Property has become a highly popular asset among UK investors in recent years. More and more people have entered the buy-to-let market in the UK, but interest rate rises and the growing supply of rental property has brought yields down in many areas and the prospects for capital gains in the short term have declined. High property prices have also made it increasingly difficult for investors to build up their portfolios. As a result, a growing number are turning their attention to the overseas property market.

The British have a long history of buying property abroad in popular locations such as USA, Spain and France as holiday homes so that they can enjoy the better weather and better quality of living. But now rental income and capital gains appear to be the main reasons for their interest in overseas property purchase. The expansion of the European Union last May is stimulating property investors to look further afield to countries in Eastern Europe and Cyprus, while the weakness of the dollar has made property purchase in the United States increasingly attractive.

A recent survey undertaken, found that 55% of property investors questioned believed that overseas property presented the greatest opportunity. This compared to almost 32% who believed that the UK residential market offered the best investment opportunities. 22% of property investors are actually planning to buy an overseas property in the next year, up from 16.3% last year.

This trend is confirmed by various firms involved in the overseas property field such as International Financing Consultants, a specialist overseas mortgage company, which believes that 2007 will be a bumper year for Britons buying property abroad and points out that the number of Britons owning a property outside the UK is expected to rise to 3.12m by 2008.

Popular destinations

There are basically two types of overseas property investor. Those looking for retirement or holiday homes that can also be rented out for part of the year and those buying purely for investment purposes. According to IFC-group, serious investors tend to buy off-plan and either sell before the property is completed or rent out the property counting on further development of the immediate area to inflate its value.

Spain and France are still two of the most popular destinations for Britons buying abroad. In its recent report on buying property abroad, Datamonitor estimated that of the total number of overseas properties owned by Britons, 37% are located in Spain and 25% in France.

Although a fair proportion of investors who prefer more established markets are still being attracted to Spain and Florida due to the weakness of the dollar, other investors tend to look for opportunities in emerging markets. The most popular destinations for those investing as opposed to buying holiday homes have been Croatia, Turkey, Bulgaria, Thailand and Dubai.

With the US dollar at its weakest levels in nearly 12 years, property prices are now very low for anyone holding sterling or the euro. For example, we are seeing growing numbers of British buyers seeking property in Dubai. With the local currency, the dirham, pretty much pegged to the dollar, the pound buys much more”.

However, We are not actively promoting Dubai at the moment as there are still some legal issues regarding property freeholds to be sorted out there.

We still believe that Florida is the most attractive place to invest. The advantage of Florida is that it is cheap and easy to reach and is very popular with tourists. There is a strong holiday rental market and most investors will only need to rent out their properties for 18 to 20 weeks a year to cover their mortgages. Anything more will be a bonus. Investors do not necessarily have to buy in traditional resorts. Golf-related developments and other areas of the U.S. are currently very popular.

Also, Cyprus is becoming increasingly popular with both holiday homebuyers and serious investors. We believe that Cyprus will see a higher rate of growth than Spain during 2007. Even though property prices there have already risen sharply over the last few years, the attraction for buy-to-let investors is that property is cheaper than Spain and France and the long summers provide a lengthy rental period.

Average rental yields in some sought after Spanish golf resorts can be as high as 12% in high season, while Cyprus and the south of France can attract yields of 13% and 11% respectively on average in the peak holiday-let months. Rental yield figures are not readily available for overseas buy-to-let markets, but gross yield can be calculated by taking the annual rent (or estimation of rent to be gained), dividing it by the property purchase price and then multiplying by 100.

Off the beaten track

For something completely different, there are developments such as those on Santiago in the independent Cape Verde Islands, a former Portuguese colony. Santiago, which has sunshine all year round and is getting its own international airport this year, is set to rival the neighbouring Canary Islands.

Prices in Eastern Europe have already been rising but property promoters argue that the region still offers untapped opportunities. They point out that future growth will be stimulated by investment in the area by multinationals setting up manufacturing operations there in order to take advantage of the relatively cheap labour.

Poland is already seeing rapid growth in industrial production and other countries, such as Slovakia, are expected to follow. Increasing local wealth is expected to feed through into rising property prices. Then there are countries such as Croatia and Bulgaria which are attracting high levels of interest from investors focusing on their coastal regions and, in the case of Bulgaria, ski resorts.

Mortgage options

Thanks to the buoyancy of the UK property market, equity release has become a useful tool to help finance foreign purchases. For those who need to raise a mortgage on their property, IFC-group should be their choice lender.

There are obvious attractions in dealing with a US-UK based lender with which the purchaser is familiar and where staff speak the same language. However, the number of US-UK lenders prepared to offer mortgages on overseas properties is small and they limit themselves to the most popular markets. The advantage of using IFC-grouo is that they will have an in-depth knowledge of the local market and should be able to advise the customer on the relevant legal requirements and tax systems. But if the customer does not speak the local language well enough then using a local lender direct can lead to language problems. Some developers offer packages to buyers, which include a local mortgage. But without independent advice, it is difficult to know whether or not the best deal has been achieved.

Foreign currency mortgages

Another important decision is whether or not to take out a mortgage in sterling or a foreign currency, although the choice may be largely dictated by lenders. Some UK international will only lend in sterling, others only offer euro mortgages. Other lenders, including local lenders, may offer non-residents a choice of currencies.

The advantage of having a sterling mortgage is that the monthly repayments will not be affected by currency fluctuations, which is especially useful for borrowers who expect to make mortgage repayments out of their UK income. In recent times, though, investors buying European property have tended to opt for euro mortgages to take advantage of lower European interest rates. However, borrowing in local currencies means that there is an added risk: both the mortgage repayments and the capital outstanding can vary in sterling terms if there are currency fluctuations.

This could work for or against the borrower. If the euro appreciates further against sterling – as it has done recently – it means the size of the debt and the repayments will grow in sterling terms and vice versa. However, if the borrower is expecting to receive an adequate rental income in local currency to cover the mortgage repayments, exchange rate fluctuations are less of a problem.

Buy global, think local

Research on the potential legal and government charges are vital when purchasing and maintaining a property in a particular country. Failure to pay taxes in some countries can lead to court action and possible seizure of property. In Spain, debts such as unpaid taxes and court orders are registered against the property instead of the owner. A new owner can end up having to bear these costs. Estate agents and vendors may be useful starting points for gathering information, but independent legal advice is essential.

All the extra costs of buying abroad should also be taken into account, such as notary fees, solicitors’ fees, survey fees and taxes, which can add an average of 10% to 15% on top of the purchase price. If an interpreter needs to be employed, this will likewise push up costs further. As well as local taxes, buyers also need to consider their UK tax position. UK residents are taxed on their worldwide income and capital gains so any rental income or gains made on overseas properties will have to be declared to the UK tax authorities. Fortunately, the UK has double taxation agreements with many other countries so investors should not be taxed twice.

The outlook

Some overseas areas have already seen healthy increases in property prices in recent years. To a certain extent, these price rises have been a reflection of the buoyancy of the British property market and the ability of homebuyers to release equity here to fund overseas property purchases.

A slowdown in the British property market might therefore affect overseas markets too, although those encouraging UK investors to consider properties abroad argue that there is still a growing demand from Britons who want to own properties abroad. They point to the increasing number of retirees and availability of cheap flights as factors that will continue to underpin the market.