Property Prizefight - Hurghada vs. Bratislava

I used to be indecisive.

But now I’m not so sure.

Which is why I am having a devil of a time trying to decide where to invest my own hard-earned cash.

There are a lot of opportunities for investing in real estate which I am sure are going to lead to very good returns over the next two years or so. But I don’t just want ‘very good’. I’m greedy. I want ‘the very best’!

I’ve narrowed the contenders down to just two after much deliberation. I quite fancy Sofia still – that would probably have been my third choice, and I would also love to invest in Podgorica, Montenegro if anyone was developing some offplan properties there, but I haven’t seen any yet.

So my final two contenders are Hurghada on Egypt’s Red Sea coast and Bratislava, the capital of Slovakia. Initially I was more keen on Sharm el-Sheikh than Hughada with regards to opportunities on the Red Sea, but I later discovered that foreigners can only buy property in Sharm el-Sheikh on a 99-year leasehold basis – not freehold. While it’s probably not a big deal, there’s just something psychological knowing that, at some point in time, the value is going to go down as someone looks at the amount of years remaining on the lease and decides that it’s not a very good investment for them. I also heard some information recently that interest in Sharm is starting to wane a little compared to the Hurghada region.

So Hurghada and Bratislava are my favourite two opportunities at the moment.

But how to decide between the two of them? Although I think that they both have great potential for short-term gains, you really couldn’t find much more different investment locations within a few hours' flight of the UK if you tried. So I have decided that the only way to decide where to invest is to put them both to the test in terms of a ‘fight out’ between the two of them – a fight to the death over ten rounds.



In the Blue (Danube) corner, we have Bratislava, a.k.a. Pressburg – one of the older cities in Europe dating back to the end of the first Millennium. Bratislava has spent much of its time being a regional city administered from somewhere else – Budapest, Vienna or Prague, before finally becoming capital of Slovakia from January 1, 1993.

In the Red (Sea) corner, we have Hurghada, a.k.a. Al Ghardaqah. Hurghada is very much the ‘new kid on the block’, having only been founded just over a century ago. Up until 20 years ago, Hurghada was a simple fishing village until it went on to become Egypt’s leading tourist resort because of the excellent aquatic sports facilities on the Red Sea.

So which of these two locations is going to make for the best investment. Let’s have the two of them slug it out over ten rounds to see which one is the victor.

Round One: Entry Price

Hurghada looks very confident on this one. Prices in Hurghada are still astonishingly low compared to either anywhere in Europe or the other new seaside hotspots like Morocco or Turkey. With prices starting from around EUR600/m2, it’s possible to pick up a small studio apartment for the price of a new car – and not a terribly good car at that. For EUR18,500 or GBP13,000, you could get a basic Ford Focus or a studio apartment in Hurghada. I’m not saying that the Ford Focus is a bad car, but I’d much rather own an apartment in Hurghada than one of those, thank you very much!

Prices in Bratislava are still pretty low compared to anywhere else in Eastern Europe and a steal compared to anywhere in Western Europe. But at EUR1750/m2, it’s still going to cost a fair bit of cash to get a decent apartment. For EUR100,000 or GBP 70,000, which is what it is going to cost you to get a nice apartment, you could get a very nice car indeed.

So Hurghada wins round one with ease.

Hurghada 1: Bratislava 0

Round Two: Price Appreciation to Date

After Hurghada’s runaway success in round one, it has a bit more of a tougher fight in round two as both locations have seen property prices appreciating fast in 2007. According to the Slovak Spectator, property prices in Bratislava increased by 20% in the first half of 2007. However, the old-timer still can’t compete with the young upstart when Hurghada’s prices have increased by a minimum of 30% over the same period. It’s another victory for Hurghada, making it two in a row.

