As property markets across Europe continue to suffer from a lack of interest and a lack of finance we have seen some dramatic falls in property prices right across the board. We have seen many of the new emerging property market hammered, we have seen many of the more established property markets fall to their knees and we have seen investors running for the hills.
But when markets finally calm down and investors regroup, where will they look to? Will they look to renew their love affair with the emerging markets of Europe such as Bulgaria or will they look to pick up historically cheap property in areas such as the UK?
This is a quandary which many property investors will have to consider at some stage, but we hereby enclose some pointers for consideration :-
Developed markets
There are a number of factors to consider when looking at the eventual recovery of developed markets throughout Europe with the UK being a prime example. These include :-
Economic recovery
Even though it would be fair to say that the UK economy has probably suffered as badly as any in Europe up to this point there is a perceived belief that the economy will bounce back sharply when investment markets return to normal. It is also the fact that countries such as the UK have experienced economic downturns before and managed to recover to former levels and beyond, often coming back stronger than before.
It is this experience and past encounters with economic uncertainty which will likely see investors returning to the UK property market faster than they return to the emerging area of the market. There is a solid market for property in the UK, there is a financial system which is as strong as any in the world and it is liquid.
Employment
Employment is a major factor for any economy and property market because unless the population have money in their pockets then any recovery will be very short lived. It would be foolish to say that the UK economy has not been hit hard but compared to the devastation which some emerging economies will experience over the coming months the long term affects will be very different. Many emerging markets have had to depend upon foreign business and foreign investors to create new employment positions and this flow of investment could take longer to return.
Property markets
When you look at the number of people who own their own homes across Europe, the UK has one of the highest percentages at around 70%. Compared to the likes of Germany (around 45%) there is a marked difference but in emerging markets there will likely be a much lower level of property ownership. The UK property market has always attracted more than its fair share of overseas interest because it is seen by many as a central part of Europe, both in terms of economic activity and financial markets.
Emerging markets
While it can be very difficult to forecast how emerging markets will react it is not necessarily all doom and gloom and there are some factors which could attract property investors once the markets have settled. These include :-
Economic recovery
The one major concern about the timing of any economic recovery in an emerging market is the fact that these economies have often seen overseas investment as the fuel for the fire. Unfortunately, many investors and overseas countries will be looking to get their own houses back into order before looking at re-establishing overseas operations. However, there may be attractions for companies looking at the cost base of areas such as Bulgaria compared to the likes of the UK – even after the economic downturn.
As the business community looks to stagger back to its feet there will be a need to keep costs as low as possible. This could see some operations moving to cheaper emerging markets where labour costs will likely be lower and governments will be very keen to refloat their economies. Tax incentives and grants might also come to the fore as the fight for business begins throughout Europe.
Employment
Employment could be one of the factors which holds back the ‘bouncability’ potential of emerging market economies. Unless the authorities can stimulate the economy as quickly as possible there is a chance the country could experience a prolonged period of economic uncertainty and increased concern for the population. This would mean less money in the pockets of the population, a lower level of economic activity and possibly an extended period of hardship which would not immediately attract new overseas businesses and investors.
Property markets
The performance and direction of emerging property markets is often very difficult to forecast as it could literally go one of two ways. Investors could retreat to more established market looking for the ‘safety’ factor after having their fingers burnt or they could look to get ‘back in’ on the ‘ground floor’ again in the hope that the economic growth of yesteryear would return. Quite how investors would view each property market around the Europe would depend upon their risk profile, money to hand and their belief in the underlying country.
Conclusion
While many people expect a flight to quality when the financial markets finally return to normal this is a very difficult call to make. Some investors will have had their fingers burnt in emerging markets and now look to more developed market which have fallen sharply, such as the UK, or they could decide to try again in emerging markets at a lower entry point.
The problem with emerging markets is the belief that because the country was experiencing a period of economic growth before the credit crunch, this is bound to come again – but it does not always work that way. While Bulgaria for example may have offered some excellent growth potential in the property market last year another market may offer better value next year.
A good track record and a solid property ownership base are vital to the long term success of any property market but there is no right and wrong answer as to whether developed of emerging markets offer better value.