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Buy-to-let abroad: the pros and cons of being a landlord in Europe

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05/10/2015
As soaring property prices make London more and more unobtainable, is buying on the continent the answer for buy-to-let investors?

The London property market is becoming prohibitively expensive for most buy-to-letters. One square metre of property in prime parts of the capital can cost as much as £19,000, second only to Monaco in European terms where property goes for £33,000 per square metre.

As a result, priced-out, would-be landlords may consider looking to continental Europe for buy-to-let properties.

Marcus Phayre-Mudge, head of property equities at BMO Global Asset Management, believes European property offers a dependable income stream with many markets exhibiting “sound fundamentals” for rental growth coupled with “sustainable earnings”.

However, becoming and being a landlord on the continent isn’t without its shortcomings. While property is almost always cheaper than in London, roundtrip transaction costs – the total costs associated with a purchase, including commissions, exchange charges, fees and taxes – can be significant. Property laws on the continent also tend to favour tenants.

Here’s what you need to know about buying an investment property in five of the most popular European capital cities:

Amsterdam

Amsterdam’s property market suffered badly in the financial crisis, declining sharply year-on-year until reversing in the final quarter of 2014.

Despite this, property prices in Amsterdam are the 11th highest in Europe. The average price per square metre for city centre property is around £3,770, although on the outskirts this falls to £2,194.

The market is attractive in respect of income, with gross rental yields ranging from 5 to 6 per cent. Total transaction costs for purchasing property in Amsterdam are also moderate by international standards, ranging from 6.6 per cent to 14 per cent of the property’s price.

But there are downsides to being a landlord in the Netherlands.

“It’s almost impossible to evict tenants. Contracts are typically unlimited, and landlords can only give notice in exceptional circumstances, and only with the backing of a court,” says Matthew Montagu-Pollock, compiler of the Global Property Guide.

Landlords also have a host of tenant obligations For example, they are responsible for most repairs, and are expected to act as a mediator in the event of a dispute between the tenants and their neighbours (click here for a full list). As a result, property in Amsterdam may not be suitable for overseas investors unless they can rely on a locally-based intermediary to carry out day-to-day responsibilities on their behalf.

Barcelona

After five years spent in a continuous state of recession, Spain finally re-entered growth in 2014 (at a rate of 1.4 per cent). The country is forecast to continue on this upward trajectory, with predicted growth of 3.1 per cent in 2015, and 2.5 per cent in 2016.

The Spanish rental market is also recovering, but Montagu-Pollock believes investors should remain wary.

While Spanish property prices have fallen significantly in recent years, in Barcelona costs remain comparatively high in Western European terms, with apartments costing between £2,500 – £3,000 per square metre.

“Gross rental yields of around 4 per cent are still not high enough to make buying attractive, but they are a little better than they were previously,” he says.

“Total roundtrip transaction costs are also fairly high, ranging from 9.5 to 15 per cent of a property’s value. Estate agent commission is typically around 3 per cent, and buyers incur a property transfer tax, ranging from 6 to 10 per cent of the property’s value.”

Overseas landlords incur high taxes, with all property owners subject to a flat tax of 24.75 per cent on gross rental income, a 3 per cent supplementary tax on property owned by non-residents, and all capital gains accrued by non-residents subject to a flat rate of 20 per cent.

Berlin

Despite its status as capital of Europe’s political and economic heart, and significant rises in average prices in recent years, Berlin property remains the cheapest in Western Europe. Prices per square metre in the city range from £1,870 to £3,000 for the most exclusive properties.

Still, yields remain moderate at 4 per cent, combined taxes for landlords can be as high as 45 per cent in total, and new laws prohibit the raising of rents by more than 10 per cent above the local average.

On the upside, Montagu-Pollock says owners will have no trouble letting a property due to significant demand, and this demand will only increase as the city attracts ever-higher numbers of arrivals, both national and international, each year.

Brussels

Brussels is home to the nerve centre of the European Union and as such is a magnet for both long- and short-term émigrés from the world over.

The average price per square metre of housing in central Brussels is £2,600, and £2,100 on the outskirts. Gross rental yields on apartments range from around 4.5 to 5.5 per cent, and on houses 4.5 to 5 per cent.

“Investors will primarily be discouraged from purchasing property in Brussels due to high round trip transaction costs – the third highest in Europe – which include a registration tax of 12.5 per cent payable on most properties, and 21 per cent VAT. Closing costs range from between 15 and 28 per cent of a property’s value,” says Montagu-Pollock.

“There are also capital gains tax (CGT) liabilities of 16.5 per cent payable on gains from  property held for less than five years, and landlords can expect income taxes of between 9 and 23 per cent.”

Some buyers may be deterred by Belgium’s pro-tenant laws, which make eviction a difficult and protracted process. Rent increases cannot be written into contracts, with most rents set according to the cost of living.

Despite this, in 2014 the International Monetary Fund warned Belgian house prices exceeded historical averages in respect of incomes and rents, although the organisation also dismissed the prospect of a market correction.

Paris

The Parisian property market has been attracting significant interest from UK buyers in recent years due to a favourable exchange rate, cheap mortgages and falling house prices.

The national association of French estate agents, FNAIM, notes house prices have been falling by an average of 2 per cent a year since the financial crisis, and could fall by up to 3 per cent this year. Buyers can secure fixed mortgages at low rates, for terms as long as 20 years.

“If you have an apartment in Paris you will have no trouble letting it. Demand outstrips supply,” says Montagu-Pollock.

However, investors may be deterred by a number of factors. Property prices are among the highest in Europe at around £8,100 per square metre for central apartments and £5,100 for outer.

“Gross rental yields are poor, around 3.6 per cent for small apartments and 3.1 per cent for bigger properties. Rents can only be revised once a year, and by no more than any increase in the most recent INSEE rental index,” Montagu-Pollock continues.

“Even when a contract ends, the owner can only recover a property from a tenant if they or a member of their family intend to live there, or sell up. Eviction is achieved through the legal system, and takes a long time.”

French taxes are also typically high, and tax law very complex. A brief introduction can be found here, but landlords can expect CGT of 19 per cent, and rental income tax of 10 per cent. Round-trip transaction costs range from 7.90 to 28.99 per cent.

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