What elements make a successful property market?

by Ray Clancy on April 27, 2009

Stop and think before you invest!

If you ask 10 property investors what criteria they use to choose their property investments you will likely get a number of different answers but there will be some common themes. While there is no quick fix or one formula fits all for a successful property market there are a number of elements which need to be incorporated to stand a greater chance of capital gain.

Among the more common elements to consider when looking to invest in property are:-

Local economy

The performance of a local economy has a significant impact upon the local property market as without business and employment in the region there will be little demand for property. As we have seen in many areas of the North East of England, some of the old coal mine villages and towns have never recovered from the closure of local pits which decimated the local workforce.

Transport links

Whether you’re looking in the UK, America or any other area of the world the need for affordable and reliable transport links has never been more vital. You can have the best properties in the world but if they are not easily accessible then this will affect demand which will eventually affect property prices. A prime example of this is the massive rise in low-cost airline travel routes over the last decade which has encouraged a number of highly successful local property markets.

However, during the ongoing recession a substantial number of low-cost airline travel routes have been shelved which has had a significant impact on many areas which had previously benefited from these affordable transport links.

Tourism

Whether we like it or not the influx of visitors from overseas, or from other parts of a country, continues to have a significant impact upon local property markets. Spain is the prime example of a successful property market based almost wholly on the tourist industry which has brought millions upon millions of potential new property buyers to the region.

Local amenities and services

Within a successful economy comes the need to service and accommodate the local population which has often seen a substantial improvement in local amenities and local services. However, more and more we are seeing schools and other such local services having a substantial impact on local property prices. Whether you’re in Spain, America or the UK, the need for quality schooling, and Dubai is another prime example of this, is becoming ever more apparent.

Political stability

While many property investors have made significant returns by investing in some of the more “troubled” regions of the world there are significant risks attached to such investment strategies. Countries such as the former Yugoslavia, where intense fighting carried on for some time, saw a complete decimation of the country’s infrastructure and investors literally fleeing for their lives. A number of “brave” investors have made substantial returns after taking on properties which had collapsed in value with few buyers in the market and international and local sellers in abundance.

However Brazil is a prime example of how political stability, which is often followed by economic stability, can literally change a market overnight. This is a country which is now has one of the better performing economies in the world and recently saw its credit rating move higher as the prospects for the country improved. Slowly but surely property demand is spreading throughout Brazil with investors looking for new and exciting niche markets against a backdrop of significantly reduced political unrest.

Financial services

While the vast majority of countries around the world and accommodate substantial mortgage industries, there are some which are less accommodating than others towards overseas investors. One example of this is Germany where overseas investors have until lately found it near impossible to raise significant mortgage finance to acquire properties in the region. While changes are going through the German regulatory system it could take some time for the full benefits to be felt.

Interestingly, a number of countries such as Dubai and Egypt have until recently been fairly self supportive with very few investors taking on substantial debt to acquire property. However, the introduction of overseas investors from Europe and other areas of the world, where mortgage finance is commonplace, has forced many regions to change and adapt to investor requirements.

Exchange rate risk

While often underestimated, the exchange-rate risk can play a significant part in the success or failure of any overseas property investment. As we’ve seen of late, the UK pound has fallen from around two dollars to the pound to just under $1.5 which has severely impacted upon UK investors looking to properties overseas. Interestingly, the Euro has appreciated substantially against the UK pound and may well become the preferred currency of transaction for many European investors looking to invest in other areas of Europe. The fact that more and more EU countries have converted to the Euro negates the potential currency risk for many investors.

Regulatory environment

One problem which occurs time and time again is the introduction of “surprise” regulations such as those seen in places like Dubai. After tempting in substantial overseas investors the Dubai authorities decided enough was enough and tightened the very regulations which have attracted overseas investors in the first place. This tightening of the Dubai regulatory environment for example, against a background of a weak global economy, has had a significant impact on the local property market and local property prices.

The trust factor

While many people ignore the “trust factor” associated with investing in any country or any niche market it is vital to the long-term success of any property investment. The more risk associated with any one country or any one property market the larger the impact on prices, the fewer potential buyers and the more potential sellers. These are doomsday scenario factors which have literally obliterated many markets around the world, a number of which have never recovered.

Conclusion

These are just a small selection of the more common elements which property investors consider when looking to invest overseas. Above all, the need to do your homework and be fully aware of local practices, local regulations and the local property market is vital. Those who follow like “lemmings” will at some point face significant challenges once the “clever money” has left and the followers remain.

While every property market around the world has different characteristics you need to appreciate your own goals and your own investment guidelines and stick to these rigidly. It is only human nature to consider “flexibility” in markets you may like and may have a “soft spot” for but this is a recipe for disaster!

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