Theres income in foreign property investment

Investors over the last few years have associated the word property as a bye-word for fast investment profits, extraordinary investment returns and stories of individual investors going from rags to riches over night. With house prices booming in the UK; up by 300% in 10 years, more and more UK investors looked to replicate this experience in undiscovered parts of the world. Combined with the potential financial investment rewards may like the cache of telling their friends at their next dinner party that they are not actually a financial control clerk in an SME but that they are actually a budding international property investor.

Wearing my multiple hats of town planner, surveyor, property investor and equity investor I travelled around Eastern Europe and the Baltic States of Latvia, Lithuania, Estonia in the early part of the Millenium and I was convinced that these beautiful countries with grand and neglected cities were going to experience an economic boom and off the back of that a thriving property market. However, I resisted the temptation to invest for very practical reasons.

• Language barrier
• Not understanding the legal & planning system
• The practicalities of not understanding the areas of a city or town, which are the good areas to buy a potential investment property and the places to avoid
• The difficulties in managing a property. If a boiler goes in this country it is difficult enough to sort out but at least you can always pop round and check that the plumber really has installed a new boiler and not billed you as such but then just replaced a part. If this happened in Poland or Estonia it could be many years if ever before you realise you’ve been paying for work that was never done
  

All these factors meant that I never did get around to investing in eastern European property although I was convinced of its’ potential.


New buy-to-let industry for international property investors
In recent years there has been an explosion in a whole new industry catering for westerners to invest in international buy-to-let. English speaking agents, letting agent, even companies building purpose built buy-to-let accommodation ready to be bought and let out. At this point an investor should know that the real investment opportunity has gone. I would have willingly bought a beautiful but shabby apartment house in the old part of town because that was going to be the Kensington or Chelsea of the revived country. I’m not interested in buying a non descript box in the equivalent of the Isle of Dogs. To invest I would only want a trophy asset, however these investment properties would now come along with a trophy price tag.

Wall of money
The result of the wall of foreign investment money flooding the residential investment market of these emerging countries is that often their property markets now have values that are on a par and in some cases like Estonia are more expensive than their western neighbours. This has occurred at the same time that their real economies whilst growing fast still only afford their people a fraction of the wealth of neighbouring western economies. According to the Economist Intelligence Unit in late 2006: Croatia GDP per head was $11,050, Estonia $14,120, Slovenia $21,260 & Bulgaria $4,820 compared to the UK’s $42,430.

This all begs the question if the westerner stop buying because they can’t get the money from their banks, or decide that international property investment is a bad idea, then in purely local valuations these properties particularly the non descript boxes are only worth a fraction of the price at which they were sold. This is exactly why in the end I decided not to invest directly in foreign residential property.

There is however a much better way of investing in the undoubted growth prospects of the emerging economies and property markets of Eastern Europe and the Baltic states.

How to become an international property investor from the comfort of your armchair
Having been a property investor in the UK residential investment market for over two decades and despite the availability of property management websites such as www.propertyhawk.co.uk; which enable me to manage my buy-to-let investment properties online. There are still practical difficulties in direct investment in residential property. These are:

• Managing tenants and tenancies
• Maintenance
• Finance & accounting
• Complying with legal and safety requirements
• Short term nature of tenancy and potential voids period

An investor who buys shares in companies that own commercial property avoids all these practical difficulties and the potential residential investment property bubble that may be developing whilst obtaining exposure to the high growth potential of these emerging economies.

The Stock Exchange has in the last couple of years seen a barrage of property investment companies listing which invest in a range of commercial properties in Eastern Europe and the rest of the world. Investors who pick wisely can buy shares producing a hassle free dividend income as well as potentially benefit from the capital appreciation of the underlying property portfolio through an appreciating share price.

The credit crunch throws up some property income investment gems
The impact of the global credit crunch on property companies share price has been severe. Markets have responded to the anticipated lower growth in capital values by knocking 40 50 60% of the value of these companies in only a few months. The result is some income investment gems where it is now possible to buy shares in property companies investing in growing eastern European economies at big discounts to their underlying asset value and also yielding 8%+ on existing and planned dividend payouts.

