INTRODUCTION

The Eastern European property market is one that has really come into its own in the last five years, for reasons that include the growth of budget flights, EU membership and increasing levels of foreign investment. With everyone from families and retirees to investors and second home buyers purchasing property in a region that has only recently managed to shed the shackles of communism, it’s unsurprising that people are asking questions about property purchase and the logic or otherwise of buying into such an immature market. That’s where this book comes in. Here you’ll find answers to all the questions you may have about the regions: investment potential, average prices and conveyancing system, as well as handy hints about relocating to, and living in, a largely alien environment.

We have featured the top 13 countries located in Eastern Europe that are experiencing the most demand and which are showing feasible market growth and also have a relatively safe legal system. Although Turkey isn’t technically part of Eastern Europe, we have included her as she shows the same market features as countries such as Bulgaria and Poland – last year alone saw between 10,000 and 15,000 Europeans buying in the country.

Despite many marked similarities, each of the 13 countries included here has different characteristics and features, which make them a worthy choice for a second homebuyer. These are all covered in more detail in the individual country chapters found in the second half of this book.

Whatever advice you may find, don’t be fooled into thinking you can go it alone. What is presented in this book is a guideline of what you can expect and how to go about making your dream a reality. However, there is no substitute for experienced professional advice, so in order to avoid becoming the next ‘horror story’, make sure you surround yourself with a team of experienced professionals – and do your research!

All currencies were correct at the time of going to print. However, always check conversion rates, as they are liable to change. A good site is www.xe.com.

BUYING ABROAD AND WHAT IT CAN OFFER

Once reserved primarily for the rich or rootless, today the culture of owning a property abroad is a dream lived by more than 750,000 Brits. The overseas purchase has now become a straightforward and safe process – so much so that it is anticipated that two million Britons will be living on foreign shores by 2020, with over 11 million expected to buy foreign properties within the next five years. Owning a holiday home abroad is top of the British wish list, with HIFX Foreign Currency exchange (www.hifx.co.uk) reporting that 68% of adults – 29 million people – would like to buy abroad. And the reasons why we seek to live in foreign climes? These are generally two-fold: 37% of us are looking to move abroad in search of better weather, while 32% of us are searching for a better quality of life.

Twenty years ago buying abroad was considered a difficult and risky business – and that was even before you considered looking beyond the Iron Curtain. With the lack of freedom of movement limiting a buyer’s sphere of choice it wasn’t until the advent of the package holiday and the mass development of the Spanish property market in the 70s and 80s that the idea of owning a home in the sun became a feasible prospect. Things have changed drastically since then and today property has become the cornerstone of our investment portfolio as we have seen our faith in the pensions and stock market undercut by increasing volatility in the equity markets.

The introduction and expansion of the EU means that buyers now enjoy unlimited choice, with the increase in household internet access and budget flights encouraging us to be more adventurous, whilst TV shows and the media cajole us into exploring new markets. Today you can find a plethora of companies which specifically cater for buyers seeking to purchase in ‘off-the-beaten-track’ countries, helping to make the conveyancing process a much smoother ride than it would have been five years ago. Meanwhile the fly-to-let phenomenon means that a well-researched purchase close to an airport receiving budget flights can more-or-less guarantee to cover your costs. On a more practical note, by buying abroad you’ll generally get more for your money – £250,000 in the UK will buy you a one-bedroomed flat in the centre of Bath, while in Eastern Europe you could live like a king in a six-bedroomed coastal villa.

Many have asked the question, why risk buying a second home abroad when you can own a holiday home in the UK and take advantage of a ‘safe’ market and guaranteed price appreciation – and all in your own back yard? Well, for a start, just because property prices in the UK are high, this doesn’t automatically translate into guaranteed market growth. UK capital growth currently sits at around 5%, meaning if you went out tomorrow and bought a property in the UK, hung on to it for one year and then sold it, your profit would be less than 10% of the property value. Compare this with an Eastern European market where annual appreciation rates regularly hit 30% – more in Poland, where an investment of £100,000 today may well have quadrupled within a decade – and it’s easy to see which scenario offers the best investment.

