How to get a great off plan investment deal in central and Eastern Europe

If you’re wary of the uncertainties surrounding the UK property market right now, maybe it’s time to consider a switch to a high growth alternative where off plan still makes sense.

Remember off plan?

Great for high growing markets and a thing of the past in the UK – at least for now.

New Europe has to be one of the most exciting property markets in the world for property investors. And many of the rules for avoiding the deal killers are, well, the same as for any market. But not exactly.

At Property Secrets we look for those markets where we consider there to be a relatively high level of stability, and one of the most helpful indicators for this is membership (and if you want to go a little riskier), prospective membership of the EU.

This isn’t a perfect measure, of course; but it does indicate a measure of a market’s economic and political stability and the level of sophistication of such vital elements as legal system and property law. It helps with currency stability too. Again, not perfect, but it is very helpful.

Even so, not all markets are equal and THE number one deal killer for us – and this is even before we start to look at a development - is a limited prospect for capital growth.

Off plan is all about high capital growth. It’s associated with higher risk investing, obviously, because the property isn’t built when you commit to buying. So, in return, you expect higher capital growth. That’s why the off plan market in the UK is dead. So far, so obvious.

We look at a market’s underlying economy and try and ascertain whether its prospects for GDP growth – and specifically jobs, the kind of jobs that create the aspiring middle classes (who want to own and rent modern, Western standard property) are good. That’s the first golden rule – pick the right market. (It’s worth adding here that we mustn’t forget the availability of finance for investors, or at least it’s imminent availability.)

In the high growth category we put city markets in Slovakia, Czech, Poland, Romania, and Bulgaria (NOT the Bulgarian coast!). That’s not an exhaustive list – but it notably DOES exclude the Baltics and Hungary – for economic reasons.

And, equally importantly, we have to look at cycles of growth. The property market in Poland, for example, had a spectacular period of growth, but is now quiet – prices are zero or falling slightly. We anticipate second phase price growth to kick in probably in the next few months and so a return to this market in anticipation of this is very much on the cards.

OK, so having looked at the fundamentals of the economy and evaluated whether there is immediate (or the prospect of) strong cap growth, what else makes for a great off plan deal?

Let’s run through what kills a deal on a more practical level.

Here’s the list:

• Bad location
• Bad price
• Unfavourable terms
• No exit strategy
• Uncertain developer

This is not a tick through list and there’s definitely no ranking. Any one item can kill a deal, but they all have to be considered not only simultaneously, but in context with each other.

Let’s run through them.

Location – contrary to the received wisdom, location doesn’t have to be the numero uno of property investment. It certainly IS number one if you’re looking at luxury, but generally we are not – we’re looking for apartments that have the widest appeal – apartments for the new middle classes.

Having said that, location still matters hugely – but we’re not looking here for perfection. Let’s remember that 99% of buyers simply cannot afford perfect location and therefore don’t expect it. What they can afford will generally equate to some kind of compromise – unless you’re dealing with top end luxury.

Instead we’re looking for several key factors that make for good location. Within the middle class sector of the market we focus on great access to places of work - as many places of work as possible.

Good view, some surrounding greenery, for example, matter too. But the golden rule is that good transport connections are king – and that, invariably, means great connections to the centre of town, or at least to the central business district (there can be multiple CBDs in some CEE cities.)

Bad connections/ too far out from the CBD or large employers – deal killer.

Price – We have to be careful with price. Price is probably one of the most common reasons for turning down a deal. Equally, price can be beguiling if you look at it in isolation.

Cheap is a relative term, so it’s vital to put any price into a local context. Cheap to you, may be unaffordable folly to the local market.

The rule here is price does matter – but it’s the prospect of growth we need to focus on, not the absolute price.

Terms - There’s no doubt that terms are relative to the prospects of capital growth. Lousy terms can be overcome and swallowed if there is sufficient growth in prospect. But, generally, bad terms can land an investor in difficulty.

Always look for two stage payments if possible. Sometimes it just isn’t possible to secure them and multi-stage payments are certainly the norm in many of these markets. And there’s nothing wrong with staged payments - if the price and opportunity are right.

Yes, you have to cashflow the investment, but if you are ready to take up that financial burden and the cap growth potential is worth it, no problem - especially if you can finance the stages as you go.

But many multi-stage payments are too fast to finance. You need to be able to draw down on your mortgage and pay interest only during the construction phase and you redeem your outlay when you come to sell or refinance.

But if, say, the first payment is within six months of the initial payment, you are going to struggle to finance this quickly enough. So, if the timescale is too tight to organise a mortgage, you could end up being seriously out of pocket or overstretched – which means, no deal.

Contracts in general call for just one thing – a good lawyer, one who will spot anomalies in the final proposed agreement. Anything that rings alarm bells or is out of the ordinary and even hints at uncertainty (unless you really know how to make a clear assessment), is a deal killer.

Exit strategy – This is the one professional investors will often tell you they look at first. And there’s a good reason - until you can sell your investment any profits are paper ones.

Who will you sell to? If you’re going to be a serious investor, looking for top ROI, you’re also going to be leveraged, so you’ll also need to consider who is going to pay at least part of your mortgage – who will rent your unit?

Deals with the strongest exit strategies are almost always the most appealing, because a good exit strategy equates to lower risk. Can you reassign the contract on the deal, for example – flip it, in other words? Often you can’t!

The questions to ask – and answer – are: where is the demand coming from and is it set to grow?

If it’s primarily from other investors, then forget it! It needs to be local; a real market. Primarily what we’re asking is: is there a secondary market, or is one around the corner?

How many buyers into over-developed and over-hyped coastal developments in Bulgaria now wish they’d considered exit strategy a little more carefully!

Developer – and last, but far from least, we come to the developer. In effect you’re putting yourself (well, your money, at least) into the hands of the developer because let’s not forget this development doesn’t exist yet!

We’re talking due diligence here. And we’re looking especially for a well-funded outfit with plenty of experience – no track record doesn’t necessarily spell dodgy, but, then again, it means there’s nothing to judge by.

Look at what they’ve done before, is the golden rule.

And the last – and maybe the most important rule of all – whenever possible, talk to others with experience of any market you’re considering. Learn everything from others’ experiences - especially the bad ones!

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