D'oh!
Hi Richard,
Hmmm what a difference a little under a year can make in the world of property investment!!! I, like yourself, gave this investment a lot of thought and of course I questioned the figures being quoted by Oblisk and searched the internet for answers to back up some of their statements on the economy as at that time Romania was being quoted as recession proof!!! My conclusion was that this seamed a fair investment even after discounting the profit figures being quoted. In hind-site I could have delved further and only after looking through the glossy brochure again I realise there are some things mentioned that deserved further investigation. (I will not the afore mentioned with a D'oh! as this post develops). But alas the clever marketing of Oblisk reassured me of any lingering concerns and I happily parted with the best part of £30k GBP.
Anyway, as I am sure you know this project is going ahead and I have been told that the Completion Insurance is in place so at least it will be completed. It sound as though it is on track for completion September 09 if not slightly sooner.
This information has prompted me to look into how the market is actuall doing in Cluj at the moment. I called a representative from Remax (D'oh!) who are the international estate agents quoted in Oblisks sales pitch as being the company who will market these for sale/rent upon completion. They informed me that property prices are down in Cluj by 20-50% with an average of around 35%. When asked if he thought the Fontana residence was value for money when launched (D'oh!) his reply was it wasn't and due to its distance from the centre of Cluj and lack of public transport and general population. Further more the developments which Oblisk used to show how cheep Fontana Residence was were closer to the centre thus justifiably demanding higher prices. Bottom line in terms of falling property prices the closer you are to the centre of Cluj the less the value has fallen.
When asked about rents (D'oh!) his estimation for a two bed furnished apartment was 300 euro's PCM. Yes thats right per month!!! Not quite the 5.5% yeld quoted by Oblisk???
Let me do a basic calculation using a formula which the banks use as the minimum criteria when approving a buy to let mortgage in the UK. (D'oh!)
Property price............ euro 130,000k
30% deposit.................euro 39,000k
70% LTV (mortgage)......euro 91,000k
Bank formula: Loan amount x interest rate % x 125% divided by 12 (months) and this should give us the magic number for the rent amount.
91,000 x 8% (average Romanian rate at present) = 7280 x 125% = 9100 divided by 12 = 758.33.
Hold on I must have missed something? hmmm x hmmm x hmmm div hmmm = Ohhh S**T!!! (D'oh) (D'oh) (D'oh). So how was the rent ever going to cover that???
Ok, now bearing in mind the current economic crises in the world I have to accept that it is not only Romania where property prices have fallen. In the UK my place have dived by £40K since this began so I won't be beating myself up too badly on that count. However this doesn't make the situation any easier to sort out. When asked if the end is in sight for a flattening of the Cluj property market Remax said that their research indicates March 2010. So if we estimate that by completion of Fontana in September 2010 properties in this semi remote area have declined by a conservative 35% the banks will obviously need to revalue the 70% LTV which we bought into.
So for my apartment the basic calculation works like this:
Purchase price.................. 130,000K
Revalued 35% less.............85,500K
70% LTV (mortgage)......... 59,150K
Leaving 26,350K + 14,500 (difference after revaluing excluding deposit) which I need to find upon completion. Add that to the 30,000K already invested gives me hmmmm + hmmmm + hmmmm = 70,850k Ohh S**T (D'oh) (D'oh) (D'oh).
Now having accepted that large pill does the projected rent now cover the new mortgage?
59,150K x 8% = x 125% = divided by 12 = 492.92 = Ohh S**T (D'oh) (D'oh) (D'oh).
So in summery for the rent to cover the mortgage and yes I agree that this calculation is more geared to UK landlord overheads which may differ in Romania but as a general view a loan of 35,000 at 8% will have repayments of 291.66 PCM. Meaning in my situation I will need to cover 95,000K of the purchase price on completion.
It would be great to here your views on this and potential solutions short of poking myself in the eye and claming insanity.
Pukanui
