Do you think that there is still Capital appreciation on Tenerife property?

fixer · 10th October 2007, 22:12

i was wondering if forum members thought there was still room for property values to go up if you purchased in the right area bearing in mind that some properties seem to have droped in price and the increase in morgage rates and where would you purchase?

C.I.M · 10th October 2007, 23:57

I think the your question is rather complex and needs to be considered carefully.
Your question suggests you would be purchasing as an investment. If so, then it depends largely upon how long you wish to invest your capital.
Property does well as an investment as it is, in effect, highly geared.

Example: Purchase Price of €150,000 and valuation of €175,000. You take a mortgage at 90% of the purchase price - a mortgage of €135,000.
So you only need to make up the difference of €15,000 cash plus 11% costs (€16,500). Total cash investment is €31,500 to complete your purchase.

Your mortgage is 6% per year interest only so therefore costs you €8,100 for 1 year

At the end of year one you have put €31,500 + €8,100 = €39,600 into your property investment.

If the valuation rises by 5% your property is now valued at €183,750. But,the valuation is largely irrelevant if no-one will pay it!
So what we are interested in is the sale price. If the sale price has also risen by 5% then you could sell for €157,500.

So, you have invested €39,600 and after 1 year and made a gain of €7,500
But this is not a gain of 5% as you have only invested €39,600 - not €150,000
So the real gain in percentage terms would have been 19% due to the effect of gearing by using a mortgage.

If you only took a mortgage for €100,000 the figures look like this:

€50,000 cash + 11% costs (€16,500) + 1st year mortgage payments of €6,000
Total investment of €72,500.
first year rise of 5%, again gives a sale price increase of €7,500 but now this only constitutes a gain of 10%.
The more cash you actually put into the property - the less you make as you reduce the gearing effect.
The lower your mortgage, the lower your profit - in a rising market.
The higher your mortgage the higher the gearing affect and profits - plus the money left over can also be invested in high interest acount.If prices aren´t rising - you are losing money so you really need to be investing long-term.

So, gearing = good but only in a rising market!!!
The risk to your cash is how much you would lose in this example compared to a low-risk investment. If, instead of purchasing a property in a stagnant market you had invested your cash in a guaranteed, risk free investment for 7.5%, your €39,600 would now be €42,570. Nearly €3,000.

These figures are all hypothetical but illustrate the upside and downside of short-term property speculating.

If you are purchasing as an investment then assess the purchase in comparison to every other investment on the market. Property with a mortgage is highly geared which can be a huge positive, but it can be largely illiquid which is a big disadvantage. Property investment must be viewed as a long-term investment so you can ride out the dips in the market. Short-term it can be very volatile and if you are investing for 5 years or less there are far better options.

A property investment must be considered within the context of all your other investments. Perhaps you have some bonds, cash deposits, a stock portfolio, hedge funds etc. How much of your overall wealth is your property investment going to constitute? Is that really a good idea?

If your purchase is residential - you´re going to be living in the property and its a long term thing - then dont worry about it too much. You will have plenty of time to pick your moment and will be able to sell when the market is in your favour.

So far as which area to purchase in and type of property - well I only have my opinon but there are those here far more qualified to address that particularly side of your query - Janet and Mike would be the obvious immediate candidates.

(Hope all that makes sense - PM me if it doesn´t!!!)

KirstyJay · 11th October 2007, 00:00

agreed. come here to live... not to make an investment

kathml · 11th October 2007, 00:04

If you want to invest in property think of it as at least a ten year investment

Also In My opinion if you can't afford to loose a third of your money if things go wrong don't do it

Remember for every winner there's usually at least one loser

plouer · 11th October 2007, 10:17

I agree with what CIM says, in the long term property has always been a good investment, but as we saw in the late eighties in the UK it can be disastrous, (it took over 10 years for property prices to recover), if we now look at overseas property then we are now seeing a different problem, mainly one of over supply.

The boom in the northern economies and particular the property boom in the UK, along with the media hype of shows like a place in the sun, set off a boom in the purchase of overseas property, this was mainly limited to the known markets of Spain, France and Portugal, which in turn encouraged developers to build more property and as always happens everybody started jumping on the bandwagon, which resulted in vast over supply (Spain built 800,000 new homes last year 4 times more than the UK) and the inevitable slowdown and halt of price rises in these countries.

Coupled with this the clever developers saw what was happening and moved to different countries, such as Bulgaria, Cape Verde etc, where they could offer houses and apartments at prices far cheaper than the developed markets.

Once again we are seeing over supply starting in these countries and the slowing down of the house price rises, coupled with the slowdown of the northern economies and interest rate rises, this has meant that making a profit in the short term is now becoming far harder (5 years ago you could buy off plan and sell again before the property was even finished and make a big profit).

International Property is still a good investment, but you have to pick your country and be prepared to hold onto it for a long time and look more for the rental income that these properties can produce, I would suggest that mainland Spain (rather than Tenerife) could be good at the moment as you can pick up some real bargains from the developers desperate to clear stock, which can then produce good holiday let income and in the long term, 10 years plus, good capital growth.

