Bulgarian Investment Property

Market fresh

By Murdo McHardy, head of product development at Scottish Widows

Keeping up to date with day-to-day local and legislative changes in the overseas sector is just as important as it is in the UK market

The rise in the number of people buying property abroad over recent years has been well documented. In its 2006 Social Trends report, the Office for National Statistics (ONS) reported that British families have invested more than £23bn in overseas property.

This is more than double the estimate in 1999 to 2000. Investment is highest in Europe, with Spain and France still the preferred locations for investment. In 2003 to 2004, 231,000 Britons had a second home abroad (see Location of second homes outside Great Britain, right). The bulk of this investment is recent with a 45% rise in the number of UK households that own second homes abroad between 2000 and 2004.

A great deal of this investment has been in the more developed countries such as Spain and France, and, while these locations still have scope for further growth, it is fair to say that the initial boom has passed as interest grows in their neighbouring eastern countries. The catalyst to interest in the Eastern bloc was the EU accession of several of these countries in 2004. Poland, the Czech Republic and Hungary, were joined by Latvia, Estonia, Slovakia, Slovenia, Lithuania, Cyprus and Malta to make up the 10-strong addition to the EU, with Bulgaria and Romania set to join next year.

The expected growth potential of many of the Eastern European countries is forecasted to follow the same patterns as the West. An example being Bulgaria, which has already made exceptional progress in attracting foreign investment in property with property prices set to climb higher following EU accession next year. The Czech Republic and Hungary shared the same success story in the run-up to and following their EU membership.

A growing market

The ONS reports that there has been growing public and media interest in obtaining reliable estimates of ownership of foreign property by UK households, as increased affordability and accessibility of foreign property markets have led to anecdotal reports of growing levels of ownership. But there is still difficulty in obtaining data, preventing most countries from producing reliable estimates of the real scale and location of this kind of second property investment.

The opportunity that the ever-expanding range of foreign investment opportunities spells for a mortgage broker are pretty obvious – leveraging the value from existing client relationships by arranging the holiday home mortgage as well as the mortgage on the family home. With lower loan-to-values available on foreign property purchases, it is often the case that the client will need to release some equity on their residential mortgage, so there is additional income to be gained from arranging a re-mortgage as well. Compared to the UK, markets abroad still have a small number of lenders competing for market share – resulting in more generous income streams for those brokers who participate in this area.

Despite these benefits, this growing phenomenon remains untapped by most. There are a limited number of specialist broker firms who have seized the opportunities that exist, while brokers whose main business is arranging mortgages in the UK market appear happy to pass business on to these brokers in return for an introduction fee.

There are of course, valid reasons why some brokers want to stay clear of advising clients about buying abroad. The main barrier seems to be knowledge of the markets. Each country is different, with its own economy and legal and tax system which, not forgetting the language barriers, can be just as daunting to someone who is in the role of adviser as it is to the client.

The time and effort required to gain the knowledge needed, for what may initially be an insignificant part of a broker's business, can seem more hassle than it is worth with many adopting an attitude of leaving it to those with appropriate expertise. Add to this the horror stories in the media which bring many of the risks to light, highlighting the plight of clients who have fallen prey to a legal or tax quirk they were not aware of.

There are several peculiarities in the foreign markets that brokers should be aware of. For example, there are foreign property ownership rules in Bulgaria which prevent foreigners from buying a property. The way round this is to set up a Bulgarian company. In Spain, any debts are owned on the property and not to the individual, so unless clients want a nasty surprise, they should make sure any outstanding debts have been paid before the property is legally theirs.

There are also more obvious risks to clients who invest in countries like Romania and Bulgaria. While these countries are moving quickly to establish themselves as a mainstream destination, the reality is that they are still emerging markets and as such do not have the proven rental yield and re-sale opportunity track record that countries like Spain and France have.

There are a growing number of people buying abroad with plans to retire there in future years. According to estimates, it is believed that one in eight Britons over the age of 55 will be living abroad in 2012, equating to around 2.25m people. When deciding where to buy, advisers may also feel better equipped if they understand the pension payment implication of the countries that their client is looking at.

With the choice of countries now so vast, it is understandable that advisers may be frightened off by the sheer amount of information that they need to know to help their clients.

For those brokers that want to get involved in these markets, the actual investment needed in monetary terms is relatively small, and with the number of people now switched on to owning overseas, finding customers should not be a problem. An existing client base is probably a good place to start. Key triggers for suitability include those clients who have considerable equity in their residential property or those who have high savings balances.

The motivations for buying abroad range from longer term retirement planning to those who want to invest money and have the risk appetite to do so. It would be fair to say buying abroad has now become commonplace enough to forget customer stereotypes. A typical customer could be anyone from a 30-year-old city trader to a couple approaching their 60s who are winding down for their retirement.

As mentioned earlier, a significant contributory factor to the British boom abroad has been the rise in those preparing for retirement in the sun. GLAMs – Greying, Leisured, Affluent and Married – tend to have a grown-up family who have flown the nest, made a good profit on their family home and have no plans to spend their pensioner years in rainy Britain. So the pull of warmer climates and good property investment is often too hard to resist.

While the idiosyncrasies in local property laws can seem like a minefield, if the time and effort is given to brushing up knowledge to an appropriate level, brokers will start to reap the benefits of going international. Often a bit of field research can help to get to know the areas clients might be looking at. Brokers should also consider doing a bit of networking with local estate agents, solicitors or any other suitable prof­essionals in the local area. Not only is this beneficial to present and future clients, it helps to clock up those air miles. key points In 2002-2003, 231,000 Britons had a second property abroad, 27% in Spain and 20% in France.

Brokers need to identify the key triggers to measure suitability of clients wishing a property abroad.

It is estimated that about 2.25 million Britons over the age of 55 will be living abroad by 2012.

Bulgarian Investment Property