Where to invest in buy to let property in Europe in 2020

There is an innate romance about the idea of investing in European property. In such uncertain times though, with the impact of Brexit still unclear and in the aftermath of a general election, it’s never been more important for buy to let property investors to make pragmatic decisions, particularly where Europe is concerned.

Brexit has obviously had an effect on investment in the last three years, but perhaps its impact has not been as significant as you would expect. This is especially true in emerging markets. Whilst major cities like Paris and Geneva continue to command the highest property prices in Europe, emerging markets offer better returns for investors.

Savvy investors are already voting with their feet, flocking in their droves to ‘resort’ locations in countries like Spain, where there were 25 per cent more foreign investors in 2019 than at the peak of the market prior to the 2008 crash. This could be due to a number of reasons, chief among them being investors wanting to make their moves before any further Brexit-based complications reveal themselves.

 Where to invest in buy to let property in Europe in 2020

The European property market is uniquely diverse and ripe with potential. It’s also flourishing. In Spain, 2018 represented a record year for the Spanish real estate market in terms of foreign investment, with foreigners accounting for 12.6 per cent of all transactions

While Spain is very much a known quantity for investors, problems can still occur when renting out property overseas – even if, like Landlord Action’s Paul Shamplina, you have extensive knowledge of the private rented sector (PRS).

“If you are renting properties that you do not live near, you have little choice but to rely on agents (and neighbours) to look after the property and to communicate any issues. However, the approach taken by Spanish agents is a lot more laid back than in the UK, as I have come to realise. Effective communication and attracting tenants you trust is key.”

Paul Shamplina

Here, we’ll reflect on  the wider European market more broadly.

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Head over heart

When making buy to let investments, it’s essential to consider what yields are required to cover costs and bring in a tidy profit. To cover costs, you should be aiming for a net yield of around four per cent in today’s climate, with two per cent representing the point at which your costs should be covered.

Be realistic with your expectations because, by nature, the buy to let market is unpredictable and this unpredictability is further compounded when you’re dealing with property that’s hundreds or even thousands of miles away.

Rental streams are not guaranteed and tenants can always decide to walk away or stop paying.

So finding the right tenants (ideally those with a good, steady salary to rely on) is arguably just as important as investing in the right property and the right location. You should also consider the year-round factor, as city life tends to attract tenants all year, whereas properties based in resort towns could be vacant for weeks on end in the off-season.

These are just broad guiding principles though. To really understand the market, we need to dig a little deeper and examine the trees in order to fully see the wood.

So, how should potential investors be approaching European property and where specifically should they be looking?

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Top destinations for 2020

Property commentators have suggested in recent years that it is the major cities that are gaining favour amongst investors. Of the major European cities, Paris and London consistently rank near the bottom when it comes to average rental yields, whereas Amsterdam and Dublin often come out on top, with Dublin currently boasting an average rental yield of 6.46 per cent.

Indeed, Ireland is consistently crowned as one of the most attractive destinations for buy to let investors, thanks to generally reasonable property prices, economic growth, a stable currency and consistent demand.

The fall in value of the pound after the EU referendum has no doubt had a part to play here, as investors look to the next nearest country with potential. Ireland’s average rental yield currently sits at 7.08 per cent, whereas in the UK, yields have fallen in the last 12 months from 4.91 per cent down to just four per cent as a result of not only the referendum but also a flurry of new taxes. As a result, the UK has fallen ten places in Europe’s buy to let league table – from 15th to 25th. While the UK is exceptionally diverse – don’t rule it out, there are plenty of areas worth investing in – there might be better options elsewhere. 

The UK is not alone in its low yield rut, however. France, Sweden, Croatia and Austria are all providing average returns of less than four per cent thanks to high property prices and, in the case of Sweden, the market is so tightly controlled that major profits are almost impossible. Things remain relatively steady in the cities, although there are always local factors to consider. 

In Paris, for example, the market is decidedly pro-tenant and transaction costs are high, whereas in Prague the market might be pro-landlord, but rental income tax is high and foreigners are not legally allowed to buy property directly. It all comes down to doing your due diligence and considering alternative options if your desired location doesn’t appear to be a solid investment.

Where to invest in buy to let property in Europe

It’s also wise to invest in locations with year-round tourism trade. German cities like Berlin and Munich are wise investments, as tourism is consistent throughout the year and rental prices are expected to increase by between six per cent and seven per cent in 2020. Lisbon has also seen a demand for property purchases thanks to the golden visa system, which has incentivised foreign investors by giving them a fast-track to citizenship and a very favourable tax rate. Zagreb is also poised on the precipice of some monumental tourism growth, with the asking prices for property in the city increasing by 20 per cent in 2018.

Ultimately, the choice comes down to stability or high-risk – whether to invest in more expensive property in an established country for a low return or ‘take a gamble’ on countries where prices have fallen but are recovering. It’s a risk-reward situation, but the risks of stepping outside the immediate European ‘comfort zone’ are not necessarily as great as investors may think . The rewards, meanwhile, are potentially incredible, particularly for investors who are prepared to  look east.

For those investors with less investment capital to spare or those simply looking for a bargain, Moldova represents the best value for money in Europe, with average gross rental yields of 10 per cent according to the Global Property Guide. Compare that to the average yield of 2.76 per cent in the UK and it’s easy to see why so many investors are looking to Eastern Europe. Indeed, yields are also consistently high in Poland, Romania, and Croatia too.

So, it would appear that Ireland and Eastern Europe offer the best financial prospects for investors in 2020, but if there’s one thing to understand about the buy to let market, it’s that it rarely stands still for very long. With Brexit on the horizon and the outcome still unclear, there can be no definitive predictions. Whatever the outcome might be, there are things all investors should know before parting with their capital.

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What should you know before buying in Europe?

Where to invest in buy to let property in Europe

It should go without saying that different countries will have their own diverse fiscal implications as a result of their local economies. That means potential investors should take a step back and ask themselves the following questions before making a firm commitment. 

  • What local taxes will I have to pay?
  • Am I subject to capital gains?
  • What will happen to my property in the event of my death?
  • Do I need to pay inheritance tax?
  • How might the UK’s withdrawal from the EU affect my property?
  • What is currently happening with interest rates in the country?
  • Is inflation expected to rise soon?

Of course, while it is reasonable to assume that taxes and other costs are likely to rise across Europe in the coming years, the negative impact of these issues has largely been offset by the low cost of borrowing.

Interest rates are also holding steady thanks to the intervention of the European Central Bank, which recently extended the earliest date for an interest rate increase to next year.

Those rates are set to rise over the next decade, however, so investors should be thinking long-term when it comes to their potential European prospects.

In essence, smart European investment is all about remaining vigilant, informed and wise. Indeed, the key to finding success with any buy to let investment, whether local, European or even further afield, is in knowing the facts, understanding the market and acting with your head. Because the heart, more often than not, will always lead us astray.

This post was originally published in August 2018 but has been completely updated for accuracy and comprehensiveness in January 2020.

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