SIP - 3rd anniversary...and review

So here we are.... it's August 2006, just a couple of months before Slovakia Investment Property's 3rd anniversary. The fact we've been here just before the opening of the Slovak property market to foreigners, along with being a pioneer in offering property in Slovakia to UK & Irish buyers and investors, fills me with pride and joy. And, the 3rd anniversary also seems appropriate to look back and review the initial expectations and forecasts, and the true changes and developments in the Slovak market in the last three years.

Naturally we are all very pleased with the economic development Slovakia has been undergoing in recent years. In 2003 and 2004 not many in the UK had as strong a faith in the country as we did, in spite of early signs of Slovakia's solid economic fundamentals and fast progress. With
further positive development and acknowledgements from internationally respected institutions such as the World Bank, IMF and main rating agencies, the focus on Slovakia started to grow exponentially.

Slovakia's stellar economic performance has attracted international media, and with it an increasing number of British and Irish residential property investors (as opposed to the earlier, mostly professional investors we have been dealing with in the early days, when the country only appealed to those comfortable with untapped, higher risk markets). Slovakia Investment Property was, thanks to our early vision and belief in Slovakia coupled with deep knowledge and years long experience in its property market, the pioneer in offering services to foreign investors.

Today, three years later, I am extremely proud we have maintained our position as UK's leading Slovakia property specialist, and built on it to provide our clients with an even better and more complex service. (After all, there is always room for improvement! :))

In acknowledgement of our position and quality of service, Slovakia Investment Property is frequently mentioned and quoted in British and Irish press. (For those of you curious to know more, please visit the following link: www.slovakiainvestmentproperty.com/coverage.php)
Our monthly Slovakia newsletter featuring economic and property news and analysis is republished on several renowned property news sites. And, of course, the highest recognition came in 2006 when Slovakia Investment Property was awarded with the most prestigious Homes Overseas Awards prize (category: Best Central and Eastern European Development).

Ironically, our position as a market leader is indirectly acknowledged by the many "Slovakia specialist" companies we have seen springing up since mid 2005. With the country's increasing popularity among British and Irish investors and buyers, many new Slovakia "experts" have set up in search of easy sales and commissions. Not only our clients, even we get confused at the many Slovakia websites all carrying remarkably similar names (I will leave it open whether this is due to an amazing lack of imagination or an attempt to benefit from someone else's reputation and PR). Our well researched website information and materials also keep enjoying very high popularity among the new Slovakia "experts", judging by the number of severe copyright infringement cases we've been dealing with over the last year. Keeps our solicitors happy, if nothing else! (Although in this regard, I'd rather keep them less busy, to be honest!)

It is also gratifying to see Slovakia Investment Property has been a trendsetter and a good year ahead of competition in terms of new investment "hotspots" within Slovakia. Throughout 2004 our focus was primarily on Bratislava property as the most suitable investment market. In early 2005 we have started offering Trnava as a high potential secondary market, as well as pointing towards similar potential in Zilina, and gradually in the tourist & ski resorts. Increasingly we have been warning about the importance of selecting the right area, due to the limited and very specific rental market in Bratislava (and other regions).

Meanwhile, 2005 has brought a number of new Slovakia focused agencies, recognizing UK investors' thirst for "easy, hands-off, high growth" off-plan deals in what has increasingly been considered one of Europe's top new property hotspots. The wealth of Bratislava off-plan opportunities offered to foreign buyers in the most unlikely investment locations lets me hoping the byers have not purchased with the view of rental returns (or unrealistic capital growth).

In 2006 - again, about a year after our early Trnava opportunities - Trnava has started to be promoted to the UK market as a new, "untapped" hotspot. Our Trnava investors will be pleased about having taken the plunge in 2005, and timing the letting precisely for the 2006 demand (when all the new car industry employees will have moved in and settled in their Trnava homes).

