For many years television property porn on buying the perfect holiday home abroad dominated our screens. It seemed that just about anyone could hop on a plane, buy a property for next to nothing and live the dream in sunnier climes.
Every week revealed the next must-buy place for UK investors, from Croatia and Bulgaria to Florida and Thailand. Borrowers were not only encouraged to live their sun-drenched fantasies but also told they could make money on the investment and overflowing mortgage finance meant there were lenders both at home and abroad willing to fund the purchases.
In the frenzy brokers were inundated with speculative enquiries from holiday-makers and amateur investors. But for many the downturn ended any thought of enquiring about holiday homes or making bold investments.
Figures for British citizens buying property abroad are hard to come by because it is difficult to track purchases from all over the world and there are a high number of cash purchases or finance raised on secured loans or remortgaging of UK property.
These factors make it difficult to assess the size of the market but industry estimates suggest it is worth billions of pounds.
Brokers such as Conti accept that demand has fallen in recent years, mirroring the UK mortgage and housing markets.
Emigration also hit a low of 344,000 in the year to September 2010, a 20% drop from its peak of 427,000 in the year ending December 2008, data from the Office for National Statistics shows.
Such a significant drop in people moving abroad can only mean a slowing in demand for expatriates looking for homes.
But there is evidence to suggest purchases delayed during the recession may now be made as confidence returns.
Investors’ confidence in property is still sky-high, with 80% selecting it as their number one investment choice, according to an April poll by the Worldwide Property Group.
It is the highest figure for the survey since August 2010 and it is fuelled by low interest rates, with 91% believing rates won’t rise more than 1% in the next year. And while 83% reckon it is a good time to invest in UK property, some 63% believe now is the time to invest in overseas property.
Kevin Wilkes, managing director of the Worldwide Property Group, says property remains the investment of choice.
“It just reinforces the notion that property is still widely regarded as a safe and secure investment that has demonstrated great resilience in the face of very difficult economic conditions,” he says.
But it is not just confident investors who are looking overseas. An Aviva study in April this year found 46% of people aged between 18 and 45 are considering a permanent move abroad compared with last year’s 39%.
A further 21% would consider moving for up to three years and 54% claim government cuts are playing a key role in their decision.
The renewed interest in overseas property is coupled with more serious clientele as brokers report that with fewer enquiries comes a higher conversion to sales.
Before the global downturn, about 20% of prospective investors would organise a viewing trip to their chosen development, according to data from property specialist Assetz.
Today that figure stands at 80% as buyers exercise more caution by spending a lot of time carrying out due diligence, researching the credentials of the developer, land ownership, local facilities and rental demand.
Stuart Law, chief executive of Assetz, says the froth has been taken off the overseas market as more risk has deterred amateur investors.
“However, a new leaner market has emerged as experienced investors and holiday home buyers seeking a solid, long-term investment for their spare cash remain attracted to high quality schemes in the best locations,” he says.
Simon Conn, an overseas property and finance consultant, says there is still demand for properties in more familiar markets.
“People want to buy property, especially high net worth individuals,” he says. “Demand is strong in France, Spain, the US and Portugal, where most buyers are investors looking for bargains.
“Prospective buyers have more knowledge and are more serious so with fewer enquiries brokers can spend more time advising them. The downturn has got rid of time-wasters.”
Mark Nicholls, operations director at Viva Costa International Mortgages, says while enquiry numbers have declined the number of mortgages completed has remained steady.
“We don’t receive the same level of frivolous enquiries any more,” he says. “There are still plenty of people looking to buy property overseas and there is a perception that now is a good time to do so as prices have come down across the world.
“Prices can’t come down much further and if they’ve hit the bottom there’s only one way they can go, and that’s up. Now is the time to find a bargain.”
Conti reports that enquiries about French property have rocketed from 14% of all enquiries in 2008 to 45% this year. Spain has also seen a big jump up from 15% of enquiries in 2008 to 28% in 2011 after steady increase in the intervening years.
Meanwhile, Ian Bradshaw, head of sales of international mortgages at Lloyds Banking Group, says it has seen an increase in demand and enquiries in 2011 compared with last year.
“Investors are still cautious about certain countries, such as Spain, but others are now feeling there are opportunities out there,” he says. “Interest has risen in France, Canada and the US.
“More and more brokers are now switching on to international business because they don’t want to turn away leads they may have overlooked in the past. With competitive interest rates and attractive proc fees, many brokers are taking the opportunity to use international mortgages as a lucrative and rewarding income stream.”
Geoffrey Simmonds, head of marketing and business development at Connect Overseas, says the market is returning to healthier levels after experiencing a tough few years mirroring the UK mortgage market.