Hurghada 2: Bratislava 0

Round Three: Security

After taking a bit of a battering in the first two rounds, Bratislava comes back out fighting when it comes to the Security round. Hurghada is not a great destination for anyone who is completely risk averse. Although the resort has not suffered any terrorist attacks in the past, Sharm el-Sheikh on the opposite side of the Red Sea did suffer from a very serious attack in 2005 resulting in the deaths of 88 people. Although the Egyptian government is trying to take a pro-Western approach, it is still a Muslim country which has a not terribly good human rights record, is not a true democracy, and where 16-20% of the population lives below the poverty line – which is going to create a bit of friction.

On top of the political situation, you also need to take care that your property is built to the best standards. There are no EU-regulations in force in Egypt and the standards of local Egyptian builders do not have a great reputation.

Compared to Hurghada, even the most nervous investor can relax when it comes to investing in Slovakia. As a fully-fledged member of the EU, there are no more risks involved in buying in Slovakia than there are anywhere else in Europe.

A comfortable win for Bratislava in this case.

Hurghada 2: Bratislava 1

Round Four: Economy

Egypt, perhaps looking enviously at the stellar success of the UAE in recent years, has certainly moved up a gear economically compared to most of its Middle Eastern rivals, finishing 2006 with a very respectable growth in GBP of 5.7% - that’s well ahead of most Western European countries, including both the UK and Ireland. It must be remember, however, that Egypt’s economy was so poor until recently – only 13% of the UK per head of population - that this was not such a miraculous achievement.

Slovakia, despite having a much healthier economy, still managed to beat Egypt with GDP growth of 6.4% in the same period, benefiting from a lot of foreign investment, such as the new assembly plant from Kia, no doubt lured in part by Slovakia’s flat tax rate of 18%. So robust is Slovakia’s economy now that it looks likely to become the second of the Eastern European territories to enter the Eurozone after Slovenia, currently on schedule for 2009.

Another victory for Bratislava leveling the scores.

Hurghada 2: Bratislava 2

Round Five: Ease of Access

No one should really buy a property without checking the market out thoroughly and, after you’ve bought, it’s always a good idea to go and check on the property from time to time, so access to cheap flights is a definite advantage. There are now some good, cheap flights from the UK to Bratislava from both RyanAir and SkyEurope, with a flight time of under three hours. With Hurghada, the only option is to fly on a charter flight. These are harder to find, are more expensive and it’s going to take five hours.

Bratislava eases into the lead.

Hurghada 2: Bratislava 3

Round Six: Financing

If you are re-mortgaging a property in your home country, then this isn’t going to make much of a difference to you. However, if you need to get a loan in order to buy your property, then you’ll find it a lot easier to do so in Bratislava than in Egypt at the moment. Mortgages for foreigners are only just starting to be implemented in Egypt so they are hard to come by and the interest rates are comparatively high. In Slovakia, mortgages are no more difficult to obtain than anywhere else in Eastern Europe and you can get up to 70% LTV.

Buying costs are also very low in Slovakia at 4.5% compared to 8% in Egypt.

It another easy victory for Bratislava.

Hurghada 2: Bratislava 4

Round Seven: Choice

In Hurghada you ‘pays your money and you takes your choice’. Taking the region as a whole, there’s a wide variety of property available. Some areas of Hurghada are pretty rough and properties are only going to appeal to locals or real bargain-basement tourists from Eastern Europe. At the other end of the scale, there are some super-luxury five-star resorts on the coast outside Hurghada such as El Gouna, Sahl Hasheesh, Zafarana and Gamsha Bay where you can expect to get top dollar in rents.

In Bratislava, you can also find plenty of cheap, but less than desirable properties from among the ex-Communist crumbling tower blocks. But why would you want to buy one? Although there are some very nice developments now being built in Bratislava, because it is not a major tourist destination (and probably never will be one) you aren’t going to get the super-luxury resort developments that are currently underway close to Hurghada.

A narrow victory for Hurghada in this round.

Hurghada 3; Bratislava 4

Round Eight: Yield

Of all of the rounds, this is the hardest to judge because you really aren’t comparing like with like. With Bratislava, in the vast majority of cases, you will be looking at renting out your apartment on a long-term basis to a wealthy, upwardly-mobile local or an ex-pat for a reasonable monthly rent. Global Property Guide believes that Bratislava has one of the best yields in Europe at 10% currently. This is probably a little optimistic as property prices have been increasing faster than rents this year – I’d say 8% net is realistic.

