Study dollar crash and impact

For UK investors, the decline in the Dollar since the beginning of the year and recent acceleration has been broadly beneficial thus far. Strong sterling will tend to keep inflation down in part because imports are less expensive. Lower inflation should help keep interest rates down. The high Sterling will also make exports more expensive and lead to reduced sales from manufacturing - this will would reduce GDP, a further reason for not putting up interest rates. In addition, high interest rates will tend to drive Sterling higher - and because the Bank of England will tend not to want this to happen any further, it will also reduce the likelihood of a further interest rate rise. Holding a portfolio of property in the UK priced in Sterling is beneficial to those investors that bought before Sterling rose.

So why the shift away from the dollar - many reasons:

USA and the dollar are becoming globally less important as the Chinese, Asian and Indian economies expand.

The USA budget deficit and balance of payment deficit are so huge, many countries have decided to reduce their exposure to the dollar, in case it crashes or the economy goes into recession.

The housing boom has ended, GDP growth for 2007 is forecast to be significantly lower hen 2006.

Interest rates are thought to have peaked - and could dramatically reduce if the country looks like it is heading for a recession.

So what does this mean for property investors - does it represent an opportunity?

For UK investors investing in the UK - the chances of further interest rate rises have diminished. It's likely inflation will drop to say 2% over the next 6 months and GDP will reduce to about 2.3% - so interest rates will probably plateau at 5% before dropping mid 2007 to 4.75%. This should create stable condition for property investment - with prices continuing to rise in the south and staying fairly stable in the north (rising far less fast).

For UK investors considering buying in the USA - it's likely to be a bit early to do so. It's probably best to wait to see the dollar drop further and make sure the housing market is 'not' heading for a meltdown. There are tentative signs of stabilisation and improvement in the last month, but it's early days. If a full blown recession is avoided, interest rates drop and the dollar drops say another 10%, one could argue it would be the ideal buying opportunity - purchasing dollar assets from sterling at the bottom of the housing market just as interest rates start coming down, which would likely send US house prices higher. It's worth monitoring for a few months with a view to investing in early to mid 2007.

For all those doubters - the USA will always remain a huge growth engine for the global economy. In 1950 the population of the USA was only 150 million - it's now 300 million - by 2050 it will be 450 million. You do not have such population growth in a country with huge natural and intellectual resources without a big increase in GDP. Remember productivity and GDP growth in the USA has been higher in the last 5 years than almost all developed countries. The huge wealth of the babyboomers will be heading to the coasts of Florida, Carolina and California to retire - so the trick is to find coastal property with sea views that is not susceptible to flooding from sea-level rises, erosion and hurricanes.

Booming towns around the world worth giving an bird's eye

For the adventurous and international property investor, we can provide some interesting insights into the current boom towns. Many of these cities are little heard of. Many are booming because of mining, oil and extractive industries. Quite some research has gone into preparing this list for our website visitors. The main sector themes cities where oil, mining or financial services have been very strong – there are no indications this will change in the next few years. Many analysts believe we are in the middle of a commodities “super-cycle”. The reason is because of China and India’s appetite for raw materials, global population growth and the European and USA’s continued reliance on these same raw materials. Other boom towns are tourist related – others a combination oil, financial services and tourism (e.g. London). But one thing is for sure - in all these cities and areas – populations are increasing, jobs are being created and not enough homes are being built. The ideal combination for property prices to rise.

• Green River Wyoming – coal mining
• Limpopo, Mpumalanga, Rustenburg – Rep South Africa – platinum and chrome mining
• Houston – global oil & gas services
• Macao – gambling, tourism
• St Petersburg – oil & gas, tourism, finance
• Moscow – oil & gas, tourism, finance
• London – financial services, wealth management, M&A
• Bratislava, Slovakia – low cost proximity to Vienna, E Europe boom
• Warsaw, Poland – EU integration, low cost, increasing wealth
• Muscat – oil & gas, tourism
• Luanda, Angola – oil development
• Doha, Qatar – gas developments
• Mongolia – mining, proximity to China
• Dubai, UAE – oil, financial services, tourism
• Cape Town, Rep South Africa – tourism
• Fort McMurray & Calgary, Canada – oil sands developments
• Aberdeen, Scotland – international oil & gas services
• Stavanger, Bergen & Kristiansen, Norway – oil and gas operations
• Bangalore, India – IT/call centres/communications/services
• Mumbai, India – financial services, manufacturing
• Guangdong province, China – global manufacturing
• Shanghai, China – financial services, manufacturing, export
• Beijing, China – public sector, services
• Ho Chi Minh City, Vietnam – manufacturing and services
• Buenos Aires, Argentina – business and services
• Cairo, Egypt – regional business centre

As advised in on our website, if one has a combination of:

• Increasing population
• Increasing employment
• Increasing business (GDP growth)
• Increasing wages
• Low levels of home building
• Low reliance on imported oil and gas
• Low interest rates
• Low inflation
• Exposure to financial services sector
• Land shortage and/or environmental constraints

Norway: This powerful combination will lead to booming property prices. If one uses these criteria for cities like Bergen in Norway, it’s difficult to see how prices would not continue rising. London is the same – it’s also a global centre of oil and commodities financing and re-investment of proceeds from the extractive industries that are booming. Moscow is similar albeit more regional in its sphere of influence.

