It looks as though the time has come for a serious look at emerging property markets with news that Hungary is on the brink of collapse and many more other nations in Eastern Europe are in a similar position. The International Monetary Fund (IMF) has announced a $25 billion rescue package for Hungary where the financial system has seized up and the country is literally on the verge of collapse.
The Hungary deal is hot on the heels of similar moves to bailout the Ukraine and Iceland and there are grave fears that more countries are on the verge of economic collapse. So where does this leave local property markets? Is there value there? Or should investors shy away until the dust has settled?
Emerging property markets
While it would be wrong to suggest that all emerging property markets are struggling at the moment, there is no doubt that unless the domino affect which we are seeing now is stopped there will be many more casualties before the credit crunch and worldwide recession are finished. Until just a few days ago it had been thought that the major troubles had been confined to the Western economies which have been hit hard but have the core strength to bounce back in due course.
The same cannot be said of some of these emerging economies such as Hungary and the Ukraine where much of their strength has come from overseas investment at a time when their economies were under developed and begging for cash injections to stimulate some growth. As the worldwide recession continues to bite deeper we are seeing more and more overseas investors repatriate their investments and concentrate on getting themselves back on track for the future.
Is there still value in emerging property markets?
As we suggested above it would be wrong to group all emerging property markets together as dangerous, but the fact is that as each one falls the ones which were deemed to be safer than many then come into the firing line. Let us say that you had an investment in for example Dubai (a property market which although developed a little more than others is still very young) but suddenly you saw the likes of Iceland, Ukraine and Hungary dropping you would start to question which market might be next and possibly think of banking a profit.
As this safety first affect comes into play more and more we will see emerging market economies which we once thought as ‘safe’ start to shake and many will eventually fall. You might think that once these economies have fallen as far as they can go there would be value in the property market, but you might be surprised!
In order for any property market to operate successfully there need to be a number of factors in place which include a growing economy, substantial overseas investment, supply and demand and finance!
If we look at the situation as it is now stands, very few economies are still growing, overseas investors are pulling in their horns and dumping many of their investments, supply has overtaken demand in many markets around the world and as yet the worldwide money markets have not responded to the various rescue packages put in place.
So what about the future?
While at some point we will see the international money market loosen up a little and finance start to appear again the first to benefit will be the developing economies and the developing property markets as many investors will deem the emerging market economies as too risky until the rest of the world is more secure. This lack of substantial finance will see many of these emerging markets literally lose the benefits of all of their hard work over recent years and many could be grounded for some time.
Properties will look cheap compared to 12 to 18 months ago but they may still offer the same value 2, 3, 5 or 10 years down the line. If that was the case then no property investor would look to tie-up their money in a non-performing asset for this length of time. Historically once the worldwide money markets calm down we would then normally have seen countries offering tax incentives and other breaks to invest in local property markets but the fact that very few countries around the world have the financial stability to do this will see this phase delayed for many years.
Is it all doom and gloom?
Once the worldwide slowdown has bottomed out and we can review the affect it has had on markets around the world we will be a in a better position to look ahead. However, even when markets have bottomed out and we start to see signs of life, the natural response is to go for the more developed, stronger economies which have a more secure property market. This could leave many of the emerging markets out in the cold for some time as slowly but surely investors start to branch out and eventually take another look at emerging property markets.
It is very difficult to put into words the damage and the impact which this ongoing slowdown is having on the world’s less well developed economies ad property markets. Where once investors saw blue skies and dreams coming true we are seeing the dark clouds and nightmares where properties remain unsold for months and investment funds are tied up in under performing assets.
Some may be tempted to step back into the more risky markets as soon as we signs that the worldwide economy is back on track but why invest your funds into an asset which may remain flat at best for 1, 2, 3, 5, or maybe even the next 10 years?
If some property experts are not expecting the UK market to experience a sustained recovery until 2013 what chance do these smaller emerging property markets have?
Life is tough enough in some of the more developer property market without taking on any undue risk with less well developed and ultimately weaker property markets, well at least in the short to medium term.