“At the height of the crunch we lost lenders, particularly in the Eastern European countries where people had invested heavily,” he says. “Many lenders dropped out, but now we are finding it slightly easier to source funding.”
Connect Overseas arranges mortgages in some 50 countries and Simmonds says low interest rates are helping keep costs down for borrowers while falling house prices are providing bargains.
Nicholls says Spain remains the number one destination for those wanting to move abroad and live a different lifestyle.
“But investors are also looking for income and there is opportunity for them in Florida where property prices have fallen hugely and there is the prospect of high rental yields,” he says. “The Caribbean, Cape Verde and Crete are also promising investment spots.”
In Spain the financial crisis has left huge swathes of unfinished holiday home developments and large numbers of repossessions.
As a consequence, Spanish banks have huge amounts of repossessed stock they want to sell quickly and they are offering high LTVs of 80% to 90% and low prices. Combined with low interest rates this creates opportunities for investors.
“There are some great products available, with some banks offering 90% LTV and one bank offering 80% LTV with no payments for three years like a DFS sofa,” says Nicholls.
After Spain and France, Conti data shows Turkey as the third most popular for enquiries. The overseas broker says an expansion of its tourism industry and talk of its entry into the European Union could boost house prices in the country.
Low interest rates are also fuelling demand for properties in France where rates have dipped below 2% on some variable products.
Although the affordability criteria required at French banks has tightened in recent months, finance is still available.
In recent years many lenders pulled out of the non-resident market, but now there are signs of them coming back.
This year has seen the return of lenders offering mortgages to UK buyers in Bulgaria, Romania and Ireland.
BNP Paribas has started lending again in Italy and GE Money has started lending for properties in France.
Property firm International Dreams reports that Egypt and Brazil are offering the best returns for investors and dominate its current business.
But neither country provides mortgage finance for foreigners so borrowers must find short-term development finance or make a cash purchase.
Conn says that even though there is growing demand in countries such as Thailand, local mortgage finance remains tough to locate.
“There are still foreign lenders willing to lend to UK citizens but they are being far more conservative than previously,” he says. “Lenders are not as focussed on rental income when underwriting loans and affordability is assessed to much tougher standards.
“There may be one or two lenders re-entering the market for non-resident borrowers but there is going to be no rush of lenders for the next two or three years. Lending outside your country is riskier than lending inside, so it will take time.”
Conn says more lenders may offer loans for properties valued at more than £1m but for homes worth around £500,000 or less it is unlikely there will be more players in the market.
“UK lenders are also more restrictive but they have still got money to lend in certain countries,” he adds.
The Lloyds TSB International Mortgage Service provides finance for expatriates and foreign investors hoping to invest in the UK as well as UK nationals looking abroad.
It lends up to 70% LTV in France, Canada, Australia, New Zealand, Hong Kong and Singapore.
It also lends up to 60% LTV in Spain and in parts of the US, while advancing up to 50% LTV in Dubai.
Lloyds group’s range shows there is a willingness to lend abroad but different countries provide different business experiences, with some faring better than others.
“There are countries in more difficulty than the UK, such as Ireland, Greece and Bulgaria,” says Nicholls. “They have turned away from non-resident lending and are concentrating on their domestic market.
“But most of the other countries haven’t made huge changes to their practices because they have always been cautious with foreigners anyway. Naturally, with the recession borrowers have been falling short of the affordability criteria. For instance, French banks have tightened their criteria recently but there are still products around.”
Nicholls is encouraged that GE Money has resumed lending in France and is offering competitive products.
“But lenders based in smaller countries, such as Greece and Ireland, will take longer to return to lending to foreign nationals because of the economic problems,” he says. “And there is some nervousness around lending to individuals living in troubled economies.”
BNP Paribas will no longer lend to Americans, Russians, Chinese or Germans because of concerns that the state of their national finances may affect their domestic markets.
It will lend to UK citizens and the range of deals and lenders available shows there is a healthy market for brokers to tap into.
Seeking advice when buying a property in the UK is important, but when buying property abroad the added complications make it crucial.
Navigating the various terms of the loan, interest rates and best deals through different languages, regulations and legal systems is tough.
Simmonds says customers buying properties abroad need extra advice.
“Most borrowers taking out a mortgage in the UK will understand the interest rates and the basic terms of the loan,” he says.
“However, when buying a property abroad it is twice as important to understand what is going on and borrowers need the advice of a professional.”
The language barrier can be an issue because some banks don’t have English-speaking staff so it is difficult to build relationships.
“The length of time it takes to complete a property transaction can also be a surprise,” Simmonds adds. “In the UK it can take six weeks but in some countries it can take up to six months to get to the offer stage. Borrowers have to be more patient because some foreign property markets are 20 years behind the UK.”
