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News: Warning over East European markets

New research shows that around three in ten (29%) Britons now see Eastern Europe as the market that will deliver the best capital returns for property investment over the next 10 years.

The Inside Track Group, which commissioned the survey, sees this optimism in Eastern Europe as misplaced, however. The company has performed research in the region, particularly in Croatia and Bulgaria, and chief operating officer Anthony McKay believes buyers are rushing into these markets not fully appreciative of the risks involved.

“Thousands of units are being built in both Croatia and Bulgaria – and many people see this area as the next ‘big thing’,” McKay says. “But, all there needs to be is a downturn in the market, or for political unrest to flare up, and many people are left thinking: ‘How on earth am I going to sell?’.

McKay continues: “It’s a good idea for buyers to consider higher risk, high return properties to go alongside low risk investments that make up the bulk of a successful housing portfolio. In Croatia and Bulgaria, though, inexperienced investors are putting their life savings on the line in the hope that they can make a fortune. I fear many people may end up bitterly disappointed because they are not aware of the complications within this market.”

Problematic purchasing processes

Inside Track has highlighted the following features of the purchasing systems in both Croatia and Bulgaria that could pose problems:

  • There is no legal organisation that regulates home ownership in Croatia, leading to a lot of confusion – the country’s land registry system can allow the person selling a property not to be the owner
  • Some properties in Croatia have been built without appropriate permission 
  • In Bulgaria, investors must establish a limited company before they can purchase land
  • Tax regulations in Bulgaria can be extremely confusing
  • The average wage in both Croatia and Bulgaria is low, meaning most locals cannot afford to rent new build properties, and investors are limited to foreign tenants only

The group also issues the following general piece of advice:  Ask yourself three questions before investing in any piece of property:

  • Will the re-sale value be more than the purchase value?
  • Will the property be desirable to rent?
  • Will the asset be safe?

“For the Croatian and Bulgarian markets, the answer is likely to be ‘no’ for at least one of these questions,” explains McKay.

Chris Davidson, Sales Manager at property investment specialists www.e-quity.com commented: "Bulgaria has attracted a lot of interest from popular TV shows such as A Place in the Sun, and there is no doubt that investors can pick up cheap property there.  However, with stories of forged title deeds, mafia run operations and an abundance of supply in tourist hotspots, it is difficult for investors to pick out a real bargain."

Davidson continued: “Before recommending any property to investors, E-Quity always performs what we call ‘due diligence’ - thorough research and analysis examining factors which might pose risks to investments.  Key areas include the political stability of the country, its legal system and banking infrastructure as well as the developer's track record, substantive evidence of its claims on investment performance and availability of investor security such as escrow accounts."

Davidson added: “I would recommend that anyone thinking about investing in any emerging market perform some ‘due diligence’ of their own and consider the option carefully.”

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