Enough of the practicalities: for most, the lure of a home overseas is the attractive lifestyle and low living costs. Brits, disillusioned with the weather, their wages and the spiralling cost of property and living, see the solution to their problems as a move abroad – and in many cases it has proved successful, leaving the buyer with a nest egg for the future and a home away from home for holidays. What’s more, living in the sun is proven to have a beneficial impact upon your health.

A new but significant trend is the increasing numbers of people who are relocating abroad in search of a new and exciting lifestyle. Keen to learn about the culture of a country, buyers are becoming more adventurous and this has particularly benefited the markets in Eastern Europe, where buyers aren’t just finding themselves living in an expat enclave, but actually among the local people. Still perceived as being ‘foreign’, Eastern Europe is a long way from becoming a ‘Little Britain’, Costa del Fish and Chips, or Chiantishire.

EAST VERSUS WEST: WHY BUY IN EASTERN
EUROPE?

The Eastern European property market makes a lot of sense: EU accession, improved infrastructure and continued foreign investment are all helping to secure and build upon the growing political and economic stability these countries now enjoy. With stability comes confidence, all of which helps to bolster the property market and encourage a continuation of the already high appreciation rates. While this is very much an over-arching view of the market, it explains why thousands of investors are focusing their attention on Eastern Europe. Throughout Western Europe many people have found themselves priced out of the property market.

Another major advantage of Eastern European countries is the cost of living. In Bulgaria, GDP is one-third that of the UK and while this doesn’t mean prices are three times cheaper it’s a fairly good assessment of the situation. You can enjoy a meal out with wine for £5, while in Poland a meal out will cost about £11. Prices in Romania are an average of 50% cheaper than the UK. Even the forward-thinking market economies of the Baltic States sit roughly 40 places below London in the Mercer Cost of Living Survey for 2006.

While Spain and France remain a safe bet and still experience market growth of between 4% and 8%, when measured against price rises of 17% in Estonia, 12.5% in Bulgaria (in 2005 this figure sat at a staggering 36.5%) and 9% in Hungary – figures which are set to continue to grow for the foreseeable future – there is no competition. Whereas a two-bedroomed property in St-Tropez will set you back by 730,000 euros, in Kaş in Turkey such a budget would buy you three separate three-bedroomed villas, while in Bulgaria you can purchase a two-bedroomed ski property for 45,000 euros!

What really makes Eastern Europe so appealing is not just the growth in property prices, but the economic growth and political stability that go with it. The Baltic States are a shining example of this. All three are rising stars in the tourist market, receive budget flights, are experiencing average economic growth rates of 7–10% per annum over the last few years and are politically stable democracies. All of this is what has helped make their property markets so attractive and will continue to do so for the next ten years.

Despite all these positives, as with everything, there are negatives and these are impossible to ignore. Many question the impact historical stigmas have left on these countries and their political circumstances. Corruption is – quite rightly – a concern to many, as are the questionable land registry systems in operation and the threat of defective titles. These are all things to be aware of and to take into consideration when choosing where to buy. However, with the right advice and careful planning, you can avoid becoming a victim.

While the buying process has become easier in many countries thanks to EU membership wiping away restrictions to foreign buyers, you should be aware that mortgage rates are still high – 6% in Hungary, compared with 3% in Spain – but these will drop over time and as demand increases. Finally comes the question of market uncertainty and whether the investment bubble will burst. While the 20 – 50% appreciation rates won’t last, prices still remain cheap compared with UK levels and, as long as demand continues to outstrip supply, then your investment is likely to be a sound one. However, do be aware that these countries are past the point of appreciating by 20% overnight. The markets have calmed down and in many instances now represent a better medium- to long-term investment than a market where you can buy an off-plan property and double your money by selling it on completion.