One last word of caution, as CIM said gearing can enhance profits, but most of the problems in the late eighties especially in commercial property was caused by over gearing, which couldn't be sustained when interest rates rose and property prices fell.

Peter

Janet · 11th October 2007, 12:04

Yes, there's capital gain to be made in property here, but less than there was 20 years ago. It's that simple. The huge boom times associated with a new area are gone. But there are bargains to be had because of over speculation by some, and elsewhere there are areas still being developed, and there's a buyers market here right now in some areas because of the UK squeeze ... so yes, there is still money to be made in property here.

Silicon Beach · 11th October 2007, 12:28

good thread ! thanks to the experts on here for clarifying a lot of this kind of stuff to this financial grom (as in 'grommet' - surfing term meaning 'beginner').

The only kind of gearing I knew about till now was the cog wheels that make my car's wheels go round

... but now I'll be able to confidently throw in a comment on financial gearing - it all makes sense now.

We've been very lucky recently with the housing market in the UK and here - sold a few months ago in the UK and got our full asking price, and are currently buying here at a bargain price in a buyers' market. As i say, this was complete luck, rather than any kind of foresight - we would have re-located here anyway, regardless of the property market - so it's a bit of a bonus really

fixer · 11th October 2007, 15:49

i had my own views on the subject and thought i ask and not state them not being an expert on the subject as usual C.i.M has given a great indepth insite into the subject thank you for that it will help others thinking of investing in proprty in tenerife and good comments by the others too.
i said im no expert only having purchased one property but have followed the subject with intrest the great thing with investers was to buy off plan and flip the property before completion get in and out as fast as possable this due to over supply and the situation of mortgage rates have found buyers harder to find with some of the complexes here that have been completed in the last few years still looking for there first owner and as others have posted the emergance of bulgaria Cape verde ect has given buyers much more choice.

Here is what i think there is still capital growth to be had in tenerife ive just agreed with Janet again but over at least a five year period and the location of the property is paramount as they say location location location.
this means do your research talk and listen to as many people as possable for example cim for the finance get expert help you dont want to purchase a property that know one wants or they going to build something nasty next door that will ruin you investment.

Of course there still other ways of getting capital growth beside buying off plan you can do what i did buy the worst apartment in the best location on the complex in one of the best complexes i offered and got it for 15,000 euros less cost to do up to high standard 10,000 euros not a lot you say but the apartment was now worth probably 20,000 more than i paid provided you can get a buyer as its only pie in the sky till its sold as with all investments . so Janet you must disagree with something i said and the others feel free to disagree too lets have your comments . david

Janet · 11th October 2007, 15:57

Can't actually disagree with you on any point there, fixer ... tried to find something, believe me!

ainsie · 11th October 2007, 20:54

Quote:

Originally Posted by C.I.M

I think the your question is rather complex and needs to be considered carefully.
Your question suggests you would be purchasing as an investment. If so, then it depends largely upon how long you wish to invest your capital.
Property does well as an investment as it is, in effect, highly geared. Meaning you pay, for example €50,000 for a property. You take out a mortgage for €150,000 and the valuation may be as high as €200,000.
If valuations rise by 10% per year , that means in the first year your valuation has risen to €220,000 whereas a realistic sale may achieve €165,000 depending on the market. The valuation is largely irrelevant if no-one will pay it!
This gives a gross capital gain of 30% based on the amount invested (€50,000)
You then need to factor in purchase costs (11%) and mortgage payments (6% per year interest only.)
So, you have still made 13% from market appreciation if prices are rising.
The more cash you actually put into the property - the less you make as you reduce the gearing effect.
So, gearing = good. But, if prices are not rising, you have invested your €50,000 for one year and paid 6% of €150,000 in interest = €9,000. So the gearing effect cuts both ways - you have effectively lost 18%.
Plus, if instead of purchasing a property in a stagnant market you had invested your cash in a guaranteed, risk free investment for 7.5%, your €50,000 would now be €53,750.

A difference of €12,750 between the positive and negative in a stagnant market. These figures are all hypothetical but illustrate the upside and downside of short-term property speculating.

If you are purchasing as an investment then assess the purchase in comparison to every other investment on the market. Property with a mortgage is highly geared which can be a huge positive, but it can be largely illiquid which is a big disdvantage. Property investment must be viewed as a long-term investment so you can ride out the dips in the market. Short-term it can be very volatile and if you are investing for 5 years or less there are far better options.

A property investment must be considered within the context of all your other investments. Perhaps you have some bonds, cash deposits, a stock portfolio, hedge funds etc. How much of your overall wealth is your property investment going to constitute? Is that really a good idea?

If your purchase is residential - you´re going to be living in the property and its a long term thing - then dont worry about it too much. You will have plenty of time to pick your moment and will be able to sell when the market is in your favour.

So far as which area to purchase in and type of property - well I only have my opinon but there are those here far more qualified to address that particularly side of your query - Janet and Mike would be the obvious immediate candidates.

(Hope all that makes sense - PM me if it doesn´t!!!)

lost me with the purchase price. I invest 50,000 , the price of the property is what? Is the price 50,000 and if so why am I taking out a motgage of 150000.

Call me stupid, but i'm lost here and usually Im good at this. I have read it a few times so must me missing something.