| The biggest returns involve some risk these days, and the Balkans are the theme du jour. By NEIL BARNETT As the EU spreads ever eastwards and southwards, so adventurous European property buyers are moving in the same direction. Where once purchasing a flat in Budapest or Prague seemed rather outré, it’s now hardly more exotic as an investment than a place in Paris or London. And with Bulgaria and Romania having joined the EU in January, even those Balkan countries are becoming better known and less risky property investment destinations. So where are the brightest opportunities now in “New Europe”? There are still plenty of hotspots in the countries that joined the EU in 2003, such as Hungary, but buyers increasingly need to discriminate to avoid a lacklustre return. The hot money is moving towards new territories such as Croatia and Montenegro. Poland, while not a great centre of foreign buying so far, is also coming onto the radar. In 2005, the last year for which figures are available, around 5,000 foreigners bought property in Poland, with the Germans, Dutch and British forming the largest groups. According to Pawel Madela, who runs Buypalaceinpoland.com, foreign buyers in Poland are not all interested in city apartments or seaside holiday homes. “What I think is very interesting in the property market at the moment is this rapid growth in the purchasing of historic properties by private UK buyers,” Madela says. “We have really interesting regions in Poland such as Lower Silesia, where there are many castles. These properties need to be restored, but this is also what British customers like to do – they can renovate them according to their own ideas.”  Many private buyers are already looking farther afield to countries in south-eastern Europe. Croatia, with its long Adriatic coastline and many islands, is a natural draw for holiday property. Croatia currently has only EU candidate status, which means that if you’re planning to buy there, the process will not run as smoothly as it would in Hungary or Poland. Arcady Economo, director of the estate agency Adriaticproperties.com, which deals in Croatian properties, says: “The biggest problem in the market is that according to the law most foreigners have to set up a company in order to buy a property. You can apply to buy as an individual, but you need case-by-case government permission, and that can take a year.”
Once you own a property through a company, you then need to pay tax and employ a bookkeeper, and if there is no substantial cashflow, the authorities may oblige you to sell the business – and the property. These sorts of hassles were also the rule in Hungary and Poland before their entry into the EU, and will diminish as Croatia proceeds towards accession. Even now, however, they seem to be having little effect in damping roaring demand. As Economo says: “Already about 20% of coastal property is in foreign hands, and 90% of transactions on the coast involve a foreign buyer.” This wave of foreign interest is reflected in strong prices for the region. In glamorous spots like Dubrovnik and the Austro-Hungarian resort of Opatija, new developments are fetching up to €5,000 per m2. In less sought-after coastal areas, agents say €2,000 per m2 is the norm. And if you are still after a bargain in Croatia, the islands may be the place to look – on the island of Brac, for example, €1,700 per m2 is a standard price. When Croatia joins the EU and the property laws are liberalised, a second price boom is expected – but no one is quite sure when the enlargement-fatigued EU will give the nod. For the truly bold, Montenegro offers yet more opportunity – with a fair dollop of risk. This tiny, ancient Balkan land achieved independence in 2006 and was featured in the latest James Bond film, Casino Royale (although if you look for high-speed trains and secessionist architecture, you’ll be disappointed – those were figments of the director’s imagination). It has spectacular fjords bounded by black mountains, and remains relatively undeveloped. More temptingly still, prices are currently in the region of €1,500 per m2 .  Ante Nevistic of Adriatica Real Estate says: “Montenegro is developing very fast. Unnecessary bureaucratic procedures are being removed so that life is simpler and more honest for everybody. I can mention one example: if a foreigner wants to establish a company in Montenegro, he needs only three pieces of paper, his passport and only €1 as foundation capital, and he can do it in just three days. Prices are slowly catching up to those of Croatia, but on average, Montenegro is still cheaper. Old castles in the Kotor area, for example, are on offer at the same price as similar buildings in Dalmatia.”
