Revealed – common mistakes when investing in European property

1 March 2021 | Investment

In the EU, property valuations were 5.2% higher in the second and third quarter of 2020 compared with the previous year. In the UK, which is experiencing the worst economic slump of any Western European nation, house price growth hit a four-year high.

There have also been many policy shifts since the outbreak of Covid-19, such as the ‘stamp duty holiday’ aimed at protecting buyers in the UK.

Housing prices in Europe have been steadily rising since 2013 and grew at an even faster rate since 2016, when most member states had fully recovered from the 2008 financial crisis.

This coincides with unemployment rates falling from 11% in 2013 to 7.6% in October 2020 (despite the effects of Covid-19) across member states. The positive evolution of the labour market, with favourable economic outlook, translated into higher household disposable income and greater consumer confidence.

The Covid-19 pandemic has negatively impacted some of these economic indicators, but there are still plenty of reasons to invest in European property.

Let’s examine a few things to watch out for when investing in the European property market, as well as some tips to navigate the landscape seamlessly…

Identify your target goals

The property markets in Europe vary greatly depending on the property and investment type. With regards to rental yield on residential properties, you can expect to make positive but low returns.

For commercial properties, the pandemic has caused a mixed effect, with warehouse and industrial type properties seeing growth while office buildings are becoming more vacant.

For more passive investors, Real Estate Investment Trusts (REITs) represent a very popular way to invest in real estate. Investors are able to buy shares in a corporation that owns real estate properties and receive income from increases in share price and/or timely dividends.

For more active investors with larger amounts of capital, there is the option to purchase an individual piece of property and lease it back to a tenant as a fixed income investment.

Lastly, you could invest through crowdfunding. The two main ways to take advantage of crowdfunding are through equity investments, where investors own shares while collecting cash flow from the rent and when the property is sold, or through loans where investors collect monthly cash flow from interest on the property.

Real estate crowdfunding allows investors to choose which property they invest in, rather than have a corporation select properties for them.

Naturally, you have to decide which option is suited to your budget and ability to be closely involved in the investment.

There are advantages and disadvantages to any investment or property type. For example, there are many appealing properties in ski resorts in the Austrian, French or Swiss Alps, with picturesque surroundings and access to the slopes.

However, purchasing one often comes with colossal capital requirements, transaction registration, and estate agent fees. Even after the property has been purchased, there may be significant operational costs. Therefore, once you consider all these factors, purchasing property can be much more expensive than the initial purchase price. 

Conduct research for your chosen market

It’s a cardinal sin to not be aware of the location of your chosen investment. It’s amazing how often investors will see a property online that they perceive as a dream investment, and then don’t perform due diligence.

In general, holiday rental apartments in tourist regions are very popular choices, as you can both use them yourself in the quiet months and then rent them out at a premium during the holiday months.

For any property purchase, you need to factor the cost of legal expertise, utilities, and taxes into any planning. It is also common, particularly for properties in tourist regions, to be investing in a project that is still under construction or scheduled for development. In such cases, it’s vital to check the developer’s reputation – do they have sufficient funding to complete the project?

At the peak of the Spanish property market in the mid 2000s, just under a million houses were being built each year, but some of them weren’t granted planning permission or were left unfinished due to dishonest developers and were demolished as a consequence, leaving the buyer with no compensation.

To avoid potential hurdles, seeking the help of locals is a great way to learn more about the location of your property. Naturally, it’s advantageous if you speak the language of the country where your investment is based, but if not, it could be worth hiring an interpreter.

Diversify your portfolio

Anyone who works in the real estate industry will tell you that diversification is the key to investment success. Investing in a single property is always a risk, but there are avenues available to avoid this risk. Property crowdfunding offers the opportunity to spread out the value of your investments and earn potentially higher yields in doing so.

By entrusting money in several different properties, you can make sure that you are not putting all your eggs in one basket. In this way, if one property doesn’t return the desired yield, you have the opportunity to get a much better return from another property in a different location.

When looking across cities in Europe, you can identify key characteristics such as a diverse economy, skilled labour force, good infrastructure, proactive local government, and good leisure facilities.

Not all cities you like will fulfil these requirements, and thus spreading your investment around allows you to cover the characteristics which you value most.

Fundamentally, grave investment mistakes can always be boiled down to being uninformed. If you think in broad terms, and don’t spend time researching the key details, then it is likely that you will make mistakes and lose money.

However, you are likely to be successful if you make clear decisions about the type of investment you are looking for and the location where it is based. Finally, with diversification, you can proactively work to maintain a more stable and sustainable portfolio.

*Jan Večerka is CEO of Brikkapp, a research and analysis platform for real estate crowdfunding

This post has originally been featured in Property Investor Today.