Looking for the best return on property purchases? Turn to recent EU entrants or outsiders
Before the EU's fifth enlargement NATO Secretary General Jaap de Hoop Scheffer compared “Old Europe” to a pensioner who needed transfusions of fresh ideas from the 10 incoming central and eastern European members.
Few people gauged his meaning until the second wave of the fifth enlargement, when it transpired that the 12 additional entrants provided welcome news to property investors.
The rules of real estate investment are clear. Buyers seek not only a return on their investment but also additional profits from either reselling their property or from rentals. Currently, a real estate investor would reap bigger profits through a property purchase in eastern Europe rather than western Europe. Among the reasons: low property prices, marginal taxation rates and modest living costs as well as relatively high rental dividends and fast rising property values. Most European real estate agencies promise a high investment return – defined as the percentage change in the investment's value over a specific period. There are two ways to ensure a return on real estate investment. You can either purchase property and then rent it out or wait until prices rise and sell.
In terms of the first type of investment, European countries could be divided into three groups:
Group One: Old Europe – the first EU members
Group Two: New countries in the EU
Group Three: Countries outside the EU with no prospect of membership imminent
These figures, while not providing information about all areas of the real estate market, provide a realistic picture of the situation in Europe.
Superficially, investment return on properties in the aforementioned capital cities does not vary significantly between the three groups. What makes Group One so different, however, is the fact that investment in Old Europe either equals or accounts for at least half the amount levied in taxes on property transactions. But the most important factor is the dramatic difference between purchase prices in Central and Eastern Europe compared to those in Western Europe.
In most cases, it would be much easier for an average EU citizen or a smaller company to invest in Budapest, Warsaw or Sofia, than in Monaco and pay 24,900 euros per square metre. It means that, for example, a German company with an average annual turnover would be unable to undertake a large project in its own country. In Bulgaria, however, the same company would probably receive a Class A investor certificate and, if all went according to plan, a sizeable return on the investment.
The investment map looks similar to the other type. The key element in speculative deals is finding out where prices are rising fastest. Clearly, this is the third group of European countries as well as Bulgaria and Romania.
There is one key problem in all this. Identifying the suitable investment area for speculative deals from statistical data is almost impossible. The prevalence of the “grey” economy and corruption in countries from Group Three as well as the absence of official data are obstacles to buyers. According to unofficial forecasts, the five most profitable European investment spots this year are: Montenegro – the record holder for the fastest growing property prices in the world (50 percent annual increase), Moldova (31 percent), Serbia (29 percent), Bulgaria (22 percent) and Romania (21 percent).
To recap: western European countries have been stable and expensive real estate markets for a long period. Therefore, to a certain extent, they have exhausted their opportunity. The three Baltic States and Central Europe have already become expensive investment destinations and prices are not expected to increase soon. Romania and Bulgaria provide chances for good speculative deals but without dramatically large profits. Other countries outside the EU – such as Montenegro or Moldova – may yet turn out to be the new “gold mine” of real estate but only if dealings are transparent and legal. It is up to investors to choose between safe investments with smaller profits or serious risks and equally serious dividends.