A BRIEF HISTORY OF EASTERN EUROPE

The history of Eastern Europe is a complex affair dominated by a series of national quarrels and clashes. Consequently, these countries would never co-exist harmoniously as a unified region. An area of considerable ethnic diversity, Eastern Europe’s population of 348 million is comprised of 14 major nationality groups and nine smaller ones, including the Slavs, Romans, Bulgars and Magyars. Since the 1500s the countries of Eastern Europe have been subjected to centuries of foreign rule, which finally culminated in 50 years under communist control and an isolationist policy which severed the region’s ties with the outside world. The 19th century saw the development of intense nationalistic feelings, culminating in the failed and bloody 1848 revolts, while the 20th century saw two World Wars.

It was with the end of World War I and the disintegration of the four defeated empires of Austro-Hungary, Germany, the Ottoman Empire, and Russia that Eastern Europe as we know it today began. The peace settlement saw the creation of Czechoslovakia, Yugoslavia, Latvia, Lithuania and Estonia, and in the case of Poland, re-creation, as she became an independent country after more than a century of foreign rule. Turkey replaced the Ottoman Empire, with the creation of other Middle Eastern countries in the following years.

Undeveloped and under-resourced, as the 30s came along and the world was hit by economic depression, these new states were unable to cope with the aggression of Germany, and during WWII they found themselves caught between the forces of Nazi Germany and Russia. By 1945 they were under Russian rule, and despite repeated promises from Stalin that they would be granted independence, they soon found themselves under the yoke of communism and hidden behind the Iron Curtain.

Stalin’s death in 1953 signalled the beginning of a series of revolts – such as in Hungary in 1956 and in Czechoslovakia in 1968 – which signalled the beginning of the end for communism in Eastern Europe. Independence from Russia eventually came in 1989, with the toppling of the Berlin Wall and the final collapse of the Soviet Union on December 25, 1991. Almost immediately the countries of Eastern Europe began declaring their independence and today enjoy parliamentary democracies, following many years of heartache and bloodshed.

CORRUPTION AND THE LEGAL SYSTEM

Whereas buyers in France and Spain are following a well-trodden path, by choosing to buy in Eastern Europe you are still, to some extent, a pioneer, and could be faced with corrupt officials and demands for backhanders. While such dealings may be more prevalent in some countries than others, you should still be prepared for officials who pass you from pillar to post, especially in countries such as Montenegro, which currently has a poor land registration and mortgage system in place, although they are working to rectify this.

Many countries with weak governments have seen their justice system infiltrated by organised crime groups, who bought up land during the property boom and sold it on at inflated prices and with dodgy titles. However, such occurrences should prove of little concern to the average property buyer – just ensure you check the land registry and property title thoroughly.

Thankfully, pressure from the EU is making many countries clean up their act and Croatia is one example of a government taking steps to deal with corruption and mafia activity. Unfortunately, in Bulgaria foreigners are still being charged over the odds for property – despite legislation outlawing the previously acceptable practice of charging locals less than foreigners – while Montenegro is hugely reliant on Russian money, with many mafia figures having bought up swathes of coastal land.

Bribery and black money are more commonly encountered, a common method of greasing the wheels of industry and avoiding getting your planning application buried under mounds of ‘paperwork’. While this problem is better than it was five years ago, don’t be surprised if you encounter such demands – the best thing to do is employ someone who knows how the system works. The justice system in Eastern Europe can be creaky to say the least, and while countries such as the Czech Republic are adamant the system is free of corruption, to take a dispute to court is usually a three-year process.

THE EU AND EASTERN EUROPEAN ECONOMY

In May 2004, the countries of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia all joined the EU. The result was the opening of borders, a relaxation in visa laws and restrictions on foreign property buyers, the embracing of a market economy and the introduction and acceptance of civil rights. More importantly, it has also led to massive EU funding for the new members, which in turn has translated into improved infrastructures and facilities. Since this newfound freedom of movement was introduced, more than 15 million EU citizens have relocated for work or retirement reasons to another member state.

