How to avoid the overseas property pitfalls

Many Brits rushed to buy overseas property as values soared but some are left nursing losses, and not just because of falling prices. Nick Leach, head of Pierre & Vacances Property Investments, UK & Ireland, explains how IFAs need to get involved in the process to help their clients make the right choices

The overseas property market has been a huge source of investment success for thousands of investors in recent years, but for every success story there has also been a tale of misery - an investor who has lost everything or has been left paying the mortgage on a property that will not rent or sell.

At the height of the market, investors were buying in countries such as Dubai, Bulgaria and Spain, without any real local knowledge and only the assurances of hard-selling property agents that they were making a smart investment. Unfortunately, many of these investors are now sitting on substantial losses on their investments, up to 75% in some cases.

If there is a hard lesson to be learnt from the trail of failed investments left behind, it is this: many of these poor investment choices could have been avoided if independent advice had been readily available to investors before they made the decision to purchase.

Overseas property still remains an attractive market for well-informed clients looking for investment opportunities. The French property market, for example, which has not been blighted by over-development or poor internal infrastructure, has performed surprisingly well against a backdrop of economic chaos. However, investors need to have a better understanding of what it is they are investing in, rather than accepting what they are told by someone with a vested interest in completing the sale. This is very much where IFAs could play a vital role in ensuring investors do not make ill-informed decisions.

Any balanced investment portfolio, big or small, usually contains a reasonable percentage dedicated to property. However, many IFAs still do not present overseas property investment as an asset class to their clients. There are probably a number of reasons for this.

Firstly, a significant number of overseas residential property investments are not regulated, which restricts or inhibits some IFAs from promoting it to their clients. Secondly, IFAs have been put off by the poor reputation of some developers and agents in this market and the risks that come with property investments in unregulated, foreign markets and the amount of work involved.

Thirdly, and probably the most relevant - and this is in no way a criticism - IFAs cannot be expected to understand all elements of property investment, especially within the overseas property market where specific knowledge is required to get to grips with the complexity of local laws, country-specific taxes, regulations and investment processes.

Significant resources are required to source well-built and well-located property overseas and then ensure it will be professionally managed, maintained and rented to provide a good income stream. It is also a full-time job sifting through the thousands of opportunities to find a property that satisfies key criteria in this competitive and unregulated market.

Faced with this amount of work, it is hardly surprising that many IFAs do not want to touch overseas property. But, this means advisers are missing a golden opportunity. In the past decade, thousands of people have profited from investments in property abroad and, in many cases, returns on property have outperformed other asset classes, not only in terms of yield and ROCE (return on capital employed) but also in terms of capital appreciation.

At the same time, normally level-headed people who would not consider buying property in the UK without speaking to a broker or IFA, have bought property abroad based purely on the word of the developer or local property agent, without seeking independent financial advice to check that the figures stack up. As a result, investors have purchased property at inflated prices in countries that have little or no regulation should something go wrong.

It is clear that this is an area crying out for independent advice to be freely available to prevent investor making costly mistakes. Who is managing the property? How are they generating the rental income? What is their experience? What is the price/m2 in the area? Are your deposit monies safe? Have contracts been checked by a local, qualified lawyer?

When bought correctly, good property investments can provide excellent returns and, in the long term, very good capital growth. Commissions for property investments are extremely attractive for IFAs as they are earned on the full value of the property rather than just the client's deposit money, which can often be as little as 10% of the value. As a caveat though, IFAs should be wary of overly generous commissions from desperate developers. In addition, advisers can help to organise the overseas finance through brokers.

There is clearly scope for IFAs to play a much more active role in facilitating an overseas property purchase, but for advisers to be drawn to property as an asset class, it needs to be as risk and hassle-free as possible - yet still leave the client with an appealing property investment and the IFA with an attractive source of revenue both in the short and longer term. Are there any such investment options? There is, and in France it is an extremely popular method of investing called easeback.

Leaseback has proven extremely successful in France, sold predominantly by IFAs, banks and pension funds, and offers the best opportunities for finance, guaranteed revenue streams and a hassle-free life as all management and owner issues are taken care of with no exposure to occupancy risk. Leaseback also provides IFAs with a viable and attractive property investment solution to recommend to clients that provides good yields, strong capital growth potential with minimal risk in the short and longer term and, crucially, no personal involvement.

Aside from leaseback, other options available for investors when buying property are to buy it outright and either manage it themselves or through a local agent. Self-managing a property is potentially the most lucrative for an investor, though also without doubt the most hassle and time-consuming option. Using a local agent can be unreliable and not without issues. Also, from an adviser's perspective, this method leaves little scope for revenue generation.

Fractional ownership suits leisure investors who effectively buy a portion of a property or fund of properties along with other investors, and can enjoy use of, until they are sold after an agreed period of time and the profits shared after management fees and costs have been deducted. This can provide a turnkey property investment for clients in a diversified portfolio of properties, with an attractive leisure investment angle and without any of the ownership hassles. For IFAs it provides an attractive source of commission from a broad range of potential clients, as the entry point costs can be very low.

There is a real opportunity for IFAs to tap into an asset class that has been avoided, but has the potential to provide advisers with a very lucrative source of revenue. UK investors will always be attracted by the overseas property market, but where once they might taken the plunge without doing their own due diligence, they are now much more likely to seek the advice of a third party before committing to an investment - and the IFA is in a prime position to offer that guidance and support both in the short and longer term.

Nick Leach is head of Pierre & Vacances Property Investments UK and Ireland.