In Hurghada, you’re looking at tourists renting by the week. During the winter, which is high season on the Red Sea, you should be getting high occupancy at good prices if you have chosen the right property. In the summer though, you’re going to see the property vacant for long stretches which will bring down the average. Again, 8% net should be possible in the good locations as tourist numbers are constantly increasing.

So, after much deliberation, the judges have awarded this round as a tie.

Hurghada 3.5 Bratislava 4.5

Round Nine: Competition

Bratislava is quite a compact city and the topography is such that there aren’t that many vacant plots in good locations to build on. So, if you get a good property in a desirable location, you aren’t going to have to worry too much that there will be thousands of other developments competing against yours five or ten years from now.

Conversely, the Hurghada region has a lot of coastline to exploit and the town has developed so far as a long strip along the coast. Although beachfront property should always attract a premium, there is sure to be a lot of development inland. The construction boom in Hurghada is only just beginning. As property prices increase, it’s inevitable that more and more construction will take place until the place is likely to end up as some monstrous hybrid of Bulgaria’s Sunny Beach and a poor man’s Dubai. If your property is not in an A1 prime location, your yields are definitely going to come down over time as the supply of property begins to overtake demand.

Another easy victory for Bratislava this time.

Hurghada 3.5 Bratislava 5.5

Round Ten: Exit Strategy

Although it’s lovely feeling smug when you check property prices and discover that your property is worth double what you paid for it, it’s all academic until you actually sell the property and the profits are sat in your bank account. Therefore it is essential to plan your escape route from the market. So you need to know who is going to buy your property once you’ve made your money.

With Bratislava, it’s easy to imagine who would want to buy your property three or five or ten years down the line – maybe the upwardly-mobile local who has been renting it from you would want to buy it now he has finally arrived. As the Slovak economy continues to grow, more and more locals are going to be in a position to buy a good apartment, especially if they work in Vienna, as I discussed in a previous blog entry.

With Hurghada though, it’s not quite as easy to see who might want to buy it in a few years’ time. In the short-term, while property prices are increasing rapidly, there are sure to be other speculators wanting to get into the market. However, if you leave it too late, and the area gets overdeveloped in the same way that Sunny Beach has done and Dubai is heading for as well, then you could be stuck with it and might need to discount the price to make a quick sale. As nice as Hurghada is, it’s not got the same potential for selling to retirees as Spain or even Turkey has – it’s never going to end up as a Little Britain.

This potential situation needs a lot of serious thought right from the start because Egyptian law says that foreigners cannot sell their property until they have owned it for five years. You can get around this situation by either flipping an off-plan and selling it as soon as it’s built or by registering an Egyptian company to own the property and then selling the company. But you need to plan this in advance. If you fail to do so, and you buy a property today that is due for completion in 2009, then it means that you would otherwise not be able to sell it until 2014. In my view, you will definitely want to be out of the market by then as it will definitely not have much growth potential left by that time.

So one last resounding victory from Bratislava to make it the undisputed winner of the contest.

Hurghada 3.5 Bratislava 6.5

----------------------------------------

OK, so this was a pretty light-hearted ‘competition’ here. I still believe that both Hurghada and Bratislava have more potential than just about any other markets in Europe right now and there is plenty of money to be made from either of them.

A lot depends on your strategy and your attitude towards risk. If you are looking to flip a property quickly – in under two years - and you wouldn’t be totally wiped out if something went wrong, then Hurghada could still be the better bet of the two. But, as hopefully I have been able to argue above, Bratislava looks like a sure-fire and safe bet no matter whether you are looking to invest for the short medium or long-term.

Buying in Budapest - Good or Bad Idea?

I received an email earlier today from a Propertastic! visitor asking for some more information on the current state of the property market in Budapest as he is thinking of buying there. I thought that I would post it here in case anyone else is wondering whether now is a good or bad time for buying there.

