Sunday Business Post 07.09
Irish enthusiasm for property investment has swiftly faded, with many people now left seeking a way out - Diarmaid Condon
There was a time, not so long ago, when the Irish were regarded as the canniest property investors in the world. The saying went that if you wanted to learn about a property market, all you had to do was visit the nearest Irish pub and listen to the conversations at the tables around you. Now, things are very different, and the Irish are far more likely to be referred to as the investor group that drove the property bubble across much of Eastern Europe. Because they did so with very high borrowings, they are now paying a hefty price for the highly leveraged and risky property deals they entered into when times were good and credit was freely available.
It would be wrong to say that no Irish investors did well out of the worldwide property boom - many of them did, either by accident or design. But many amateur investors are now in financial trouble due to the economic downturn, and quite a few are in deep trouble. So, where did it all go wrong? The Irish have always been interested in property abroad, but up to the mid-1990s this interest was mainly restricted to Britain and the US. Both countries would have been seen as stable investment markets in which well-heeled Irish investors found good buys.
Both countries also have strong Irish influences and ties, as well as being English speaking. Consequently they have been - and still are - the most popular destinations for professional Irish investors. The Irish love affair with overseas property speculation, as opposed to investment, really started to ignite around the mid-1990s, at a time when rising property prices here were making us feel a lot wealthier. Irish people of moderate, and even low, incomes often found they could "afford" a property outside Ireland - particularly if they had a bank manager who would lend them the money to buy it.
There had been purchases abroad before that time, but not in such numbers. Our perception of our own prosperity was increasing rapidly, and travel was becoming cheaper and very fashionable. With this came a curiosity to find out what other countries had to offer. The first country to attract our atention was Spain. It was a familiar holiday destination, with thousands of Irish people holidaying every year on the Costa del Sol and Costa Blanca.
Property exhibitions in Ireland showcasing Spanish developments became more frequent; at one point it was believed that Spain accounted for as much as 90 per cent of the foreign property market. By the end of the 1990s, most of the early Irish investors in Spain had done very well indeed, as prices along the coasts spiralled. By then, many of them had already sold on their properties, and pocketed large profits. Buoyed by their success, a number began to turn their attentions elsewhere, in particular to France and Eastern Europe.
While the stable and mature French market attracted those more risk-averse investors who bought considerable quantities of "guaranteed return" leaseback properties, much of the speculative money went towards Budapest. Hungary had opened its property market to foreigners more quickly than other neighbouring nations, although Croatia, Poland and the Baltic states of Lithuania and Latvia weren't far behind. From 2001 to 2004, if you stayed in any upmarket Budapest hotel, you would need to step outside to check that you were not still in Ireland. The city was overrun with Irish property investors, and if you happened to visit an estate agent's office, you would regularly be informed that the property which you were interested in was "owned by an Irish client." This wasn't so much meant as a sales pitch, but to convey that other Irish buyers had found the city promising and safe enough to consider an investment there. Unfortunately, many Irish investors weren't particularly discerning when it came to choosing their Hungarian investments, and quite quickly it became apparent that a number of investors in Budapest were not seeing the high profits and rental incomes they had expected. But worse was yet to come.
It was around 2003 that Bulgaria first began to attract the attention of Irish property buyers, with the Black Sea coastal resort of Sunny Beach marketed as the next property investment hotspot. The main attraction was price - properties were available at costs that seemed ludicrously cheap by Iish standards, and hundreds of buyers snapped up units in Sunny Beach as well as in Bulgarian ski resorts and the capital of Sofia. Bulgaria was the first destination where properties were purchased by Irish investors almost 100 percent for speculative reasons — everybody intended to sell their units on for a large profit. On the face of it, it didn't seem like an unreasonable expectation, because by then, every second person in the country seemed to have made a profit on an overseas property somewhere in the world.
The difference was that anyone who had invested early in markets such as Spain and Florida had almost a decade to get in and out with a profit - and many of them did. In countries like Hungary, Poland and Lithuania, investors had less than half that time to turn a profit before the market began to slide. Some of them did get out of these countries unscathed, but it was nothing like the numbers who had done so elsewhere.
The next raft of hot property destinations - including latecomers to the freehold property bonanza such as Bulgaria, Montenegro, the UAE (Dubai) and Cape Verde - offered investors only about two years of upward capital growth before the cracks began to appear
Worldwide property markets started to slow at the end of 2006, and the chances for making money out of speculative property investment went out the window The economic crisis of 2008 sent most markets into a nose-dive, meaning that those investors still involved are now in negative equity and obliged to hold on to what they've got until markets stabilise and a level of liquidity returns — that is if they can afford to hold on. In most cases the early investors, whether they bought through knowledge or chance, got out with a profit or, at least, without losing money. Those who came into markets later have, in the main, fared very poorly. Many have been left with properties worth a fraction of what they were bought for, with little or no rental potential, and a very poor chance of being sold on in the short-to-medium term.
The financial strain in Ireland is also causing huge problems as job losses mount, pay rates fall and the fiscal landscape rapidly disintegrates for those still to complete on properties to which they committed over the past three years. In addition, a number of Irish people who intended to buy just one property were convinced by unscrupulous, commission-driven agents to purchase multiple units instead. The idea was that they could sell the extra units either before, or just after, completion, thus getting their own property free, or at least at a vastly reduced price. Of course the extra properties were difficult, if not impossible, to sell. Unfortunately this practice is not illegal, it merely preyed on greed and people's desire to believe that a property market could bring them quick wealth.
All of these problems have been exacerbated by the activities of a few unscrupulous agents and developers who were, due to lack of regulation, allowed to ride roughshod over purchasers in the boom times. The Michael Lynn affair, in particular, has had a devastating effect on the market for overseas property here. The sheer scale of Lynn's activities — alleged to be €80 million worth of mortgage fraud was also so large that it made it a high-profile national story, and one which has cemented in many people's minds the potential for danger when investing abroad.
A property bubble is in many ways akin to a perverse game of pass the parcel — when time is called on the game someone is left holding a useless package. Unfortunately, in many cases that person is an Irish investor whose overseas property dream has turned sour.
While some professional investors are using the global property slowdown to snap up units at bargain basement prices, the days of swathes of Irish buyers propping up investment markets around the world are unlikely to ever return.