South Africa: Localized gems occur such as Rustenburg to the west of Pretoria in South Africa. The population is booming as 25,000 new jobs are being created in the expanding platinum and chrome mines. Pretoria is also worth considering with its access to Johannesburg, government employment – it is the regional centre of the Bushveld Complex of minerals and mines, with most mines within a 100 km radius of the city.

Canada: Fort McMurray in NE Alberta, Canada is booming oil town. A huge wave of new jobs have been created in the oil sands business – accommodation is desperately short and rentals and in big demand. Many billions of dollars are being invested to grow oil sands production – in part because this makes the USA less reliant on overseas imports. This is something not likely to go away – hence Fort McMurray will likely see prices booming into the future. Calgary, the centre and HQ of the Canadian oil & gas business is another booming town – pleasant place to live as well. The creation of new oil and gas jobs and wealthy retiring oil workers will likely support prices into the next decade.

USA: The Green River area of Wyoming is another gem – who would believe that in 2007, a boom is taking place in a coal mining area in the USA. This part of the world has more barrels of oil equivalent hydrocarbons (locked up in coal) than Saudi Arabia and Russia combined. The USA will never be short of fuel for electric power station because some of these coal seams are 50 metres thick and mines are open-cast and of the highest quality anthracite coal. Huge wealth is being created as production is increased and this is supporting rentals and property prices in this remote area of the USA.

Mongolia: Mongolia is another gem – yes, this area is booming. The reason is its minerals mining. China is desperate for its products and there is a property boom to match the mining boom. Its not likely to go bust unless China’s economy goes bust – something most unlikely in view of the sustained 9.5% GDP average growth over the last ten years and China hugely increasing middle classes and 1.2 billion population next door. Mongolia has also benefited from being next door to booming Russia and the Siberian oil and gas fields. Some gas pipeline projects run close by and as long as there is peace in the area, Mongolia’s fundamentals and booming population look impressive.

Macao: Property prices have been booming for five years – massive investment in casinos and neighbouring China’s booming economy, middle classes and interest in gambling has made Macao the rival of Las Vegas. Difficult to see this changing – all the money being made in manufacturing in southern China will benefit Macao – talk of Richard Branson investing in the area is interesting. He’s well known for getting in early – the future looks bright for Macao.

Egypt: Cairo is an interesting city. Huge, traffic jams everywhere, pollution, rumour has it the true population of Cairo conurbation is 25 million. No wander the traffic never moves. This regional business centre has benefited from relative peace, expanding oil and gas businesses north and east, and booming population. Property in the city centre for business people to avoid the traffic jams is worth considering. Always at risk of instability but the city will likely further double in size the next 50 years, making central property values increase.

Need to see where to invest and what type of property

ost business owners and millionaires live very close to where they invest their money. Despite the property business becoming ever more global, it is still most common to find successful property investors investing close to their “home”. This is because they can manage the properties more efficiently, make sure they do not get “ripped off”, can add value easily and step in quickly if anything negative happens to their properties. They can also spot a good investment and check it out quickly and easily – seizing a good opportunity once identified. They retain far more control and are able to protect their investment – they have the ability to add value to their investment. This lowers the investment risk.

Criteria to maximize returns: That’s not to say you cannot make a good profit from investing in property in another country, continent or the other side of the world, but you may have the following issues to counter:

• Exchange rate fluctuations that may work against you
• Expense of getting people around to solve small problems
• Commissions and fees can be very high (13% of purchase price to buy then sell an off-plan apartment in Spain, rather than ca. 3% in UK for low price flat).
• Less knowledge of interest rate movements, economic conditions and infra-structure investments and timing – not living in the area/country.
• Legal issues over property title – and differences in legal aspects
• Possible issues getting money out of the country
• Complex taxes and fiscal treatment
• Time and cost of traveling to check out your investment
• Less knowledge of the local rental market and less control over tenants – bigger risks of void periods if property not managed will by local agent
• Exposure to being “taken for a ride” by contractors
• Exposure to hidden or unknown taxes
• Complexity with inheritance, wills and capital gain tax liabilities

If you buy close to “home”, you will be far less exposed to all of the above – though as an example, tax in the UK or USA can change without much warning as well – like in overseas countries.

