It is a dream of thousands of Brits – to buy a second home in a picturesque spot in France and wile away hot summers converting a dilapidated barn into the perfect home in the sun.
But there are signs that many are abandoning their plans to buy a plot over the Channel as the economic downturn hits the second home market. And the situation has become so bad that some second home-owners wanting to sell up in France have had their properties on the market for as long as three years, according to agents. Experts say the overseas property market could be down by as much as 40 per cent on last year.
A popular trade show has also moved its flagship London event because of fears that the slump in the market would make for dismal visitor numbers.
Brits spent about £24bn on overseas property last year but that is expected to see a big fall this year.John Wall, who set up his estate agency after moving to France and falling in love with the Pyrénées-Orientales region, has noticed the fall in British buyers. “There is no question that the market has slowed,” he said. “Anyone still looking to buy is being far more selective and looking for a good price, which means that anyone putting a property up for an unrealistic price has a much poorer chance of selling.”
The property exhibition A Place in the Sun Live was due to take place last weekend at London’s ExCel centre but was withdrawn as those behind the event feared it would not attract enough visitors. A similar show was held in Birmingham last month and the fear was that demand was too low in the current climate to warrant another one so soon. “Developers were keen to attend but we were worried about visitor numbers,” said an organiser.
So instead of France, some investors are now looking further afield to secure a bargain. Places previously considered too politically volatile or far away are starting to attract British buyers. Thailand, Bulgaria and Venezuela are some of the destinations seeing increased interest from Brits. “Opportunities to make capital gains in so-called ‘emerging markets’ has accelerated this phenomenon,” said Mr Bishop. “Countries such as Turkey, Cape Verde and Cyprus are growing in popularity among buyers wanting some personal use of holiday properties, while pure investors are purchasing increasingly in the EU accession states, the Caribbean and elsewhere.”
According to Mike Holwill, of the estate agent Someplace Else, investors previously put off by South America are now deciding to take a risk on the region. “Brazil and Argentina were seen as too risky in the past, but their lack of reliance on liquidity has meant they have largely escaped the ill effects of the credit crunch,” he said.
Bargain in Bulgaria A home for £100,000
Bulgaria may not have been top of the list for second homes over the years, and the European Commission’s concerns over rampant corruption in the country cannot have inspired confidence among would-be investors. But it is one of the locations benefiting as investors begin to search out emerging property markets as the potential for making a profit in more traditional markets evaporates. A miserly £116,000 would buy you a three-bedroom villa on the Black Sea Coast, complete with open-plan kitchen, a large garden and three bathrooms. It may not be in the land of wine and cheese, but it is just down the road from Varna, a seaside resort and one of Europe’s oldest cities.
German investors have been popular among UK property owners looking for a quick sale, but the country’s own real estate sector will not be immune for the Europe-wide slowdown.
German banks are among the only institutions in Europe still willing to finance real estate deals, and the country’s cash-rich open-ended funds dominate global property investment.
The biggest economy in Europe, Germany’s dominant export performance recorded solid growth in gross domestic product in 2007, keeping up the momentum in the first quarter of 2008.
However, the economy performed poorly in the second quarter, contracting by 0.5 per cent.
The commercial property market mirrors the gloom. Research compiled by property consultancy DTZ shows that investment transactions in the first half of 2008 totalled €12.1bn - a 55 per cent fall on the previous year - as the crunch keeps debt-driven UK and US buyers away.
As in London, falling transaction levels are quickly translating into lower asset values. DTZ believes yields on German office properties have moved out from their historic low of 3.5 per cent in 2007 to an average of 4.65 per cent today, and are likely to SOFTEN further.
Despite the worsening property outlook, German bank lenders have risen to increased prominence in a market starved of credit.
As well as the big three - Eurohypo, HSH, and Hypo Real - the regional banks, or Landesbanken , are muscling in on the action on the strength of their covered bond method of lending.
