Investing in European buy-to-let

  • Opportunities in southern periphery
  • Average rental prices rising in Spain for past 18 months
  • Berlin currently a residential investment hotspot

Investing in residential property to let in Europe is not for the fainthearted. In principle you can buy in every member country of the European Union by virtue of the open market policy, but in reality there are many differences to navigate, especially the buying process and taxation regimes - not to mention the difficulties of managing a property from a distance and the currency risks.

Moreover, the days of opportunity - when apartments could be snapped up for bargain prices in emerging eastern and central Europe - have largely passed.

INSIPID MARKET

And a number of European markets are tainted by conflict and political fears that call any investment potential into question: Russia, the Baltics and Turkey, to name but three.

On the plus side, UK investors can benefit from a strong pound, which is at its highest value relative to the euro for eight years. If the euro stages a comeback that would mean potential capital appreciation and an increased rental yield for sterling-denominated investments; however, it also means that euro-denominated mortgages will be more expensive to service.

In truth, Europe's property market has been fairly insipid since the financial crash. And as Ray Withers, chief executive of investment company Property Frontiers, points out, the strength of the UK market, with its severe housing shortage, has diverted attention away from Europe for now.

'You can get yields of 6-7 per cent in Manchester or Liverpool currently, compared to 3-4 per cent in Berlin, for example, so it's inevitable that people are going to look closer to home,' he explains.

The main interest in Europe currently will be where higher capital appreciation is available, says Withers. Knight Frank's Global House Price index shows that prices actually fell in a number of key European markets last year, including France, Spain, Italy and Poland; Greece and Cyprus, both popular among holiday home buyers, fared even worse.

RECOVERY IN SPAIN

However, Kate Everett-Allen, from Knight Frank's international residential research team, points out in a recent note that some markets are performing strongly, with Turkey, Ireland, Luxembourg and Estonia all registering double-digit growth over 12 months.

Sweden, Norway, Hungary and Germany also fared well, while Spain appears to have finally turned the corner: 'Prices in Spain are now rising at their fastest rate in six years, due in part to improved mortgage lending.'

This comment is echoed by Spain-based estate agency Lucas Fox, which says that the recovery in prices is now being matched by a recovery in rentals.

'Rental trends across Lucas Fox's Spanish property markets show a consistent trend: average rental prices peaked in early 2008 and fell steadily until the middle of 2013. For the past 18 months, average rental prices have been adjusting upwards slightly in Barcelona, Valencia, Malaga (which includes Marbella), and Madrid.'

The Emerging Trends in Real Estate Europe report by PWC and the Urban Land Institute identified Madrid as Europe's third most attractive city to invest in, with Barcelona at number 13. George Soros and Chinese investment group Dalian Wanda are among those targeting Madrid, it says.

BERLIN

However, top of the PWC/ULI list - which covers commercial as well as residential property investment - is Berlin. Berlin has been of interest to private investors over a number of years for two main reasons.

It offered rental properties at seemingly giveaway prices - at one stage you could have bought a small apartment block in east Berlin for the price of a London flat - and its rental market is steady and legally robust.

Underpinning Berlin's attraction as a buy-to-let destination is a growing population, up 41,000 in the year to mid-2014 according to one estimate. Prices over the same period rose by 7.4 per cent.

Rents have also been increasing steadily in Berlin and throughout Germany since the financial crisis, but this has now prompted the government to introduce a rent 'brake', which Berlin will be the first to implement in full and which would limit the potential upside for investors.

Germany as a whole should be of great interest to any investor wanting to spread their wings beyond the UK.

German estate agency Engel & Völkers highlights the attraction of Dresden as an investment target, pointing out that prices for newbuild apartments have risen by 47 per cent in the past five years, compared to 33 per cent in Berlin and 30 per cent nationally. Prices in Dresden average €2,800 (£2,037) per square metre, compared to €3,850 in Berlin.

Finally, if you are looking for an investment location that's in Europe but closer to home, Dublin may be worthy of consideration. 'Prices have been going up quickly and it has already made a strong recovery from the financial crisis. Yields are fine, but the main opportunity is capital appreciation,' says Withers.

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