Pay as you grow

British investors with a seemingly insatiable appetite for overseas property have received a couple of stark reminders of the risks associated with investment in exotic destinations. In September, Thailand’s military sent tanks onto the streets and ousted Prime Minister Thanksin Shinawatra. Although no blood was shed, it was, nevertheless, a coup in what had been regarded as the one of the safest homes for investment in the Far East.

Attracting as many as 750,000 British tourists a year, Thailand has seen an influx of Britons investing in property developments in the country, particularly on the island of Phuket and in the mainland beach resort of Patong. Land prices have soared, and even the tragedy of 2004’s tsunami did not stop the interest from overseas investors.

September’s coup was not unprecedented – the last one was in 1992 – and while there has been little short term impact on the stock market or tourism, the longer term remains uncertain, particularly if democratic elections are not held in October 2007, as has been promised by the military government.

Nor is it the only country showing signs of unrest. October saw major riots on the streets of Budapest and across Hungary, one of the most progressive of the former Eastern bloc countries that has long attracted ritish capital. The Foreign Office says further demonstrations re likely.

Hungary’s burgeoning tourism industry has spread from cheap-flight city hops to Budapest to further afield. Almost half a million Britons visit each year and the lakes, such as Lake Balaton, are now fixtures on the tourist and investment map. As with Thailand, October’s events are not something a cautious investor would be entirely surprised by – and served as a clear warning to the increasing number of people investing in Croatia, Bulgaria, Czech Republic and Albania.

Despite soaring property prices in traditional property hotspots such as Spain and France, interest in overseas property has not cooled. And, naturally, investors are looking beyond these established locations for cheaper properties, greater rental yields and the possibility of capital growth.

All abroad?
Around 2.2 million Britons own property abroad: 30 per cent in Spain; 18 per cent in France; seven per cent in Greece; and five per cent in each of Italy and the US. A recent survey by Instant Access Properties (IAP) found that 45 per cent of Britons travelling overseas on holiday spend, on average, 85 minutes looking at details of houses and apartments for sale. This equates to an astonishing 22 million hours a year. No self-respecting investor can ignore the opportunities to make money from developments in the more exotic locations.

But blindly following gold rush fever can have its pitfalls. Instant Access Properties, for example, which specialises in off-plan investment in overseas development, urges a cautious approach. “It is clear from the results of our study that actually being in a foreign country makes the idea of buying property there much more appealing,” says chief operating officer Anthony McKay. “Two out of every five people we spoke to said being away had made them think more seriously about investing in a property abroad.

“What people must remember, though, is that the process can be very complicated, and a good deal of preparation must be done before parting with any money. It’s not simply a case of finding somewhere in the estate agent’s window and buying it. Our guide to investing in property abroad will show buyers exactly the right process for finding that place in the sun and make sure they cover all the bases to secure a sound investment.”

The first thing an investor must look at is the country he plans to invest in. How stable is the political situation? The economy? The legal system? How robust is the currency?

IAP’s country-by-country assessment of markets reveals three tiers of countries – and yields similar results on property investment potential as the overall country assessments produced by the Organisation for Economic Cooperation & Development.

In the primary tier are the UK, Spain and the US – with developed infrastructures, offering compelling returns. Secondary markets include Greece, Cyprus and Portugal, and have the potential for even greater returns, but with greater risk and less developed economic infrastructure. High-return, high-risk tertiary markets include the increasingly popular Eastern European countries, the Far East and South America, which are characterised by poorer infrastructure and weak resale markets.

Southern discomfort?
In South Africa, property prices have soared in recent years, driven by a huge influx of foreign money. Earlier this year, African National Congress (ANC) lands Minister Angela Thoko Didiza proposed a ban on foreign ownership of freehold property, limiting ownership to 99-year leases. President Thobo Mbeki has indicated that he supports the proposals and established a commission to look into the proposal.

Even investment in primary-tier countries is not always an easy ride. In Spain, Valencia’s notorious “land grab” laws mean land for new housing developments can be compulsorily purchased for minimum compensation. As well as being short-changed, rural retreats become urbanised. But it is not just a double whammy, it’s a triple – Spanish local government charges an urbanisation tax for the new infrastructure.

In the longer term, it is impossible to assess how developing countries will react to massive accumulation of properties by foreigners. UK newspapers are full of stories about how properties in places such as Cornwall are unaffordable for local people, and it should not be forgotten that in 1979, Welsh Nationalists embarked on an arson campaign that saw more than 200 English-owned holiday homes burnt to the ground. The campaign eventually turned to direct attacks on English people. Transplant these sentiments to further flung locations, where the disparity is more marked, and the potential for a social and political backlash is all too evident.

Brad Rosser, co-founder of IAP, urges caution: “Our aim is to identify specific country markets, with manageable risk, which comes from political stability, a well developed legal system and secure land laws. We’d look for a robust infrastructure, with good transport and a well developed banking system. A stable political environment and a positive economic outlook gives us the assurance we require of a country before we recommend investing in it.