The Baltics have till recently been Europe’s hottest residential investment destination, with Estonian house prices (e.g.) rising 556.41% between 1997 and 2006, and 245.95% in the past five years. But residential property in the Baltics is now expensive. Apartments in capital cities are priced at around the same level as in Copenhagen, Helsinki and Stockholm, according to research by the Global Property Guide.
Why have Baltics’ property prices surged so strongly? Research suggests that long term property price rises are strongly correlated with high GDP growth rates (though there are many other additional factors). The list of European countries which in the past five years have experienced high per capita GDP growth is, unsurprisingly, headed by Latvia, Estonia and Lithuania – which all experienced above 8% GDP per capita growth (as did Belarus, where however foreigners cannot buy).
In future, house prices in the Baltics are likely to rise more slowly than in the past, the Global Property Guide argues in a report published this week. Gross rental income (yields) have fallen to moderate levels. Further, the financial authorities can be expected to discourage excessive house price inflation.
European alternatives to Baltics property
In its report this week, the Global Property Guide looks at alternatives to investment in the Baltics. Are there other European countries where buying property is likely to bring good rental returns and capital appreciation?
The most attractive investment opportunities for residential buyers appear to be:
Slovakia - Still the most attractive, inexpensive, very high GDP growth
Turkey - Strong GDP growth, housing market dynamic
Bulgaria - 10.6% yields, reform on track
Romania - 8.17% yields, strengthening economy
Hungary - Weak economic growth, but relatively low prices
Slovakia – Bratislava (GPG Rating: *****)
House prices are inexpensive, and GDP growth has recently turned strongly positive, with no increase in inflation. Rental income tax is low, there is no capital gains tax on long-term property holdings, and round-trip transaction costs are low.
Turkey – Istanbul (***)
Good GDP growth, a reformist government, and impressive housing market dynamics. There is no capital gains tax. However, prices are a little high in Istanbul, and the law is mildly pro-tenant. However, coastal areas probably deserve a better rating than Istanbul.
Bulgaria – Sofia (***)
10.6% gross rental yields, reform on track, how prices, but very high transaction costs on purchase.
Romania – Bucharest (***)
8.17% gross rental yields, strengthening economy, low rental income tax, no capital gains tax, good GDP growth and pro-tenant landlord and tenant laws.
Hungary – Budapest (***)
Prices are relatively low in Budapest, but Hungary’s economic growth is weak. Buyers should consider Hungary only if the government makes a serious commitment to economic reform.
The Global Property Guide is enthusiastic about the investment opportunities in Bratislava, Slovakia. The country has many investment advantages - high growth, low prices, good yields, and low taxes and costs. We consider this is a winning combination. The flow of investment money into the country suggests that economic growth will continue strong and reform will remain on track.
In our view only four other countries among Europe’s ‘high rental income return capitals’ are reasonably attractive investment destinations. These countries are: Bucharest (Romania), Istanbul (Turkey), Sofia (Bulgaria) and Budapest (Hungary). All of these four are attractive, but all have some disadvantages as investment destinations.
In Eastern Europe, we believe that Russia and the Ukraine have various disadvantages which make them unacceptable investment destinations. Russia, in particular, is very expensive, has high transaction costs, low gross rental income returns in Moscow, high taxes and an uncertain political environment. Its strong GDP growth makes Russia attractive for some domestic investors, but for foreign investors the risks are now too high.
The Global Property Guide (globalpropertyguide.com) is a research publication and website (globalpropertyguide.com) for the high net worth investor in residential property – providing information about the process and benefits of buying property in any country in the entire world.