This is what he wrote:

I'm an italian man who wants to buy an apartment in Budapest to rent it. I'd like to know the tax I have to pay to buy a property in Hungary (the different tax of Italy) and the prices of some apartments. May I have some information about agencies (web sites) which sell properties ? Is it convenient buying an apartment and renting it ? Can I rent it all year long (12 months) ? Hungary entered in EU some times ago, is it convenient again to buy something in Budapest ?
Best Regards
Loris Terzi

And this is my reply to him:

Hi Loris,

Thank you for your email. It is nice to hear from you.

Let me start with your last question first: Is it a good time to buy in Budapest?

This very much depends upon whether you are looking for a short-term or long-term strategy and your attitude to risk.

If you don't like taking risks and are looking for long-term growth rather than to make some quick money over the next one to three years, then perhaps Budapest is the right market for you.

The history of Budapest's property market is something like this:

Of all of the cities in Eastern Europe, Budapest was the first to see large price increases as a result of foreign investors and speculators entering the market. Budapest was especially popular with buyers from Ireland, the UK and Germany.

The result was very fast appreciating prices in the 12 months before and after Hungary joined the EU on 1 May, 2004.

However, since that time, growth in property prices started to slow as the market became saturated and supply of new properties coming onto the market started to exceed supply. In addition, the Hungarian economy, the most robust of all the Eastern European countries during the 1990's, started to run into some problems, leading to a cooling of the economy. The result was that, during much of 2006, prices were actually dropping slightly, although the year did finish up with a slight gain.

The current situation is that the market in Budapest is quite static - prices aren't going down, but they aren't really going up either.

This doesn't sound very promising, does it?

However, the fact that prices have been so static over the past few years means that prices in Budapest now seem very low compared to other major Eastern European properties.

If you look at our Key Statistics page of the site, you will see that currently prime Budapest property costs around EUR2250/m2. This definitely looks cheap when compared with Warsaw at EUR3500/m2, Prague at EUR3000/m2 or Ljubljana at EUR3250/m2.

The chances are that, at some point, the Hungarian property market should take off again and prices will rise to join those of its Eastern European neighbours. However, it is anyone's guess as to when this will happen. If you are looking to remain in the market for at least five years, then I am pretty sure that you will catch the 'next wave' of Budapest property increases, but you might have to sit back and watch your property's value remain the same for the next two or three years. The likelihood that prices will go down much further though is quite low - Hungary is, after all, a very stable country (even if it is not going through the best of times at the moment).

You can read more of our thoughts on the stats of the market in Hungary in our Hungary -Overview section.

If you are still undecided about Hungary and are looking to see the vale of your property increase faster, then maybe it is worth looking around 120km north-west of Budapest to the Slovakian capital of Bratislava.

Currently Bratislava is our top tip as the prices are still low (EUR1750-2000/m2) yet are increasing fast - showing 20% growth in the first half of 2007 alone.

If you want to know more about the reasons why we think Bratislava is so interesting a market, you should read our Slovakia - Overview section or a recent entry about Bratislava's potential that I posted to this blog.

Moving on to your other questions now about taxation:

You can read all about the different stages that you will need to pass through in order to complete purchase of an apartment in Budapest in our Hungary - Buyer's Guide section:

The tax system in Hungary is rather complicated compared to many of the other Eastern European countries and it is highly recommended that you speak with a qualified Hungarian accountant in order to advise you as to what would be the best way to buy a property. The main ways are to either buy as a person, or to establish a Hungarian company and to buy the property in the company's name.

The disadvantage of buying a property through a Hungarian company is that it takes an investment in both time and money in order to register it and keep it running. However, the costs should be more than made up for by the tax savings that you will receive over the duration of the time you keep your property.

Here are the main taxes and how they vary according to the different types of ownership:

Tax on rental income:
Personal: 20%
Corporate: 18%

Deductions for expenses:
Personal: Not allowed
Corporate: Allowed together with 5% depreciation on property and furniture, etc.

