The following is a guest post by Scott Dixon, Founder & Chief Editor of Mr Market Newspaper. Multi-award winning investor and author Scott Dixon has become known as one of Australia’s thought-leaders on investing and is a regular industry commentator.
You can learn more about scott at his website.
Most Australian’s would never consider a property purchase outside our own borders. It is assumed to be a logistical nightmare and we wouldn’t have a clue where to start.
However, there are a growing number of people that desire the European dream… Owning a Tuscan villa, a Chateaux in France or a humble apartment on the Mediterranean sea.
For many, the thought of spending retirement as an endless summer – 6 months of retirement in Australia and 6 months in Europe – sounds like a dream come true.
With this dream in mind, plus the recent “crash” in European property, we have investigated the current scenario and will portray our findings.
Where to start? – the economic backdrop
From a growth perspective, Europe has been a “no go” zone for a few years now. Fund managers and other investment professionals have avoided it, citing the economic risks as potentially catastrophic. However as a contrarian, this is usually the perfect hunting ground for bargain prices.
The reason is that a depressed economy typically reduces the buying demand and conversely increases the rental demand. As this happens, rental yields tend to increase. This makes the opportunity for profits higher.
In Europe, it is important to realise that they came from a highly leveraged backdrop. Property prices outstripped rents for such a prolonged period that the rental yields dropped to historical lows. While this has partially un-wound, rental yields remain far lower than ideal.
… In other words, it is still cheap to rent in Europe.
In Munich, a 2-bedroom apartment can be rented for as little as 300 euros per month (AU$430pm) which is unheard of in Australian cities.
Meanwhile, a small house in the picturesque city of Bordeaux can be rented for just 670 euro per month (AU$960pm).
Maybe cheap rents are expected given their economic woes. Unemployment is still over 10%, economic growth is practically non-existent and inflation is low.
Yet at the same time, it has been reported that property prices in many of the European countries have crashed.
This is only partially true, because many European nations have gone on to reach new heights despite the crisis under their feet (Spain and Ireland are exceptions).
On the ground, the first thing you will notice is that property prices are lower than Australia in raw terms. The global real estate site Remax.com is used widely by Europeans (similar to our realestate.com.au) and provides detailed listings of properties available. It is worthwhile checking this site if you want to investigate further.
How much does it cost?
If you are like us and had hopes of finding a $50,000 property on the coast with access to excellent facilities, you are going to be disappointed. It is true that properties exist at this low-end (especially in Spain and Portugal) however the state of these properties are questionable.
So being realistic and depending on where you are wanting to buy, the average range for a decent 2-3 bedroom apartment in a mid- tier city seems to be around AU$300,000-500,000. Think of Munich, Seville or Bordeaux.
If you want a high-quality location, you will be paying around Australian prices or possibly more. Think of Paris, London, Nice, Tuscany, St Tropez or even Barcelona.
In truth, Europe is more expensive than many people realise. It is not like the USA where you can get a property yielding 10%+ in a major city for less than $100,000 to $200,000.
Therefore, some Australians that are serious about the European dream may need to consider a sharing arrangement with friends or relatives. This is a feasible solution and may open up more opportunities, but before putting in a bid it is important to re- consider “the logistics” and “the fundamentals”.
What do you need to know?
Buying in Europe is actually not that restrictive. Unlike the past in Italy and Poland, they have open borders and allow international buyers to access their markets.
Typical purchase costs (think stamp duty, etc) are also lower than Australia in many cases.
If/when you do buy, you will need to pay tax on the rent and any capital gains. Australia adopts a double-taxation agreement which can be a complex area but typically means you will pay the same tax on foreign investments as Australian ones.
It is always best that you talk to an accountant before making any purchase offshore.
The other major implications for Australians are access to debt and the currency.
Firstly, it will be very difficult to take out a loan in Australia (or Europe for that matter) to fund the purchase. Therefore, the purchase will typically need to be made in full.
Also, if the Euro falls then Australian property-holders will lose purchasing power and money if converted back into Australian dollars. However, if the economy continues to improve and the Euro strengthens against Australia then investors will benefit from both prices rises and a currency appreciation.
Where are the best places in Europe to buy?
This is a tough question in any country; however Europe is a fairly mature market which makes life a little easier.
Based on our assessment of various areas in Europe, we can summarise the opportunities into a few of the more favourable cities:
Porto (Northern Portugal)
A very picturesque city that is on the tourist trail and appears one of Europe’s best bargains. It costs less than $2,000 per square meter and the rental yield is reportedly above 6%.
To put this in perspective, Melbourne costs around $8,000psqm and Paris costs above $14,000psqm. Obviously it isn’t without risk (the Portuguese economy continues to struggle) but it could be argued that this is already priced in.
San Sebastian (Spanish northern coast)
One of the most beautiful cities in Europe and frequented by many tourists, this city is one of the most affluent areas in Spain and hence avoids many of their unemployment problems.
Current prices are around $4,000 per square meter and the cost for a small apartment can be as low as AU$150,000. Rental yield outside the city is also decent by European standards at 4.3%.
Sainte Maxime (France south-coast)
This is the sister city to St Tropez but still beautiful and flocked by 60,000 tourists every summer. This city currently offers prices around AU$7,000 per square meter and it is possible to find apartments in the AU$300,000 to $500,000 range. Did we mention they get 300 days of sun a year?
Riga (Latvian capital city)
for those looking for a smaller capital outlay, Riga could be your ideal choice. Considered one of few areas in Europe that is growing, right now it offers some of the best conditions from an investment perspective with a yield of 5.4% and a cost per square meter ranging from $1,300-$3,000. However, the cold weather may deter many people chasing the endless summer.
Of course, there are plenty of other areas that would make idealistic lifestyle choices.
Major cities such as Paris and London have little room for new developments and hence will always demand a premium over peripheral cities or towns – yet they remain very expensive. Similarly, the coastline along the Mediterranean will demand a premium and remains outside the budget of the average Australian.
As part of the supply/demand equation, there are other economic factors to consider.
There is growing evidence to suggest that Europe’s struggle is the start of a long deleveraging process. With access to debt restrained and debt levels already at record high, it is not feasible to grow at a rate akin to history.
Unemployment is the other obvious problem; however this could be more cyclical than structural but must be considered for reasons of demand as well as crime/safety.
It is possible for Australians to buy property in Europe, although European property as a whole does not present the opportunities that many would ideally hope for. In the end, property is always a matter of supply and demand. This is true in Australia, Europe or the Western shores of Africa.
On this basis, there are some great pockets within Europe that remain appealing to an investor – yet overall the continent unfortunately remains more expensive than we would like to see.
Mr-Market.com.au – for more awesome global and local financial/investment information
Numbeo.com – where you’ll find interesting financial statistics by city/country
Remax.com – for actual European property listings