Known as the Pfandbrief , the method of repackaging property loans and selling them on to institutional buyers is more highly regulated and requires less leverage than the similar commercial mortgage backed securities (CMBS) model, which has suffered death by credit crunch.
Crucially, this gives German banks liquidity that their European counterparts cannot match. And the result? While few CMBS transactions have been executed, Eurohypo research shows that in the past 12 months, €58.5bn of Pfandbrief loans were issued.
Across the world, the German open-ended funds remain one of the few active operators in the real estate investment market that have the cash and the nerve to execute transactions.
In London, the German fund DEKA recently finalised its £230m purchase of Moorhouse, a City office building, representing a yield of 6.4 per cent. This has come as a shock for a market used to seeing transactions graze the 4 per cent mark little over a year ago.
This is quite a turnround from 2006, when, following a series of corruption and valuation scandals, the open-ended funds engaged in the mass-selling of property assets, as investors withdrew their money.
However, the profits generated by selling assets near the top of the market attracted investors back in, and the cycle appears to have turned in their favour.
“The German funds have always liked London because of the long leases with upward-only rent reviews, and the fact that the tenant is liable for the upkeep of the building,” Mr Farquhar says.
“Provided that it is a core asset that ticks all those boxes, the thought of falling values is not stopping them from buying now.”
The ambitions of the open-ended funds are not limited to London.
CB Richard Ellis research estimates that the funds collectively have €22bn to spend on property. The Asia Pacific region is a big target for many, including RREEF, which is targeting investments in China and Malaysia, and Union, which has already invested in Japan, Singapore and South Korea.
However, ironically, actual German investment vehicles are struggling. Real estate funds listed on London’s Alternative Investment Market have performed particularly badly because of their often high levels of gearing
“When these funds floated, high debt levels were considered desirable in order to drive high equity returns,” says Mark Young, real estate analyst at Oriel Securities.
“However, these high levels of indebtedness are now a cause for concern, leading to severe de-ratings in recent months.”
Develica Deutschland, a German commercial property investment fund is the biggest faller to date. It is 286 per cent geared, and has lost 82 per cent of its value in a year.
A separate Aim fund, Deutsche Land, only became fully invested in December 2007, meaning that much of its investment portfolio of 54 commercial assets was acquired at the top of the market.
Activist investors have been sniffing around the sector because of the deep discounts to net asset value, but now the powerhouse is slowing, German real estate is less of a tasty prospect.
The market for the most expensive homes in London is expanding despite the economic crisis, research for the Standard has found.
Sales at £10 million and more have increased, with the number of transactions up by a third in the year to last month. Virtually all the buyers at this price at present are foreign, with the Middle East dominating again. The survey, carried out by estate agency Savills, found that the upper end of the London property market now falls into three distinct “leagues”. At the top is the narrow tier of homes selling for £10 million plus. In the larger tier below, prices range from £5 million to £10 million. Here, sales volume is down by a third. This is the section of the market where City staff who have enjoyed big bonuses have been competing with wealthy - but not billionaire - foreigners. Below that is the £1 million to £ 4 million bracket, almost entirely driven for the last few years by City employees on the expectation of their bonuses. In this category, sales have slumped by 45 per cent. In the lower two leagues, much reduced demand has been driving prices down. But in the £10 million-plus “premier league”, prices have actually gone up, by 0.6 per cent since June. “In the traditional areas of Knightsbridge, Mayfair, Chelsea and Belgravia, old money and international demand are keeping prices more stable. “However, only the very top tier - the ultra-prime £10 million plus market - continues to see demand and values holding firm, driven as it is by a growing number of global billionaires.” There are indications the boom at the very top end is slowing. Separate research by estate agency Knight Frank found prices in the top tier dropped 1.7 per cent in this sector last month. It comes as figures show the number of new homes being built has sunk to an all-time low. In the three months to September, 38 per cent more surveyors reported a fall than a rise - the lowest since the Royal Institution of Chartered Surveyors study started in 1994.
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