Capital Gains Tax:
Personal: 20% (but lower if you hold the property for at least six years)
Corporate: 10% (but you can reduce this to 5% if you sell the company and not just the property)

VAT:
Personal: 25%
Corporate: 25% (but you can reclaim the VAT on all purchases that you make through the company including the property itself)

Hungary has a Double Taxation Agreement with all EU countries and so you will only be charged once on your income - not in Italy as well.

Next question: What are the prices of property in Budapest?

As has been previously mentioned, prices for high quality apartments in areas where there will be good demand from people looking to rent is around EUR2250/m2 - so around EUR135,000 for a 60m2 apartment.

Obviously there is a huge difference in the prices depending on where you are looking to buy and the condition of the apartment. Cheaper apartments could be 50% cheaper, but there is the risk that no one will want to rent them from you. Super-luxury apartments could be 50% more expensive, but will attract premium rental prices.

Information on web sites with properties for sale:

You can find links to all of the companies you will need to deal with in order to buy a property in Budapest in the Hungary - Directory section of the site.

Not only will you find details of real estate agents in Budapest, but also other companies that you will need to deal with such as lawyers, accountants and letting agents.

It's also worth checking out some of the ads on the same page as well which advertise Hungarian property.

What is the rental market like?

Propertastic! usually recommends investing in capital cities rather than coastal holiday resorts because there are more options when it comes to renting out the property. With cheap flights to Budapest, the city has a tourist market year-round, so you aren't just dependent upon a few months in the summer to make all your income.

But where capital cities really score over holiday resorts is that there is a good market for long-term rentals - either to ex-pats or to wealthy Hungarians. Although the price per week is lower for long-term rentals, there is a lot less hassle involved and there are likely to be only short periods when the property lies empty.

The occupancy rate that you get on your property is very much dependent upon the property's location and condition. We recommend getting the best apartment that you can within your budget as, the more centrally located and the better condition a property is in, the more you can charge in rental fees and the more bookings you will get.

Rental yields in Budapest are currently quite good at around 6% net. This means that, on a EUR135,000 property, you should be looking at generating an income of around EUR8,100 per year, or EUR675 per month.

Hopefully this answers all your questions. It is advisable, however, to speak to as many people as you can regarding possibilities for purchasing property in Budapest in order to get as clear a picture as possible as to the potential of the market.

Good luck!

Kind regards,

Nick

- - - - - - - - - - -

Have you got any burning questions about Central & Eastern European real estate that you would like an answer to? Then just drop me a line at nick@propertastic.com and I'll be happy to answer you.

Property and the Schengen Effect

I remember walking around an overseas property exhibition in London in 2003 listening to everyone selling property in Eastern European talking excitedly about ‘The Dublin Effect’. This was not long after it was announced that the eight major Eastern European countries were going to be joining the EU on 1 May, 2004.

The agent’s point was that, as a result of joining the EU, Ireland had gone from being one of the poorest countries in Europe to being one of the richest, and property prices in Dublin had gone through the roof as a result. Surely the same thing was going to happen in the capital cities of the new Eastern European entrants as well?

With hindsight, these agents weren’t exactly wrong, but they weren’t exactly right either.

Prices did go up for sure, and anyone buying property in Prague or Budapest, for example, would have made a tidy profit if they had got into the market at that time. However, the reason was different from the promised ‘Dublin Effect’.

The reason why property prices went up so fast in 2003 and 2004 was very close to the old Wall Street proverb of ‘buy on the rumour, sell on the news’. It was the speculative buying frenzy before EU accession that led to the gains, not as a result of great economic improvements afterwards. In fact prices in Prague and Budapest plateaued shortly after accession.

This shouldn’t have been too much of a surprise to anyone who thought about the situation logically. Ireland was a tiny country compared to the size of the EU as a whole. Just a small part of the EU budget going into Ireland was able to make a huge difference. But when the ten new members of the EU joined all at once, adding a population of 70 million to the EU compared to Ireland’s 4 million, it should have been obvious that the effects upon each of the Eastern European countries were going to be substantially diluted, although certainly highly beneficial in the long-term.

