Bratislava / Prague / Polish cities

[z101]

I guess you will make a good living trying to sell it propman, but I for one am not buying it.

I HAVE been to both countries to look at them for investment. Too many risks. Anyone naive enough to compare markets should get 'independent' advice before investing.

 

[MichaelDes]

Ceatharlach, And if I were to put a price on your dubiousness of all this talk about them, do you think a fair price would be that apartment prices in Warsaw were only 36% of that of Dublin? (source: Savills HOK, RConsulting Feb 07). I believe that such a price difference is a fairish assessment of the risk, given that average industrial wages in Poland are 30% of what they are in Ireland (approx €9,600 vs €32,000).

I believe exceptional returns can be made in OPI if done right. Within equity there is a wealth of valuable information but within property there is wealth of spin. The only way IMO to evaluate the market is through rigorous internet enquiry and by visiting any location on numerous occasions before committing. QWERTY alludes to the main points that I consider very important the entire list is more exhaustive than this. CDE is also right in that serious value can be added through refurbishment and development of property.

Ceatharlach, I concur with you as the main consideration to me is local wages. In Warsaw property is 36% of Dublin prices [which can not be afforded in Dublin, hence tanking nominally] but wages are 30% by comparison. Therefore affordability is a more difficult problem for the average Pole buying locally. If Ireland has a bubble then Poland by virtue must be a more ballooned bubble, which is being fed solely by artificially exposed FDI whose greater wages strengths have distorted the market.

According to Nationwide statistics going back at least thirty years, disregarding interest rates, inflation, income after tax and other relevant factors, a speculative bubble is described as any market whose price of average property exceeds four times average income. What is the correlation in these CEE countries? The correlation will affect UK market nominally by 10% but in real terms 24% as average house prices are 6.6 times average incomes. Stagflation is now the new disease in town due to wage constraints.

On an off thread note, does anybody know the excel calculation to work out montly payments when interest rates, term and borrowing levels are known. For instance 100k at 5% over a repayment term of 20 years. It would be invaluable to realising the propensity to afford??

 

[JohnGajah]

I'm an Asian living in Budapest looking to buy a property, and this is my first post. I came across this website when I was looking for more info on Irish investing here. I'm glad to say I've learned a lot from the way Irish/Brits have been investing here, both from the success which I have seen, and the problems/mistakes which I have read about (the people in the posts seem to have more problems than successes). From my observations, it appears that the people who seem to have successes are those who bought early, or those who have spent considerable time living here (or coming here often to see and understand the ground realities. Having studied several transition economies, I find many aspects of the CEE countries not easy to understand from a western/layman point of view, and my hesitation in taking the plunge.

From my observations, I note that the prices in Hungary are not highly correlated with wages. It is difficult to generalise, because, for starters, Hungarians begin with high rates of equity (from having bought privatised apartments for a song). They are also able to leverage on family reserves/undeclared funds when the need arises (at least the ones who are buying the same type of city properties as the Irish - I think they are probably from the upper 20% of Hungarian income earners). Hence the prices are artificially high in correlation to the "average income".
In any case, the "average income" is not a good indicator, since these countries "market economy" are only 15 years old, and during this time, there were too many drastic changes, recessions, devaluations etc, and also new forms of financing, uneven salary distributions and increases to really come up with a clear picture relating income to property prices. I think the salary levels only started becoming clearer and evenly distributed just before accession, at which time property prices started rising because of foreign investors. So I think the correlation would be weak or misleading for a few years more. On a separate note, the correlation in my country has been about 8x for at least 20-25 years (Due to high population density, we've come to accept that we have to pay higher prices for living space).

I have a great excel spreadsheet (which I got from my bank at home) which I can send Michael Des. Its really good cos, it calculates your payments for different amount,terms, and allows for varying interest rates during the term (all easily filled in). It also tells you how much of your payments go towards interest, and how much is towards the principle. Not sure how to send it, or at least make it available to anyone interested.

 

[budapest]

Interesting post, JohnGajah. I know the complexity of CEE property markets only too well and I absolutely agree that generalisations and statistics don't work very well in developing economies. 'Average Income' is further complicated by the existence of the black economy in most of these countries and as you say, substantial funds often magically appear out of nowhere in order to buy properties here. However, this situation is improving all the time.

Whether it's Bratislava, Warsaw or Budapest, I cannot understand how anyone can buy (typically off-plan) properties without having visited the country at least several times or preferably having lived there for a few months. I'm still cautious about buying in Bp, despite having lived here for years and having a good understanding of the market. I've been to Warsaw several times and have connections with the city, but I still wouldn't buy property there without either sound unbiased local knowledge or living there first. What seems to be happening in 2007 in Poland is very similar to what happened around 2003 in Budapest, when investors bought everything that was thrown at them, with no real concern for value or rentability.

What these developing CEE economies do offer however is high potential for rapid economic development, with high annual wage increases, increased spending power, etc, which will hopefully feed into the property market. And in Budapest at least, good rental returns for the right properties means that you can stick it out for the long haul.

 

[Propman]

If Ireland has a bubble then Poland by virtue must be a more ballooned bubble, which is being fed solely by artificially exposed FDI whose greater wages strengths have distorted the market.

