European Investment Property – Is now the right time to buy?

European Investment Property - Is now the right time to buy?

As 2016 gets started, it’s time to get to work on our resolutions. For most of us, that means finally doing things we’ve been putting off: Getting fit, spending more time with family or having a critical look at our investment portfolio and deciding where to allocate those funds that are sitting idle in low yield accounts. If you have EUR 80,000 /USD 85,000 or more, one of the best options right now might be European investment property. We believe it’s a particularly attractive time to buy German and Spanish property in cities such as Berlin, Madrid and Barcelona.

European investment property: why now?

Europe is Cheap
The Euro is currently cheap vs. the US Dollar and British Pound. Since mid-2008, the Dollar has appreciated by nearly 50% against the Euro, from 62 eurocents to 91 eurocents, while the Pound rose over 30% from 1.02 to 1.33. In fact, the last time the Dollar was this strong was in 2003, only a few years after the Euro was created and when the US economy was booming. All of this means that if you hold Dollar or Pound savings, it might be an especially good time to take a look at Europe.

The cheap Euro also may also help boost the European economy’s recovery over the coming years, as European goods and services become cheaper and more attractive in Dollar terms. This in turn could support higher property prices.

You can still find cheap property markets
While some European markets such as London are already at eye-watering prices and others such as Greece are still very problematic, one can still buy relatively inexpensive properties in markets like the major cities of Spain and Germany without undue risk. In both these markets, prices have already started rising, as we will see further on. So if you have toyed with the idea, now is the time to get serious.

Inflation and interest rates are still low but are likely to rise as economies recover
As the European economy recovers from the past few years of crisis, inflation rates are likely to rise. Because rent contracts are adjusted by inflation, property provides a very clear hedge in this scenario.

Also, although the US Fed began increasing interest rates at the end of 2015, so far the European Central Bank has signaled that it will continue to keep interest rates at low levels. This means that mortgage rates are also very low, making it an attractive time to finance property purchases. As the economy gains strength, and especially if inflation rises, this could change.

Why Buy Spanish Property?

After 6 or 7 years of reading headlines about the ‘PIGS’, sovereign debt crises, soaring unemployment rates and crashing markets, why buy Spanish property?

After 7 years of declines, prices finally started rising in 2015
As you can see in the graph below, in the years leading up to their peak in late 2007, Spanish property prices soared, at rates of up to 15% per year. They were then dragged down by the double-whammy of the global financial crisis of 2008 and the subsequent European sovereign debt crisis. But from 2014, as financial tensions eased, declines slowed.

Finally, in 2015, prices stabilized and then rose 1% vs. 2014. Meanwhile, the number of house sales, another indicator of market strength, grew in the high teens.

As an European investment property, Spain is now very affordable
A good indicator of whether the price of property is fair is how it relates to local incomes and rents. At its peak in 2007, Spanish property was about 75% above its long-term average multiple of incomes, according to The Economist. By this measure, it was among the most overpriced in the world! But having fallen over 40% since then, it is now back at its long term average. By comparison, several other European countries are about 20% above that average.

International property investors have an additional advantage: while property prices have stabilized on paper, local unemployment is still high and mortgage markets are weak. This opens up good opportunities to those who can pay cash or finance abroad.

Prime markets (Madrid and Barcelona) are performing better than the national average
As is often the case with property cycles, the markets in major cities have recovered faster than those in suburbs and holiday resorts. The map below shows house price rises in 2015. As you can see, prices are recovering well in Madrid and Catalonia (around Barcelona), while other regions are still struggling.

Let us go over the two key markets – Barcelona and Madrid.

European investment property in Madrid

Spain’s capital has a population of 3.2 million in the city, and 6.5 million including the surrounding metro area. It is a media, telecoms, transport and banking hub, home to companies such as Telefonica, Iberia and BBVA.

The property market has benefited from international buyers, especially since the Spanish government offered residency to those who invest EUR 500,000 in the country. Wealthy Latin Americans, in particular, have taken up the offer thanks to low language barriers and attractive exchange rates vs. the US Dollar.

In summary – this is a cosmopolitan business city. Prime investment property in Madrid is a far cry from the cheap holiday developments that still sit empty.

European investment property in Barcelona

Spain’s second largest city houses 1.6 million people and 5.4 million including the surrounding metro area.