Which companies should you buy?
The Income Monkey particularly likes the following investment property shares
as an income play:

Dawnay Day Carpathian
Company admitted to AIM in July 2005 with the intention to invest in a diversified portfolio across 6 countries in Central and Eastern Europe. The intention is to pay a dividend of 10p for the financial year ending December 2007.

High 135p low 98.25p CURRENT 100.50p market cap
Projected dividend 10p Yield 10%

Raven Russia
This company is a great play on the fast expanding Russian economy. One thing that any expanding economy needs is warehousing with which to serve the shops and businesses. The Russian economy has a massive shortage of this space. Raven Russia aims to provide A grade warehousing facilities by funding the developments with a local development partner. It than buys the completed development at a pre-agreed price. It is currently forecasting an ungeared yield of 12.4% which means that it can afford to pay out big dividends. It is expected to yield just over 5% paying a dividend of 5.5p for this year. This dividend the company expects to rise to 9p when the development portfolio is fully let giving rise to a yield of just over 8% at the current share price of 107.75p.

High 126p low 88.5p CURRENT 107.75 market cap £460m
Projected yield 8%

Equest Balkan Properties plc
Equest Balkan Properties plc is a commercial property investment company focused on South Eastern Europe but primarily Bulgaria and Romania. Its’ objective is to invest principally in a range of income-producing; commercial, retail and industrial property opportunities in or around the major cities of Bulgaria, Romania, Albania, Bosnia & Herzegovina, Croatia, FYR, Macedonia, Serbia & Montenegro and Turkey, where it considers investments have potential for capital appreciation. The Company may also invest in development projects where it expects high rental yields. It may also invest selectively in land acquisitions.

High 132.5p Low 85.5p CURRENT 85.75 market cap £120m
Projected yield 8.75%

Prospect Epicure J-REIT Value Fund
For those investors that are looking for high yielding investment opportunities outside the EU then they should look at Prospect Epicure J-REIT value. This company is an Isle of Man registered company which was set up to invest in the exciting opportunities represented by the Japanese real estate market. It intends to do this by investing in Japanese property REITs. The Japanese property market has been in a massive slump since the 90’s but with the general recovery in the Japanese economy is showing signs of recovery. It is targeting a 7% yield on its offer price of 100p which at its current price of 85.25p equates to a yield of just over 8%.

High 135.25p Low 74.5p CURRENT 85.25p market cap £86.10m
Projected yield 8%

Mapeley
Investors that still have faith in the UK property market want to have a look at Mapeley. This share has slumped from a high of just over £40 early this year to currently trading at a little over £18. This puts them on a massive yield of 9.6% forecast to rise to 10.4% next year. With a rock solid set of tenants including the Government and Abbey National and several large outsourcing contracts their income seems assured. The market seems to be marking them down savagely because of concerns over the future of the UK commercial property market. With the shares being valued at a discount to the net asset value of £745million at a discount of 27% the value of UK commercial property would have to fall off a cliff for investors to be holding a share with less value than that of the property it owns. With interest rates set now to fall in the foreseeable future income investors may not see yields like this on a property investment for a very long time. It’s clear that investors should fill their boots before sanity in the investment market returns.

High £40.30 Low £18.30 CURRENT £18.41 market cap £542 million
Yield 9.6% Prospective Yield (08) 10.4%

The Income Monkey verdict
Income junkies want to hold onto their nerve with the current uncertainties in the investment property market caused by the credit crunch. Property prices across the globe are fully valued and are likely to fall. However, those wise investors who can see past the short term investment market worries and who buy these property stocks can afford to ride out any dip in the capital values of these shares with the sound knowledge that they are receiving a strong dividend income backed by a secure and rising rental stream. In time growing economies and a stabilising property investment market means that capital values will rise and investors will also benefit from appreciating asset values and rising share prices.