Property investment: A question of risk

21.10.2007

Every month, Zoe Dare Hall shows how experienced buyers profit from property abroad

Part 1: What kind of investor are you?

We all accept that investing in overseas property entails risk. But what is risk? Experts tend to evaluate it in several different ways. Boracay Low-risk? Although the Philippines is not yet an established overseas market, 7CI reckons the quality of Boracay makes it a winner, with rooms in an aparthotel fom £54,250

Guaging risk:

Ready2Invest's Jonty Crossick divides risk into two: market and location risks (including political and economic situation) and specific development risk (including developer's track record and exit strategy). "Give the components different weights by looking at how uncertain each component is - then compare the risks with the potential returns," says Crossick.

While French leaseback properties, which offer secure guaranteed income, are widely considered the lowest-risk overseas investment available, returns are low and you can't sell within nine years.

Lance Nelson from Jet2Let suggests low-risk investors stick to upmarket resorts in European countries with highly developed infrastructure and lettings market. Switzerland, he suggests, is ideal, even though his company - which specialises in higher risk emerging markets - does not sell there. Returns may be low, but so is the risk.

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Alistair Powell, MD of Seven Continent Investment (7CI), takes a different tack. Look at the development, not the country, he says. "The Philippines are high risk, but Boracay island, where we're selling rooms in an aparthotel from £54,250, is low risk because there is huge demand from Japanese and Korean tourists."

The better the hotel, the higher their occupancy rates, so the higher the investor's rental yields is the thinking.

"You buy a hotel room based on cold factors - returns, room rates, a profit and loss sheet, not emotions," says Powell. "Investors can see exactly what yields they will receive, and who their resale market is, then make an informed decision."

Sea, ski or city?

For a secure long-term investment, pick a city, says Simon Tweddle, Property Secrets' chief analyst. "Prague is the lowest-risk blue-chip location. Buying costs are low at around 1%, prices rose by 20% last year and finance is available for foreigners."

Coastal or ski resorts are seasonal and dependent on tourism, so investments there carry a higher degree of uncertainty. "A city market is driven by locals and there are always people looking to rent or buy," says Tweddle.

Bucharest is a medium-risk city, with high growth rates but an uncertain rental market and limited financing options. Tirana, the Albanian capital, is high-risk. "It is a pure capital growth market. You can't rely on rental returns," says Robin Barrasford, of Barrasford & Bird, who is selling off-plan apartments there from £29,000.

Rent and resale:

The key problems new investors need to consider: will the property provide me with enough rental income to support my mortgage? And is there a local market to resell to? "If you can't let your investment properties, that will send you bankrupt quicker than having to sell your assets," says Alistair Powell.

Bulgaria, say both Powell and Simon Tweddle, is an example of a market with no obvious exit strategy. "There's no incentive for agents to sell resale properties because developers pay them such fat commissions to sell off-plan," says Tweddle.

Also, consider over-supply. "Dubai is now high-risk because you can't rent out properties there due to over-building," says Powell.

"Instead look at the next emirate along, Ras Al Khaimah. It's the same distance from the airport, apartments on a palm-shaped island cost from £90,000 compared with £500,000 in Dubai. It's a blank canvas where you just know prices will go up."

What the experts say:

JONTY CROSSICK - Ready2invest

"Strip away any deal to work out what it really is, not what it's being marketed as. Ask who is guaranteeing your rental and how they can guarantee it and find your own comparables to see if the product is really priced under market value."

SIMON TWEDDLE - Property Secrets

"You don't have to take high risks to make good money in property. Just because you're a highrisk investor, it doesn't mean you always have to go for highrisk markets."

LANCE NELSON - Jet2Let Property

"The single biggest risk is of an illegal development. If you focus on the legal and contractual side, you can turn high-risk destinations into medium or even low-risk."

ALISTAIR POWELL - Seven Continent Investment

"You can't talk about a country being highor low-risk, or even one area within it. You have to look at the specific product."

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