SEBASTIAN WILLNOW/AFP/GETTY IMAGES
Everywhere you go in Madrid, For Sale signs on half-built apartment blocks dominate the Spanish capital. No surprise: The global recession has hit the country's once-booming real estate market harder than most. Property prices from Barcelona to the Balearic Islands fell 6.5% in the first quarter of 2009 alone. They are expected to drop 35% or more from their 2007 peak by the end of this year.
The economic downturn—in Spain and dozens of other countries—has left many homeowners struggling to keep up with their mortgage payments. But for well-funded property buyers, the recession is opening up a bonanza of cut-price deals. When times were good, cheap credit fueled almost insatiable demand for second homes and investment properties. Now, financing is harder to come by, and developers are slashing prices to offload stock built for a dwindling number of buyers.
The power shift in property sales is gradually enticing investors back into the market. From European hot spots in Croatia and Montenegro to less exotic investments in Florida and the Southwest U.S., now may be the right time to buy. Double-digit price declines since 2007 and the renewed strength of the dollar against foreign currencies make buying overseas more affordable for Americans. And emerging countries, especially Brazil and India, carry the prospect of continued economic growth despite the downturn while offering properties costing as little as one-eighth the price of the average U.S. home.
Bullish on Montenegro
"Where people can get a good deal, they're grabbing the bargains," says Charles Weston-Baker, head of international residential investment at realtor Savills in London, which saw a 10% to 20% jump in sales in April compared with the month before. "Price falls are putting property back within the grasp of investors."
Needless to say, buying when the property market is low can pay big dividends over the long term. But investors still face uncertain immediate prospects. Stimulus packages worldwide have begun to reignite lending, but banks continue to charge premium interest rates and demand hefty down payments that could shut out some bargain hunters. Analysts also caution that real estate may depreciate well into 2010, leaving investors facing declining property values until the global economy rebounds.
To limit downside risks, market watchers suggest hunting out properties in countries with the best long-term economic growth prospects, such as Turkey or India. They also advise wherever possible that buyers obtain financing from multinational banks to reduce the chance that domestic financial problems could affect the loan. For investment properties, locations offering the prospect of steady rental income from tourists are less risky than those relying on local tenants.
Which markets worldwide are worth considering? Adam Challis, associate director at CB Richard Ellis (CBG) in London, is bullish on Montenegro, just north of Albania on the east side of the Adriatic Sea. With its pristine coastline and growing business ties to the European Union and Russia, Montenegro has enjoyed 28% compound annual growth in tourism since 2001 and 20% annual growth in real estate prices since 2005. Until the global downturn began to be felt in 2008, buyers were pouring nearly $600 million per year into the domestic property market. "Montenegro is fast establishing itself as a high-end [tourist] destination," Challis says.
Researchers at realtor Jones Lang LaSalle (JLL) also recommend Eastern Europe, but say some Western European markets should pique investor interest as well. Falk Schollenberger, the company's head of residential investment in Germany, reckons domestic real estate, particularly around Berlin, Munich, and Frankfurt, offers low-risk returns in a market that hasn't suffered the double-digit price declines recorded in European countries such as Spain and Ireland.
To cut their balance-sheet risk, many German banks have begun to sell off their property portfolios, often marking down assets by up to 50%. "Forced sales are likely to become more common," says Schollenberger. "There will be further negative pressure on house prices, which will present investors with potential bargains."
If Europe doesn't sound appealing, the Middle East and Asia could offer bargains for investors willing to take on more risk. At the top of many lists is battered Dubai. Analysts at UBS (UBS) reckon property prices in the United Arab Emirates' largest city have fallen 25% since early 2008—and could drop 70% more by the end of this year. That provides an opportunity for investors to snatch cheap deals at luxury resorts, which developers are looking to offload to service large debt burdens.
To be sure, any investment before the global economy mounts a sustained turnaround carries risk—and even more so when it involves real estate, which was the primary catalyst for the current global economic mess. But for buyers with strong stomachs and access to capital, this may be the best time in decades to load up on property.
Check out our slide show for a look at 18 promising real estate markets.
Scott is a reporter in BusinessWeek's London bureau .