Now that UK property prices seem to be stabilising, many investors are looking overseas for their next property punt. UK investors are lucky enough to have a wealth of opportunities right on their doorstep in the form of the emerging markets of Central, Eastern and Southern Europe. And discovering the next property hot spot would be easy, if only you knew where to look.

‘Emerging Europe’ typically includes those countries that have recently gained, or are currently candidates for, European Union (EU) membership. The bulk of these are located in Central and Eastern Europe and many are former Soviet bloc economies. Loraine Pinel, senior investment director at stockbroker Lewis Charles Securities, provides further clarification, defining emerging markets in general as those that are ‘transitional or in the process of moving from a closed to an open market economy, while building accountability within the system’.

Carving up the map

When discussing emerging European economies, Pinel divides the category in two. Firstly, she groups the ten EU Central and Eastern European (CEE) countries together, minus Bulgaria and Romania: ‘Those countries are economically further ahead than the second group. They have been aid recipients for longer, their infrastructure is more advanced, their currencies are more stable and their property markets have picked up.’

The second group is led by Bulgaria and Romania, but also includes Serbia, Croatia, Ukraine and Russia, according to Pinel. ‘Some of these countries have already embarked on a series of economic reforms that should lead to a stronger and more responsible economic performance,’ she explains. ‘Others are further behind.

In many of these countries, infrastructure spending is under way and rising incomes and credit availability are fuelling interest in property. Added to this, we often find a massive imbalance in supply and demand for apartments and houses, and pent-up demand on the retail side.’

Pinel mentions Romania in particular here. She says the country has one of the lowest gross lettable areas (GLAs) of retail space in the CEE, but that demand is certainly there for more development.

A recent report from PricewaterhouseCoopers (PwC) contains an article by Glen Lonie, partner, tax and legal services group, and Brian Arnold, director, financial services (tax) group, on the ‘coming of age’ of these emerging European property markets.

Discussing roughly the same regions as Pinel, Lonie and Arnold divide the CEE area in three: Central Europe and the Baltic States (CEB), South Eastern Europe (SEE) and Russia and the Commonwealth of Independent States (CIS) (see box on page 30).

They view the year ahead optimistically, saying, ‘Declining yields [in CEE] are leading to a change in investment patterns, with more focus on higher-return opportunities either through development or moving into the, as yet, less-invested countries of SEE and CIS.’

Not so new

But emerging property markets don’t need to be new EU entrants. Some members have simply lagged behind others in economic terms – for example, Greece, which became an EU member in 1981. Emerging markets may not even be EU members at all, well not yet anyway. Turkey is widely seen as a potential property investment hot spot now that it has commenced candidacy talks with the EU. It has already been a British holiday favourite for some time, making the country one to watch in terms of holiday rentals at least.

In this respect, Turkey is a perfect example of what to look for in an emerging property market. Its economy is growing stronger and it offers good weather, beaches and sightseeing possibilities, which attract holidaymakers and the possibility of a residential rental market.

The smart money

But of course the trick is to hunt down the future hot spots before everyone else does. ‘The smart money was in Romania, Bulgaria and Hungary ten years ago. Now there is a new wave where things are still pretty opaque,’ says Gavin Rabinowitz, managing director of Credo Property, the property arm of wealth management company Credo.

He explains that opacity keeps prices high, as it takes more research, effort and specialised resources to locate and make viable investments: ‘In the UK market, yields and capital appreciation rates have been decreasing, making everything more expensive. Therefore, people have begun to look for greater returns and always go to more opaque markets for this.

‘Even as a fund, you can’t just go in and buy – a lot of local knowledge is needed. The legal system is often difficult, so you need a local partner. For a private person, it costs a lot of money to get the right information and ensure you aren’t taken advantage of.’

A boost to the economy will have consequences for the domestic market, not just international investors. On a very basic level, as economies strengthen, individuals’ pay tends to increase and, in turn, so does their level of disposable income. This means that people have more money to spend and creates demand for property sales and rentals.

On a commercial level, a stronger economy means more businesses, which need more buildings. A growing economy also requires greater infrastructure – schools, hospitals, government buildings and so on. All of this spells good news for property investors.

Deciding factors

Writing for PwC, Chuck DiRocco, managing director of industry trends and analysis at the Urban Land Institute, highlights this very fact with regard to Moscow and Istanbul. In explaining the rise of both cities into eighth and seventh place respectively in its investment risk/return rankings, he quotes one respondent to his research as saying, ‘Growth rates in Moscow and Istanbul will continue to drive demand through increases in job growth and disposable income.’

When looking at direct investment, which tends to focus on residential properties rather than commercial, a number of extra factors come into play. The appeal to British investors of the more established property investment markets of France and Spain is a good indicator of what to look for in an emerging market. Pinel points out that both are close to home for British investors and offer the attraction of cheaper properties, good weather and year-round appeal.

Investing abroad undoubtedly requires more time and research, whether you are investing directly or indirectly. But for those prepared to make the extra effort, impressive returns are plentiful.

• Czech Republic
• Hungary
• Poland
• Slovakia
• Slovenia
• Estonia
• Latvia
• Lithuania

South Eastern Europe (SEE)

• Albania
• Bosnia
• Bulgaria
• Croatia
• Macedonia
• Romania
• Serbia
• Montenegro

Russia and Commonwealth of Independent States (CIS)

• Russia
• Armenia
• Azerbaijan
• Belarus
• Georgia
• Kazakhstan
• Kyrgyzstan
• Moldova
• Tajikistan
• Turkmenistan
• Ukraine
• Uzbekistan