Brokers warn that extra vigilance is needed when buying abroad and it is crucial to get independent legal advice.
Conn says that in some countries you have to be careful about the legal process and the rules governing foreign ownership of property.
“Borrowers must cast a sceptical eye on cheap properties and take independent legal advice,” he says. “If it is a bargain, buyers must ask why it is a bargain. It could be that a development is unfinished and didn’t obtain all the licences.”
It is not just consumers who may need the advice of experts as UK brokers may not feel comfortable tackling the processes in foreign countries.
Bradshaw says expertise is needed when buying abroad because legal processes and costs can be different from the UK’s. Conn hires brokers in certain countries because they have good relationships with local lenders.
Simmonds says Connect Overseas uses brokers in countries where it struggles to build relationships with local banks, such as Ireland, Bulgaria and Romania.
“In these countries we use brokers but it is our preference to go directly to lenders,” he says.
International Private Finance, a London-based specialist broker for overseas deals, says it never outsources business to foreign brokers and is focussed entirely on the international market. It does not do any property business in the UK but gets referrals from a number of London brokerages.
Simon Smallwood, managing director of IPF, says it is important to use a specialist when trying to arrange a deal abroad.
“A problem in the mortgage market has been that brokers have tried to deal in all kinds of finance without fully understanding it,” he says. “Internationally this is even more important because of the different jurisdictions and property laws.
“It is not getting any easier to find lenders at the moment so brokers need to use specialists to get the best deals.”
Michael Dowling, managing partner at Irish brokerage Dowling Financial, says it has been working with UK brokers for 15 years.
Irish brokers are regulated by the Central Bank of Ireland and must be appointed by various lenders to transact business on their behalf.
“UK brokers can get authorised in Ireland but it can take six months and is costly,” he says. “Unless brokers are writing a lot of business in Ireland it’s not worth it.
“We also know how the Irish market operates and we can process and package an application and offer brokers guidance that meets the criteria of Irish banks.”
Dowling Financial charges UK brokers 0.5% of the loan amount when it is offered and a further 0.5% on completion.
Outsourcing to foreign brokers or UK-based specialists could still result in referral income for brokers and meet clients’ needs.
Either way, it is useful for brokers to know this overseas market exists and be prepared to act if clients express an interest in a foreign purchase.
Brokers with high net worth clients in particular should be ready to advise on holiday homes or investments. In tight times it is clearly a market that can boost income and expand brokers’ breadth of service.
The media obsession with everyone finding their place in the sun may be over but there is still a healthy number of serious buyers and brokers should take advantage of this opportunity.
Head of lending
Lloyds TSB International Mortgages
Rewards outweigh complexities of international property market”At a time when the UK market remains subdued, the international sphere offers brokers a good opportunity to expand their businesses. Placing international mortgages can lead to highly lucrative commissions for brokers that aren’t often available in the UK.
Our research has shown many people aspire to owning a property overseas and having delayed their purchase during the recession, they are now beginning to re-enter the market.
Coupled with this, there is also the demand from overseas residents both UK expatriates and foreign investors for property in the UK, a part of the international mortgage market that is often overlooked.
Alongside the lucrative commissions involved, brokers can see a lot of repeat business and cross-selling opportunities because the distances involved mean overseas buyers prefer to deal with just one point of contact.
International customers are also more likely than UK borrowers to need a broker since they feel they need assistance with a process they perceive to be complex.
For the same reason, brokers are sometimes put off entering the international market. But they should not be daunted because the potential earnings can outweigh the difficulties involved, although it is good to have an understanding of how the markets differ.
Overall, international mortgages offer brokers a chance to diversify their income streams
First, international mortgages take longer to complete than UK mortgages due to the language barrier and distance separating the customer from the property.
Second, brokers should be aware of differing tax and legal systems overseas, although the borrower’s solicitor will be able to provide full information about what is required.
Finally, the language barrier can also present its own problems and many brokers choose to use a UK lender with experience in that market.
There are a few things brokers can do to expand their international customer base.
The first is to maintain relationships with previous customers who have moved overseas. In about 90% of cases, expats rent property for the first three or four years of their overseas posting. They will then try to buy in their adopted country or return to the UK, and in both cases will need an international mortgage.
Second, brokers should work closely with their local estate agents, especially in areas with high foreign investment such as London.
These estate agents will frequently see overseas investors looking for property in the UK and offer good opportunities for referrals.
Overall, international mortgages offer brokers a chance to diversify their income streams. The commissions are frequently higher than in the UK.
We pay brokers an uncapped 0.5% proc fee for most locations, sometimes even more.
When coupled with higher loan sizes an average of £300,000 for UK property the opportunity seems all the more attractive.