So in summary, if you buy property abroad, you have to convince yourself that the financial rewards out-way the increase in investment risk coming from the above aspects.

The romantic idea – does it make business sense? Many people may have a romantic view of property investment abroad – buying a nice villa in a beautiful location when prices are rising seems idyllic. However, making money in property investment is about as far from an idyllic setting as you can get – it does not matter what setting the property is in – it’s all about whether you can add value to the property when you purchase it, then add more value after the purchase – whilst achieving high rents and yields – to keep your cash-flow positive.

Let the numbers do the talking: Property should be viewed in a dispassionate and objective manner – the numbers should tell the story:

• What is the return on equity after a year – after two?
• What is the rental yield on the investment?
• How quickly can you release equity after adding value, to continue building your portfolio?
• What is the monthly (hopefully) positive cash-flow projected to be
• What are the downside risks – voids, interest rate rises, cost escalations, chance of prices dropping?
• What do you think prices will do in the next few years?
• What major positive change is taking place that will project prices higher?

These criteria have little to do with a nice sunny location, historic buildings or an exotic location. That said, if you firmly believe that a property you identify in a historic, sunny, exotic location will benefit from massive price increases in the short-medium term and yields will be good – then it might be a good idea to buy such a property. But do not expect to be able to easily manage it – and consider the investment time it will take you to service or add value to such a property remotely – can you afford the time? Can you better use this time to purchase property closer to home, at lower risk?

What criteria should I use to choose an area? PropertyInvesting.net suggest using the following criteria to test whether a property is in a good investment area or not:

• Population increase (0-15 year time horizon)
• Land / property shortage
• New infra-structure developments (rail, metro, road, retail, events, business)
• New jobs (preferably services-banking)
• Good communications
• Regenerating area with major new investments
• GDP growth and inflation under control
• Interest rates about to drop
• Attractive-popular area for rentals
• Yields good
• Fiscal - stable tax regime –secure legal title – currency stable

If you can find such an area close to home, then there’s less reason to go further a-field. For example, let’s compare properties in two locations:

1) a cottage in a village in rural central Italy (idyllic setting) £120,000

2) one bedroomed flat in Shoreditch – ½ NE of City of London (dull setting) £160,000.

For the Italian cottage:

The population is declining by 2% a year, there is no land shortage (many families are selling up to pay for retirement with the aging population in the rural areas), no housing shortage, no infra-structure developments anywhere close. Family run businesses are closing because of competition from Asia, tourism is stable but not increasing, no regeneration in the village, GDP is zero % in this area, interest rates for Eurozone are climbing and expected to for a few more years. It’s very remote so rental demand is low, roads are poor and the nearest airport is 80 miles away, yields are low because of high void periods, and the fiscal regime is uncertain because of political coalitions that change every few years in Italy. Overall – difficult to get to, manage and therefore risks are higher – one would describe it as a poor investment, unless you picked the cottage up at 25% below true market value and sold on quickly (though the market is slow, so this would be unlikely) .

For the London flat:

The population of London is forecast to increase by 10% in the next 10 years – an extra 800,000 people. More single people will need one bedroom flats. Not enough homes are being built – net shortage per year is about 15,000 homes in the London area. Located between the City, Docklands and the new Olympic site, Shoreditch is short of both land and housing. The local population is growing at about 1.5% a year – many wealth bankers are moving in because of travel problems getting to their city jobs – so one bedroom flats are popular for “weekly worker bolt holes”. Kings Cross International and Stratford International will be open end 2008 – with Paris 2½ hours away on the High Speed One train. The area is rapidly regenerating and the City fringes are expanding towards Shoreditch. New small businesses in services, media and finance are moving in. £5 billion will be spent in the nearby Lower Lees Valley on the Olympic development by 2012. 30,000 new jobs will be created in the next few years. London as a global financial centre has had a good run – and this looks like continuing – more financial services are moving from New York to London (shift in business projected to be 7% in the next 5 years). Rental yields are acceptable, and rental demand is strong – rents are likely to rise as the housing shortage worsens. The fiscal regime is not as stable as one would like, but one can read up about it in advance and see most of it coming – even react against it in some circumstances. Interest rates may be near their peak – and if they drop, asset prices could rise further. It’s one the last places you would expect a house price crash with so much money being made ½ mile away in the City and 1 mile away in the Docklands.

Why go Italian? So why would anyone living near London choose to buy an Italian cottage? Don’t have a good answer this one! (possibly a person close to retirement who is not interested in making money and does not mind get bored in a lonely part of the world – albeit in an idyllic setting). When you consider that in the time it takes to fly to Italy and back to visit your cottage you could have purchased another good London flat - you should consider this as lost “opportunity value” through not investing locally.