I reckon that, in line with Slovakia Investment Property's forecasts for new market opportunities, the focus will be increasingly on tourist centres and holiday-let properties. Although we've been offering carefully selected opportunities in this market since 2005 (and will increasingly do so due to the very positive results), the holiday-let market, similarly to the long term rental market in Slovak cities, is limited and locations need to be selected with utmost care and knowledge (and realistic expectations!). Let's hope investors will do their own research more often than in the past ... sadly due dilligence is something many buyers seem to leave to the selling agents!

So, how has the Slovak property market changed over the last three years? Has it lived up to the expectations?

Yes - if your expectations were realistic! I can't stress it often enough - invest for the long term and you will not be disappointed. Believe any claims of outrageous gains and hands-off riches (preferably in the shortest time) and, well ...

The Slovak market continues to be driven by the strong domestic demand, particularly in Bratislava and the economically strong regional capitals of western Slovakia. Little is happening in the regions of central and eastern Slovakia, including the capitals Banska Bystrica, Kosice, Presov. Due to high unemployment and extremely low purchasing power of the local population these cities represent a high risk and low return for any residential property investor at the moment (and probably for the next 5 years).

Prices of new residential properties in Bratislava have been increasing by an average of approximately 10% p.a. (although this varies based on location, with slower growth in less desirable areas). Classic apartments in BA I (city centre, Old Town) have appreciated by approximately 15% p.a. (with up to 20% for top quality properties). This particularly strong growth on period property is likely to continue due to the high demand for city centre apartments and extremely limited supply with no sites for new construction in this area.

In terms of new built properties (locations BA II - V) the prices will develop in line with demand and supply, and location and quality will play an increasingly important role amidst increasing competition of new projects. As in the past, areas closest to the city centre are most sought-after, although there are exceptions and some locations need to be considered with special care (in particular the traditionally unpopular BA V - Petrzalka, south of the Danube). Good quality new apartments in popular locations should benefit from approximately 10% annual growth for the next few years. Similar development is likely to be seen in the towns of Trnava and Zilina, benefiting from solid local economies and good purchasing power.

The rental side has been the cause of some concerns. We have been warning on the limited and selective rental demand in Bratislava (and practically no rental market in other cities, with the exception of increasing demand in Trnava and Zilina over the last year). Due to the high owner occupancy and lack of rental culture among local population - students and migrant workers excluding - and strong preferences of the expat tenants for city centre location (classic apartments). Growing supply of rental properties means investors in new built apartments are going to be facing increasing void periods and, depending on location, difficulty in finding a tenant.

A similar situation presents itself in nearly all of the Central Eastern Europe markets, and a positive change cannot be expected in coming years. Here, once again, the importance of independent research and due dilligence process becomes apparent. In times when most British overseas property buyers look for (buy-to-let) investment as opposed to a vacation home, the 'weapon' most agents use to close more sales, more quickly, are claims of high yields and fantastic capital growth. Let me say this ... you will not get 8-10+% yields on rental apartments, no matter whether you buy in Poland, Hungary, the Baltics, Slovakia, or elsewhere in the region. Agents also don't mention the hundreds (and even thousands in some cases) of empty new apartments in Budapest, Prague, Bulgaria, etc ... with little or no prospect of finding a tenant in the next few years.

Now, that sounds worrying ... and it is, at least to those foreign investors who have purchased off-plan in one of these cities, and have not been able to let their "buy-to-let" property ever since completion, being forced to subsidize the full mortgage and costs. And, the lucky ones who have let their apartments are, in most cases, receiving a significantly lower rent than the overly optimistic promises by British sales agents.

So, does it mean Central and Eastern Europe (CEE) does not represent a good investment opportunity?

The answer is no. Or perhaps - depends. If you are buying with the view (or necessity) of covering your costs with rental income, and you cannot afford to keep a vacant property for at least 6-12 months, then you may want to seriously reconsider whether buying in CEE is a suitable option for you. (However, this will also apply to buying in most of world's markets.)
In fact, if your vision is to purchase a number of off-plan properties via mortgages that will be paid by rental income while your investments will double in value in a few years and make you rich ... well, in that case, my advice on whether to buy in CEE or not would be a definitive no.