Polish wages are not being fed significantly by "artifically exposed FDI" (FDI being Foreign Direct Investment, by which is meant by new jobs created foreign companies establishing in Poland). Instead, the belief among economists and commentators is that Polish wages are under-reported; Poland has a huge grey market economy and a significant number of Polish people are earning higher money as self employed due to corporate tax rates of 19% vs the highest rate of 42%.

In any case, I'm sure we'd agree on the point that further rises in house prices in Poland will be in line with wage increases (which are currently running at 9% per annum). The huge increases which started in 2004 are over for the time being.

 

[MichaelDes]

Polish wages are not being fed significantly by "artifically exposed FDI" ...Poland has a huge grey market economy. Poland will be in line with wage increases (which are currently running at 9% per annum). The huge increases which started in 2004 are over for the time being.

Propman. Re FDI this is a typo as I meant foreign money inflating local property. But on the subject, you may have shot yourself in the foot mentioning Warsaw prices are 36% of Dublin prices but wages are only 30% of Dublin wages - major bubble territory therefore. I stand to be corrected on that score though so


(i) What is the average salary in Warsaw? To account for the grey economy it would be a matter of adding as a maximum would it not, 20% on top.

(ii) What is the average price for a two bedrrom apartment with parking space? Say 1000 sq feet in a decent average area.


If it is more than 6 times salary the market is definitely in bubble territory - some commentators always mention a soft landing as a sweetener. All markets especially after 1st or 2nd cycle crash hard. Where globally is there a market which has grown 10% per year for a number of years that eventually stabilised.

For anyone to argue that you can not correlate average wages against house prices with the argument that the economy is going through a growth phase and wages are catching up, is simply ridiculous. If property is speculative as I suspect it is, the trend will continue at a rate above inflation etc until it goes beyond a point of no return. With unemployment low in Warsaw and wage inflation running at 9%, what is this doing to local consumer prices? The economy has to have cost push inflation from oil and commodities and demamd pull inflation combined. No company under the financial constraints globally from the credit crunch etc could tolerate such levels of activity and would IMO quickly relocate should it continue. These pays rises of 9% are being offset by inflation which to an extent affects propensity to afford? Finally what has HPG as a percentage been for any CEE region from Dec 2006 to Dec 2007?

 

[Martin77]

On an off thread note, does anybody know the excel calculation to work out montly payments when interest rates, term and borrowing levels are known. For instance 100k at 5% over a repayment term of 20 years. It would be invaluable to realising the propensity to afford??

Off Thread Answer:

for constant payments to repay a loan:
-PMT(interest rate per month,number payments (months),present value, final value,0)

=-PMT(exp(ln(1+5%)/12)-1,20*12,100000,0) = 653.84 per month

for repayment of 100K over 20 years at an APR of 5% with monthly compounded interest payment at the end of the month.

ignoring arrangement fees, taxes etc. etc.

 

[Propman]

Propman. Re FDI this is a typo as I meant foreign money inflating local property.

There has been (relatively) little of that in (some) Polsh cities e.g, Wroclaw approx. 15%, in Poznan <10%. I often have to get help get contracts translated into English for buyers because the developer has not dealt with foreign buyers before.

But on the subject, you may have shot yourself in the foot mentioning Warsaw prices are 36% of Dublin prices but wages are only 30% of Dublin wages - major bubble territory therefore.

I think that a 6% dfference between 30% of wages vs. 36% of prices could hardly be described as "major bubble territory".

(i) What is the average salary in Warsaw? To account for the grey economy it would be a matter of adding as a maximum would it not, 20% on top.

(ii) What is the average price for a two bedrrom apartment with parking space? Say 1000 sq feet in a decent average area.


If it is more than 6 times salary the market is definitely in bubble territory

I don't agree with that analogy because if you follow your logic, then the average apartment in Dublin should be worth 6 times average wages (€32,600 x 6 = €195,600). It's not; its worth approx €400k according to Savills HOK. So are you saying that Dublin property is 51% overvalued?

For anyone to argue that you can not correlate average wages against house prices with the argument that the economy is going through a growth phase and wages are catching up, is simply ridiculous.

I haven't. Huge domestic demand, undersupply and the opening of the mortgage availability with cheap interest rates is what caused prices to double and more.

If property is speculative as I suspect it is, the trend will continue at a rate above inflation etc until it goes beyond a point of no return. With unemployment low in Warsaw and wage inflation running at 9%, what is this doing to local consumer prices? The economy has to have cost push inflation from oil and commodities and demamd pull inflation combined. No company under the financial constraints globally from the credit crunch etc could tolerate such levels of activity and would IMO quickly relocate should it continue. These pays rises of 9% are being offset by inflation which to an extent affects propensity to afford? Finally what has HPG as a percentage been for any CEE region from Dec 2006 to Dec 2007?

As I'm not sure how to extrapolate HPG in Poland, I'lll just point out that inflation in Poland has been down to 1.6% in the last year, is rising through 2.5% and expects to be at 3% by year end. Not excessively high. And GDP at 6.5%

 

[MichaelDes]

I think that a 6% dfference between 30% of wages vs. 36% of prices could hardly be described as "major bubble territory".