Experts stay focused: If you establish yourself in a certain area – it’s likely you will become somewhat of an expert in the local market – you’ll know the best contacts, establish a network, and have access to be the best deals. You will be able to eek out better value property because of your in depth knowledge of the market. You will not be diluting your knowledge. If you have an early local success – you have a very good opportunity to rapidly duplicate it and improve on it – it’s more difficult to do this rapidly when you purchase overseas. It may not be as exciting or indeed challenging. That said, if it’s simple, you can rapidly duplicate, leverage your skills in a focused manner – you will likely have the best possible chance of rapidly building a high equity property portfolio with lowest risk.

Does it matter to you whether you can tell your friend “I invest in Bulgaria and Cyprus – beautiful and exotic locations” or whether you can tell yourself “I made one million pounds net worth last year”. If the latter is more attractive for you – you’re probably more likely to achieve this by investing in a growing area close to home. Doesn’t sound quite as exciting – but property investing is primarily about making money, not excitement. You’ll find this out by asking experienced property investors and developers how and where they made their money – primarily locally and by duplicating something that worked well for them – and sizing it up. They also had fun – making money.

Objective and practical: We hope you have found this special report helpful – we try and bring you objective, impartial and practical advice and insights. We’re in the business like you are – to make money - as fellow investors - all this advice is aimed at helping improve your investment performance, and help you avoid the pitfalls.

The need to worry about you buying houses at peak time

Very interesting times for house prices in the UK. There are signs the UK housing market is cooling – meanwhile the Bank of England surprised the market with a 0.25% interest rate hike to 5.25% in early January. This was followed by an inflation report which showed CPI inflation at 3.0% and RPI inflation at 4.4%. CPI is a full percentage point above the Bank of England’s target and very close to when the Governor is required to write a formal letter to the Chancellor describing what he is doing to control inflation.

The news about city bonuses and a “wall of money” – some £8 billion hitting the property market has helped fuel steep house price rises towards the end of 2006 in the expectation of continued rises in 2007 when this money is banked – mostly between end January and early April.

Many economists are now expecting rates could rise to 5.5% in early February because there are signs of high money supply levels, increasing wage settlements and retailers ramping up prices - and this would feed through causing inflation. The effects of higher oil and gas prices in early 2006 will feed out of the annual inflation figure which should help to moderate inflation, but there is a feeling and genuine concern that the buoyant economy is leading to increased spending patterns and retailers taking advantage of customers willingness to accept higher prices by raising their prices. The good news is, oil prices have dropped from $78/bbl to $50/bbl and wholesale gas prices from 80p/therm to 28p/therm – but it's almost as though this has fuelled growth, activity and hence inflationary pressures on this occasion.

There is also some evidence that India and China are jacking up prices, whilst eastern European labour is not as low cost as it was a few years ago – the skilled workers can now command higher wages now they are settled in the UK and the labour market remains tight.

So what does this mean for the property investing community?

1. Do not be surprised to see interest rates rise to 5.5% in February and possibly higher still by mid summer – make sure you budget for such increases in your cashflow projections.
2. Do not be surprised if house price growth drops to zero in the Midlands, North and West by Q2 2007 and moderates to say 2-5% in London and the South-East if inflation takes off in the next few months – we should see if this is the case by end February.
3. If prices fall, make sure you have enough cash in the bank to see you through any stormy period – and those with a lot of free cash and good positive cashflow would likely be able to pick up some real bargains if distressed sellers appear in the market.

It’s important though to note that, because the property market is such an important part of the overall UK economy, the last thing the Bank of England wants to see after their top priority which is inflation, is house prices crashing. Because the strength of the economy in the south (GDP growth 4.5% in London) is so much stronger than the north (GDP 1.5 - 2%), if interest rate rose so high it stifled the London economy and house prices dropped in London – this would imply the North, West and Midlands would be sent into recession with house prices crashing. So what this means is, the Bank of England would need to keep rates at an appropriate level to keep the north growing (not in recession) but cool London – and by implication – northern house prices may drop to 0-1%, whilst London would drop to say 3-5%. So its difficult therefore to see house prices crashing in London because this would imply a meltdown in the North. This is one of the reasons why PropertyInvesting.net favours property investment in London and southern England at present – it's lower risk. Also, London and southern England is rather less exposed to higher interest rates because earnings are higher, price to earnings ratios are moderate in areas close to London and property equity levels are generally higher. The population increase, services business growth and shortage of property and land all support prices, as well as jobs growth and international business.

So - keep monitoring the news, state of the market and which direct inflation goes, because it should be critical to your investment strategy - to "avoid" buying at the peak of the market and selling at the low of the market.