The next EU related factor that the sales agents are getting excited about is entry into the Euro, a feat that only Slovenia has managed to achieve so far. Despite agents’ best efforts, Slovenia’s adopting the Euro on 1 January 2007 doesn’t seem to have had a huge effect upon property prices, probably due to the fact that prices there are already pretty expensive.

Next is the turn of Malta and Cyprus to join the Eurozone on 1 January 2008 which, again, the agents are making a big song and a dance about.

However, there’s another big change in Eastern Europe happening on 1 January 2008 which no one really seems to be talking about so much, yet which I personally believe could have a bigger impact upon some property prices than Euro entry. This is the enlargement of the Schengen zone to include Lithuania, Poland, the Czech Republic and Slovakia.

The what?

The Schengen area constitutes a border-free travel zone within the EU among the old member states, with the exception of Great Britain and Ireland. Non-EU countries, such as Norway, Iceland and Switzerland are also included in the Schengen zone.

Currently, whenever you cross the border from one Eastern European country to the next, or from any of them into Western Europe, you need to go through passport control. Not really a major problem on long journeys, but not something that you want to go through on a regular basis, week in, week out, on shorter journeys.

From 1 January 2008, all this will be changed, and the only notification that you are leaving one country and entering another will be the ‘Welcome to …’ signs.

So how could this affect property prices?

Across most of the region, the answer is probably not a huge amount:

Lithuania: Faster entry into Poland. Not so much difference in property prices either side of the border. So probably not so much difference.

Poland: Easier access into Germany. But it’s Eastern Germany, which is not where the money is. So again, probably not a major factor.

Czech Republic: The southwest of the country borders the rich Bavaria area of Germany. The problem is that the areas on both sides of the borders are mountainous and depopulated. Nuremburg is 65 miles from the border; Munich is over 100, so it’s not really commutable. Maybe there will be a few more Bavarians who would be interested in summer cottages in the border regions, but a round trip of this length takes such a time that the time savings by not having to stop at the border are fairly insignificant.

The situation on the Czech Republic’s southern border with Austria is quite similar – mountainous and depopulated for the main. The South Eastern corner of the country might see some slight gains. Breclav, for example, is 45 miles from Vienna and has a direct rail route, so it could be interesting. The Czech Republic’s number two city of Brno is a bit further away – 70 miles. That’s pushing it a bit for a daily commute though.

Which leaves one big winner from the Schengen entry and that is … Slovakia!

Or, more precisely, its capital, Bratislava.

Discounting the Vatican City, Bratislava and Vienna must be Europe’s two closest capital cities, if not the World’s. Just 35 miles separates the two city centres. That’s nothing at all – about the same as Reading or Dunstable is from London’s West End (and the traffic certainly is nowhere near as bad).

In terms of property prices though, the two cities are worlds apart. Prime city centre property in Vienna is currently going for EUR3500. The best new developments in Bratislava are exactly 50% of that – at EUR1750.

I just can’t see that this situation is going to last forever. Sooner or later, prices in Bratislava are going to start catching up with Vienna (which looks far from overpriced itself and is showing steady growth). Once it gets more easy to commute from Bratislava to Vienna, more Slovaks are going to start working there earning a much higher salary than they would be able to do so in Bratislava, and they will start using that money to start buying decent apartments back home.

Conversely, poorer Austrians could decide that they would get a lot more for their money in Bratislava (although this is less likely due to the fact that not many Austrians speak Slovak, whereas many educated Slovaks will speak German).

Even without entering the Schengen zone, all of Bratislava’s prospects were looking great already, with Slovakia’s low taxes attracting a lot of inward investment into the country such as Kia, leading the country to be dubbed ‘the Tatran Tiger’. Add to this the fact that prices are still among the cheapest in Europe, that rental yields are among the highest in Europe and that Slovakia is currently on schedule to adopt the Euro in 2009 and it’s hard to find a single negative about the city.

Click here for a more detailed look at the current state of the Slovak property market.

For the best potential, look for high-quality developments on the west side of the Danube – the closest side to Vienna, and I’m pretty sure that you’re on to a property with some of the best potential for growth in Europe at the moment.