homes each year to satisfy rising demand - a problem likely to be exacerbated by the current market slowdown: with sales of new-build schemes struggling, developers are holding off embarking on off-plan projects, a factor that will, over time, push prices back up again.

For Law, the crucial element is yield - the amount a property pays in rent compared with its value. If yields are low and you are buying purely in the expectation of rising prices, as is the case in much of central and eastern Europe, then you are in danger of being sucked into little more than a pyramid scheme. 'It's like the emperor's new clothes. If you haven't got the yield, then you haven't got value,' says Law.

Nevertheless, he would still consider buying in cities such as Manchester, generally regarded as having a surplus of new-build flats - provided the price is right. 'All new schemes in Manchester have ceased,' he says. 'At some point in the future, there will be a dire shortage of city-centre flats.'

Does that mean investors should ignore foreign markets? Far from it. Knight Frank's latest quarterly Global Property Index, made available exclusively to The Sunday Times, shows that prices in many parts of the world are still rising at a considerable rate - and, in some cases, have even been accelerating.

Surprisingly, perhaps, 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%.

Bulgaria was closely followed by Singapore (up 31.3% on the year), Russia (up 30%) and Poland (up 22.4%). Elsewhere, though, there were signs of a slowdown - and worse. Prices in Spain last year were up 4.8%, compared with 9% in 2006, and in France by 2.5% (also against 9%).

There were also some absolute falls: 0.3% in America and a substantial 7.1% in Latvia, 7.3% in Ireland and 14.5% in Estonia - all three of which had seen spectacular growth in 2006.

Whichever country you choose, you should apply the same tests that you would use when buying at home - only with extra care, because of the unfamiliar economic and legal situations. This means considering not just yields - and, indeed, quite how easy it is going to be to rent out and manage your property at a distance - but also your exit strategy. You may be making a juicy capital gain on paper, but a profit is only a profit once you have realised it. Happy investing.

Text source: The Times

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