In the three years since 2004, Estonia has averaged one of the best economic growth rates in Europe, reaching nearly 10% GDP growth per annum, with increases of 89.9% since 2000, an average GDP of 6.23% and low inflation. Such economic prosperity has fuelled huge levels of foreign direct investment and price rises of 30% per annum in the last few years, making the property market one of the most popular investments in Europe. PriceWaterhouseCoopers carried out a recent survey which highlighted that 42% of 201 companies surveyed forecast a growth in Eastern European operations, with 46% of companies considering investing in the newly-joined Eastern European countries.

However, while positive growth can be witnessed, with new member states experiencing an average economic growth rate of 6% – seven times that of the original EU members – it’s important to remember that we are only three years into EU membership and there is still a long road ahead. GDP rates among new members currently sit at between 35–75% of Western European levels. The Economist predicted that even if the new member states continue to grow at a rate double the original EU15, it would still take an average of 50 years for them to reach economic parity.

Slovenia adopted the euro on 1st January 2007 and the euro is soon to be embraced by many eastern countries – the Baltic States are looking at 2008 – 2010. Consequently, travelling between countries is destined to become increasingly easy. It’s also good news for investors who will no longer be required to ride the rollercoaster of exchange rates, while those looking to secure a mortgage can expect a drop in inflation and interest rates as Eastern European countries seek to fulfil the requirements of the Eurozone. Finally, this is all good news for the property markets, which should expect to see a significant rise in prices and demand.

Recent admissions

Bulgaria and Romania joined the EU on the 1st January 2007, but what will it mean for investors? Accession and its relationship to residential property prices is one of the most pervading questions surrounding membership. Bulgaria saw property price rises in anticipation of EU membership with real estate one of the country’s fastest-growing sectors, up 5.3% in 2005.

While EU membership doesn’t guarantee inflation within the property market, it does allow for economic stability and prosperity, which in turn allows the market to flourish. Lessons on this score can be learnt from Spain. In 1986 it joined the EU and faced challenges over its economic stability. However, tourist numbers increased dramatically – a similar picture to that of Bulgaria, up 22% annually – and foreign property purchase began in earnest and continued over the last 20 years. Over the last few years, Romania has seen capital growth of 30%, with rental yields as high as 15%, along with the development of a mortgage market. Thanks to EU membership, this growth is likely to have been safeguarded and PriceWaterhouseCoopers have earmarked Romania as the one place in Europe where investors can make money fast.

THE TOURISM BOOM AND BUDGET FLIGHTS

It was the advent of package holidays that gave holidaymakers the idea that the lifestyle of sun, sea and sand could be enjoyed year-round – all they had to do was buy a property on foreign shores. It’s a well-known fact that as the number and regularity of budget flights have grown, so the overseas property market has expanded. The introduction of new flight routes has been responsible for the creation of new property markets and as more and more Eastern European countries join the EU, so the routes will continue to grow.

Between 2000 and 2004, there has been a 45% increase in the number of UK households owning a second home abroad. This correlates with the rise in passenger numbers. Since the 1980s, the number of international passengers per year has risen from 43 million to 167 million, and today 80% of Brits hold a passport compared with 24% in 1984. Ryanair has seen passenger numbers grow from 5.5 million in 2000 to nearly 31 million in 2006.

2006 saw aviation activity in Eastern Europe in double figures for the first time, with an overall 12% rise from 2005. Flights to Poland were up by 21%, Turkey by 19% and operations in and out of the Baltic States increased by a staggering 87% in summer 2006.

In the future, demand is unlikely to lessen. Between 2004 and 2005, tourism figures rose by 22% annually in Bulgaria and 22% in Turkey, with Poland seeing tourist figures hit 15.2 million in 2006, making it the 12th most visited country in the world. For investors looking to buy to let, this is good news – it’s also good news for the property market. Tourism means increased awareness of each country’s market, which in turn stimulates demand for property, and so those buyers looking to secure a good investment should keep an eye on the new and planned budget routes, as they are certain to stimulate the property market.