Friday, August 21, 2009
Some of the best distressed deals are in prime locations in Spain
Dear Reader,
Distressed or crisis opportunities in some European markets is one of the hottest plays on my radar today. This is an opportunity we have because of the current economic crisis. I’m talking deals with discounts of 52% on list prices or 40% on official valuations. Deals in blue chip locations that will immediately throw off positive cash flow. Deals in locations that will be the first to recover once market sentiment changes. Deals where up to 100% financing may be available.
Let me explain why we have this opportunity and how it works. Crisis investing means buying when everyone else wants or needs out. At an aggregate level, markets overreact and overshoot both on the up and downside. Assets become mispriced.
Banks lent to developers to build. Developers built in anticipation that there would be no problem selling their units. After nearly a decade of runaway demand and floods of cheap money, they took their eye off the ball. They took on more debt and risk than they should have and they overpaid for land.
Credit and financial crises combined with oversupply has led to a break down in some markets…many markets in fact. Put simply: sales dried up. High quality, completed units are left sitting waiting for a buyer. Banks need to purge their loan books. Developers want to lick their wounds, move on, and live to fight another day. That’s why we have this opportunity. Forced sell-offs are happening…demand is rock bottom. This is a formula for opportunity.
Distressed deals are available in many markets across the world. Europe in particular is awash with distressed deals. Thing is, no matter what the price, most markets still don’t make sense to me. The countries of central and Eastern Europe have deep structural and currency issues that need to be resolved before I would recommend any opportunities there.
In Ireland, there is a major oversupply problem, compounded by sky rocketing unemployment and an imminent fiscal crisis. Rents in Ireland have fallen by up to 30% in the past year alone. These countries are on my watch list but I don’t expect to be making any recommendations here in the near future.
I’m focused on these three golden rules:
-Buy quality (location, construction, amenities and fit-out)
-Don’t take on any construction risk…buy completed units
-Don’t take on any project risk…make sure the condominium is functioning. You don’t want to be one of 10 owners in a 100-unit condominium.
The best opportunities are in the UK, Spain and Portugal. Developers here relied heavily on debt. The discounts here can be big…buy well and you still have access to a strong rental market.
Stay tuned…in the coming weeks I’ll identify the areas within these countries that need to be on your radar.
Ronan McMahon
You might also be interested in:
Posted Under:
Want More?
Sign up here for your free Pathfinder Alert e-letter, and we’ll send you our $50,000 Report...showcasing seven real estate opportunities for $50,000.