Particularly Warsaw, if the propensity to afford is more difficult than Dublin. Average house price to average income are 12.2 times according to your figures or €2721 per month for a 20 year mortgage!! This IMO will correct itself nominally and in real terms.

I don't agree with that analogy because if you follow your logic, then the average apartment in Dublin should be worth 6 times average wages (€32,600 x 6 = €195,600). It's not; its worth approx €400k according to Savills HOK. So are you saying that Dublin property is 51% overvalued?

Yes -very possible. UK 1989 to 1996 or Japan still ongoing 16 years later. Prices nominally correct by 10% to 15% [Japan 33%], but then 0% HPG against yearly inflation, causing deflation for several years. Poland by your figures, IMO will follow the same tune but be worse off in terms of price instability and correction. The fundamnetals in Poland are more skewed by comparison. Any market is an artificial bubble when wages are totally out of kilter to propensity to afford.

See the exact correlation of [broken link removed]. The UK presently is heading in the same direction and wages are only 6.6 times to average house price!! The UK and further afield will have to reallign because so much M0-M3 was pumped into the system via easy credit. This has now completely and utterly dried up and will be for sometime [see Libor in London today 6.75]. This phenomena and disease has affected Europe and wider a field. Again of these emerging markets, with financial imbalances to income and tighter liquidity in banking, they will be hardest hit and this spells absolute doom to me, so avoid.

CEE market could be in the denial stage IMO within the property cycle chart.

 

[z101]

Well put. It's just fundaments that dont add up to me. Combined this with what is a relatively new economy and I can think of a half-dozen established economies that are a more sensible investment.

I find having read a lot of posts throughout there are people who may have went in both feet with property investment in some countries, and thus have to 'bang the drum' and talk the respective market up.

 

[Propman]

My approach to assessing the fundamentals (of Poland, Ireland or anywhere else) is different. I'm not starting from a position where I believe that a €400k apartment in Dublin is very possibly going to be worth only €196k and I do not believe we are facing "absolute doom". So we'll always have a different view ...

 

[MichaelDes]

So we'll always have a different view ...

Exactly. It's a subjective business. It's good to have differing views otherwise the thread ultimately would be very boring. You know what you are doing, and no doubt provide an excellent service. So on that score I wish you continued success...

For my considered views for property growth in many CEE over the next few years click [broken link removed] or else [broken link removed].....nothing has convinced me otherwise that stacks. P.S. I like leveraged property as an investment vehicle, and there is some very good opportunities in 2008 but not IMO those listed on the title.

 

[ringledman]

Exactly. It's a subjective business. It's good to have differing views otherwise the thread ultimately would be very boring. You know what you are doing, and no doubt provide an excellent service. So on that score I wish you continued success...

For my considered views for property growth in many CEE over the next few years click [broken link removed] or else [broken link removed].....nothing has convinced me otherwise that stacks. P.S. I like leveraged property as an investment vehicle, and there is some very good opportunities in 2008 but not IMO those listed on the title.

MichaelDes, could you expand on your 2008 opportunities.

Cheers.

 

[MichaelDes]

MichaelDes, could you expand on your 2008 opportunities...Cheers.

In terms of European investment, my choices would sway towards the mature northern markets such as Holland, Denmark [Malmo done to death at this stage - I think] and Germany, discluding the East except Dresden.

Further afield would be the Far East, particularly Singapore for residential & commercial and for commercial only in 2nd tier cities of Japan i.e. Fukuoka, Kyoto. Markets to consider in the fourth quarter forward of 2008 would be America and United Kingdom, within London especially. But due to the credit crunch it might be necesscary to wait a bit longer until these markets fully bottom and produce good yields compared to borrowing rates.

Generally yields for me must be 7.5%+ and borrowing lower by a decent margin, otherwise forget it. Good fundamentals usually are followed by capital appreciation but not always. Russia is too risky with their government, otherwise it would be a choice. China and Hong Kong are dodgy as hell and too expensive....

Best way to make money in property is through refurbishment and floor space expansion. But you need to know what you're doing, if not leave well alone. Resorts whether snow or sun, no way. Nice or Cannes area of France looks okay if prices fall [price p.s.m. still too expensive], but this would be a lifestyle choice rather than for any quick capital return...

A good way into these markets other than having deep pockets is through good international syndicates with vast experience or as an alternative to syndicates in Japan then J-Reits. All my speculations are based on educated guesses based on fundamentals. But then again of late, fundamentals within property investment have not been a useful paradigm, look at prices in CEE!! On this point however and IMO as the American credit crunch morphs into a global problem these idiosyncrasies will re-correct. Fundamentals same as post-dotcom-era will return to rule the day. Hope this helps...

 

[z101]

I wonder where opportunities will be created by the credit crunch as people still need to rent..

 

[TRMA]

I believe that Slovakia more than any other country is in a position to capitalise on a resurgent German economy. Infrastructure will be constantly upgraded as car manafacturing and other production continues to increase. The nearly completed motorway between Bratislava and Banska Bystrica puts our road network to shame!