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February 28th, 2013
As safe as foreign houses by Peter Baxevanis

Dramatic price reductions on property in European countries such as Greece and Spain and in the recovering US market are leading Australian buyers to abandon the expensive domestic market in search of investment opportunities offshore.

Australian property is among the most expensive in the world and values and rents are continuing to climb. This contrasts with prices in the US and Europe, which have fallen significantly, particularly in Spain but also in Italy, France and the Netherlands, according to The Economist’s house price indicators.

Foreign investors are being enticed to invest offshore in countries such as debt-stricken Greece, where the government plans to offer five-year visas to non-EU citizens who invest more than €300,000 (just under $380,000) in real estate, and Spain, which hopes to revive its near-collapsed market by granting residency in exchange for property purchases of more than €160,000.

Coupled with heavy discounting of 40 per cent to 70 per cent for high-end properties in areas such as the Costa del Sol along the Spanish south coast or on Greek islands such as Rhodes and Santorini, is the ability to borrow up to 90 per cent of a purchase price, head of Savills International in London, Charles Weston Baker says.

People are coming in and seeing what they can pick up on the basis that these properties are at below construction cost.”

US and European institutional funds are buying up unit blocks while international private investors are taking advantage of the Spanish rental market, which has maintained its pricing. Browsing on Spanish real estate website www.panorama.es brings up a luxurious, three-bedroom villa on Marbella’s exclusive Golden Mile, reduced to €680,000 from €1 million, and another five-bedroom villa at the same location down €1 million to €1.5 million. At popular golf course townships such as Elviria, apartments are as low as €160,000 while four-bedroom homes are €1.2 million – a quarter of their 2008 peak price.

“The property market will come back over a period. In the meantime [investors] can rent them out. It’s still good occupancy and the rental returns can be around 15 per cent,” says Weston Baker.

But the lure of a cheap investment with the promise of strong returns and residential permits has landed many unwary buyers, including experienced investors, in more trouble than the initial outlay was worth.

There are risks that property prices could take years to recover because of the oversupply in Spain, thanks to thousands of new dwellings constructed during the boom. Buyers must be cautious looking for stable rent returns.

A foreign currency mortgage could see any gains in value lost in the conversion from euros to dollars. Australian banks also may not provide finance if the security is an overseas property.

Property lawyer George Dimaras says there are many investment opportunities in Greece. He works for his Australian clients as well as those in Switzerland, France and Italy from an office in the plush suburb of Kolonaki in Athens. Two years ago most of them were disputing inheritance claims, now the majority are property investors hunting for cheaper, quality dwellings in popular areas around Athens and on the islands, where prices are down 40 per cent.

Dreamy three bedroom villas on 1,500 square metres in northern Corfu going for around 300,000 euros are drawing in buyers.But regulations and taxes, including stamp duty, conveyancing, insurance and inheritance tax, could add thousands to the price, Dimaras cautions. He believes there is a real risk that Greece could leave the euro zone, which could lower property values.

Meanwhile, laws introduced in December oblige foreign owners to prove they permanently reside abroad, lest authorities tax them for their worldwide income – not only that earned in Greece. On top of this, buyers need to consider issues such as maintenance, in countries where real estate agents may be less reliable and tenants more difficult to manage.

Gaining professional advice is crucial, Dimaras says.

“I have advised many clients not to proceed with a sale because there were risks with the title,” Dimaras says. “This is the first thing to think about.”

His job involves not only legal work but negotiation with vendors and advising clients about heritage. Where owners have the option of building their own dwelling after buying land on islands such as Crete or Kastelorizo, the proximity of a property to archaeological ruins – common in Greece – and its plot size affects what can be built.

In the US, the glimmer of recovery in the property market is drawing Australian private
investors on the promise of stable, long-term returns and capital growth.

US real estate research group Zillow’s Home Value Index shows home prices were up 5.9 per cent year on year in 2012 and could grow 3.3 per cent this year.

Among those taking a stake is Dixon Advisory’s US Masters Residential Property Fund, which recently sought $80 million in equity to spend on the recovering housing market last year but ended up oversubscribed with $100 million, reflecting investors’ revitalised confidence.

The fund grew its portfolio of houses and apartment complexes in the New York residential market to $US270 million ($256 million) upon further acquisitions in December. Dixon’s managing director of funds management, Alex MacLachlan, says areas such as Hudson county and its surrounds, like Brooklyn and Harlem, have growth potential, good valuations and long-term returns, including rental yields of up to 12 per cent.

The region has a “landlord friendly” tenancy regime and bread and butter rents of $US1200 to $1400 a month are rising.

“There is good scope for capital growth, with the improvement of the economy and gentrification in the area,” MacLachlan adds.

But while there are hopes for a revival in US property prices, the outlook for the country’s economy remains uncertain and any property investment is a “longer term play”, he says.

The key to buying overseas is not just to do the research and seek local advice, but to go 10 steps beyond what you might normally do at home.

The Australian Financial Review ‘As safe as foreign houses’ | PUBLISHED: 25 Jan 2013

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