Of course, bureaucratic streamlining, a rush of money and the newness of the country’s regulations inevitably bring some degree of risk. Economo has words of warning for the unwary: “Montenegro is very popular with Russian buyers, most of whom come with cash. They’re more comfortable than Westerners with the lack of rules and protection in Montenegro. It’s a dangerous market.” You pays your money, you takes your choice, as they say in Podgorica. Post-boom central European hotspots such as Budapest are settling down but buyers have to focus as a result, argues KESTER EDDY A little more than a decade ago it was a dream market for landlords in central European capitals, especially those with luxury property within easy reach of the business districts. It was a time when large multinationals, smaller regional firms, venture capitalists and various buccaneering consultants were besieging the privatisation agencies in Warsaw, Prague and Budapest, all eager for a slice of the current (and future) economic pies in the former communist states. And to lure reliable executives into this supposedly dangerous frenzy, multinationals would fork out a small fortune for classy accommodation – meaning rents equivalent to €7,000 a month for a villa in clean air on the outskirts of town. “In the early 1990s there was an enormous inflow of foreign businesses into the region, and the number of properties for suitable executives was very limited. We could see the law of supply and demand working very well,” says Tomás Duda, managing director of Professionals real estate agency in Prague. But with privatisation largely over (at least in the more advanced states), furious activity by developers hoping to take advantage of the shortages in recent years, and a steady flow of home-grown young managers appearing on the market, such heady days are a thing of the past. “I know companies that employed 30 or 40 expats back then. Now the same companies have only three, maybe fewer, still in place. Not that these companies are going out of business: it’s just natural cost cutting, as they find locals are capable of doing the same job for less money,” says Duda. The result is that formerly sky-high rents for mansions are now roughly half what they were, and shrinking, he adds. Duda now specialises in new home projects, typically smaller flats of between 60 and 80 m2. These attract a steady stream of foreign investors, particularly from Ireland and the UK. Rents and values have risen by about 35% since 2000, and while some foreign buyers have moved into Prague, a larger proportion, banking on the trends continuing, is buying for investment, Duda says. The story is similar in Budapest, where the boom and bust since 1990 has been, if anything, even more pronounced than in Prague. But Nicholas Leigh-Wood, managing director of Midas European Property, is wary of new property, saying this segment is saturated in the Hungarian capital, with many flats proving too cramped and expensive.  Leigh-Wood has adapted to the new situation with a business model based on quality renovation of older property in the heart of the city.
“The days of the wild east and wild rents are over,” he explains. “If you are a bank and you want to house an executive with no kids, he will not want to go into a villa in the upmarket Buda hills. He will need a smart, two-bedroom flat in central Budapest, at a rental limit of around €2,000–€3,000 a month.” Hence Midas concentrates on buying apartments of around 100–150 m2 in “classical” buildings constructed around 1900. Leigh-Wood guts and rebuilds these (a strict practice after the only exception to the rule later proved a managerial nightmare), keeping as many original features as possible while ensuring the style will appeal to Western clients. Midas flats are not cheap, but the building quality and associated service is guaranteed, Leigh-Wood stresses. “Clients have my mobile number;” he says. “We have an office located nearby and provide 24-hour service.” With 56 apartments under Leigh-Wood’s belt, the model appears to be working well. Rents are at an annual €170–€200 per m2, giving yields of 8.5%–9%. As an experiment, Leigh-Wood has recently bought a villa in the Buda hills of the type that once brought in €7,000 month, but is planning to carve this up into four quality apartments. “The yield on a huge villa would only be about 4%. It’s simply not worth it,” he says, adding that it really is better to stick to larger apartments in the city centre that foreigners working for multinationals will rent, preferably in the Fifth District. As for those agencies openly promising annual twofigure capital growth and vast rental incomes, they are lying. One not entirely scrupulous agency even directly targets the Irish with such campaigns, aware no doubt that they have proven the most willing to accept outlandish claims and buy unseen in the past. When it comes to villas, one spot in the region stands out – the Adriatic coast, meaning primarily Croatia. While on the coast of Istria apartments are typically priced at around €2000–€3000 per m2 – a level still proving attractive to buyers from Germany, the UK and nearby Italy – with prices rising at about 25% per annum, all the smart money in this part of northern Croatia is going inland on big stone villas with pools, says Andreas Dussmann, managing director of Dussmann Homes in Croatia.  “This area is completely unspoilt, and rental demand is huge,” says Dussmann. “We have attracted many bankers, lawyers, and people working for multinationals. Among the top names are Ralf Schumacher, [food company] Dr Oetker and [baby food manufacturer] Hipp, all from Germany.”
Luxury stone villas with pools now sell for around €450,000, snapped up mostly by wealthy buyers from Germany, Switzerland, Austria and the UK, according to Dussmann. While the really rich use such properties only for themselves and friends, others buy for the returns from rents, which can hit €3,000 per week. “This means annual income of up to €40,000,” says Dussmann. “These people only use their places for maybe two weeks, and in the off season.” Buying property in Croatia has its own caveats, however, and while Dussman says the market is getting cleaner, he adds that there are “plenty of dodgy agents and developers still offering poor-quality or incorrect information. It’s best to deal with reputable foreign agents that appear in the property magazines and national newspapers.” Buyers need to check for good title and be aware of details like building zones. In addition, infrastructure such as water and electricity can sometimes be very expensive when buying land, Dussmann warns. But with the steady growth in the Croatian economy, expansion by budget airlines, and new developments like marinas and golf courses on the horizon in Istria and other parts of Croatia, Dussman sees the pressure on property prices going in only one direction – up. |