Its beautiful architecture and seaside, warm weather, abundant entertainment options, attractive prices and excellent airplane connections have made it very much a ‘lifestyle city’, with tourists, students, and international investors pouring in and even a few professionals choosing to make it their home and commute by air to cities like London.

Barcelona’s economy is robust and diversified. It rivals Rome for the position of third most visited city in Europe (after London and Paris), hosts some of Europe’s most important trade fairs and is home to Europe’s 9th largest container port. Leading companies in the fashion (several business units of Inditex), automotive (Seat and Nissan), finance, energy and transportation sectors have offices and operations in the city.

Although Barcelona markets itself as a fun city, investment property in Barcelona banks on a highly diversified economy.

Why Buy German Property?

The German property market is one of the most unique in Europe and even the World, in that it is possible to acquire property in one of the richest, safest, most stable and most diversified economies in the world at particularly affordable rates.

In most other Northern European countries, like Scandinavia, Belgium and France, property is increasingly unaffordable, with prices 25% to 50% above their long-term average ratios to incomes, driven by recovering economies, very low interest rates and incentives for home-buying. By comparison, German ratios are about 10% below long-term averages – this in arguably what is one of the strongest economies in Europe.

Apart from price, the German market has very different characteristics from many other countries. Firstly, home ownership is very low – below 50%, as compared to around 70% in the UK and over 80% in Spain. Generally speaking, the German government does not pro-actively encourage home ownership: mortgage payments aren’t tax deductible, laws are favorable for renters and mortgage providers require quite large down-payments.

This has made for a very stable market: in fact, the house price boom and bust dynamic that drove the global financial crisis was completely absent in Germany. Whereas in other countries prices doubled or even tripled in the years leading to 2007, in Germany they had been deflating gradually for about 30 years and were about 20% below long-term averages when the crisis hit, and while other markets collapsed, German property prices started rising gradually! By the end of 2015 they were 16% above their 2008 troughs, but as compared to incomes are still 10% below long-term averages.

Within Germany, we see Berlin as one of the most attractive markets for investment property now.

European investment Property in Berlin

Unlike many other European countries, such as the UK or France, where the economy is strongly centered around the capital city, Germany is more spread out. Out of a total population of over 80 million, only 3.4 million live in Berlin. It is the largest city, but Hamburg (1.7 million), Munich (1.3 million) and Cologne (1.0 million) are not far behind.

This is one of the reasons that it is one of the most affordable capitals in Europe. Another is the legacy of East Germany’s multi-decade recovery from socialist poverty. But while once upon a time this earned Berlin its informal slogan of “Poor but Sexy”, today’s reality is quite different!

Berlin’s economy is now robust. It is home to the headquarters of leading transportation (Deutsche Bahn), telecom (Deutsche Telekom) and media companies, as well as business unit headquarters and manufacturing facilities of many other German multinationals such as Siemens, Daimler and BMW. Over the past years the city’s affordability has also attracted many startups in the technology and creative industries.

Affordability, a rich history, an abundance of museums and parks and a vibrant nightlife have also made this very much of an international lifestyle city and attracted tourists and expats.

All of these factors have meant that for the past few years, international investors have started to buy up Berlin investment property, causing prices to inch up, albeit very slightly.

Berliners have taken notice and some speculate that this will cause some locals to hedge against rising prices by buying their homes, rather than renting as they have done historically. Of course, this would increase demand, thereby increasing prices even further – an attractive scenario for Berlin property investments.

In conclusion

There are several macroeconomic reasons why European investment property, in general, is attractive. To buy Spanish property, focus on the major cities. European investment property in Madrid and Barcelona is rising, while other regions are still struggling. To buy German property, look at Berlin. European investment property in Berlin is uniquely affordable considering the strength of the German economy. But investors have caught on and prices are rising.

If you are looking to buy Spanish property, or looking to buy German property, or would like to know more about these markets, we’d be happy to help.


CHRIS LAND, FINANCIAL ADVISOR

Chris has 9 years’ experience as a UK pension specialist and licensed financial advisor. He specialises in helping clients make balanced financial decisions to grow their personal wealth.

Chris is licensed with Globaleye, an award-winning international financial advisory firm established in 1999, with 10 offices and 15,000 clients worldwide.


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