At the risk of drifting yet further away from the main theme of this blog ...
You may now ask - "Well, what is an investor to do then?"

Ok, although many readers will not like to hear this (trust me, I've seen a scary share of "I set my mind on buying this property and making money with it and don't want to hear any reason why it may not be a suitable investment" attitude), here it goes:

1. Buyers/investors need to take full responsibility of their decisions!

Most agents will always promise you exactly what you want to hear - it's unfortunate but understandable, and will happen in any market, always. The difference lies in the ease of doing your own research - which is clearly easier in your home country (not that this seems to have prevented many jumping on "high-profit discounted off-plan" deals that led to severe losses for many UK investors in the last few years).

Even if you don't speak the local language, in virtually any market where British and Irish investors have started buying property most local agencies have some english speaking staff - a simple visit and talk to independent local agents will generally reveal very different facts than what your UK based promoter claims. To know you are told the truth about the rental demand and achievable rents, try posing as a tenant. You will likely see agents are willing to drop the asking rents down quite significantly (up to 50% is not unusual when the market is static and demand slow).

2. Don't believe everything you read in that nice sales brochure!

More often than not agents present you exactly those "facts" you want to hear. After all, that is the way to get your cash. In most cases I've ever seen, UK based promoters are remarkably more "optimistic" with these "facts" than the local agents (who truly know the market and who you will depend on to rent your property, or eventually sell it on). In most cases, I'd say, count on 50% of the promised rents as being truly achievable. And, to be safe, picture in a 6 month void period before you manage to find a tenant. Which is not to say you can't be lucky and experience a better scenario. However, if you do it the other way around, you may be stuck with a property producing a loss you cannot afford to subsidize.

3. Compromize on your requirements in favour of your main goals

One thing keeps puzzling me ... the number of investors with a mind set on a very particular property type (you guessed it - new build!) while disregarding the local market, demand, and any other issues. Yes, it may be true that profits were made in UK off-plan property in the years of a strongly rising market (although more than a few got into trouble with these very same properties as well) but, does that mean off-plan is necessarily where the best potential lies in CEE?

Well, if you want to find someone to rent your property, the answer in most CEE markets is a no! It does pay to know (and research) your market well. If you do, you'll find out that in most CEE capitals the city centres have the highest rental demand and the best chances for letting ... and, as it happens, most city centres in Central Europe consist of classic (period) properties rather than new builds. And guess what, it's the (classic) city centre apartments that are in highest demand and shortest supply, reason why they are seeing the strongest appreciation.

If you have a goal, a purpose why you're buying a property abroad, research the local market in order to find the right type of property and location that will ultimately lead you to achieving that goal. Starting with a closed mind and strong set preference for something (based on your personal likes or experience from other markets) is only likely to result in disappointment, or, worst case, in a disaster.

4. You really need an exit strategy!

So, you bought a nice new flat, but no tenants in sight? Several months later and several thousand pounds shorter you decide you need to sell on. You may be willing to forgo any profit due to the short holding time and are happy to just recoup all your costs. So far so good ... but, have you researched the local resale market BEFORE you bought? If not, you may simply find out there is none, and you are stuck with a property and no potential buyers.

Admittedly, this is quite an unrealistic scenario in the Central European markets with healthy domestic demand such as Slovakia, Czech republic, Poland... But, what about, for instance, Bulgaria? Cases of investors unable to rent or sell their Bulgarian property are mounting, and, I'm afraid to say, will only be increasing in the next few years with thousands of new properties nearing completion. The point is - you need a clear and realistic (meaning well researched) exit strategy! If there is none, I definitely wouldn't risk my money on even the most promising investment opportunity.

So, starting with our 3rd anniversary, review and prospects of the Slovak market, and finishing with general concerns and solutions applicable accross all of Central Eastern Europe, let me conclude this post by saying THANK YOU.

Thank you for all your support, trust, patience and understanding. Slovakia Investment Property will continue working hard to offer you help, advice and some excellent property opportunities.