Liverpool managed a draw on Sunday in a very dull game against Chelsea at Stamford Bridge.  But it was a pleasure bumping into a subscriber to this newsletter on the way to the ground – best wishes to Chelsea fan Bernie.

I have a busy two weeks coming up with visits to Dublin at the weekend for the Sunday Business Post Property Expo followed by property investment seminars in Bahrain and investor meetings in Dubai.

I have received a number of e-mails from investors asking me to elaborate on comments I made last week about spiralling inflation and base rates in Romania as well as the huge current account deficit there and the potential impact on property investors.

I am unable to respond to individual e-mails, but Fitch, the global credit rating agency, can provide some of the answers, particularly on why countries such as Romania and Bulgaria potentially have a lot to lose from the credit crunch and subsequent financial turmoil:

Fitch downgrades Bulgaria and Romania from stable to negative

"Current account deficits in the Baltic States, Bulgaria and Romania have risen to levels that look disconcertingly stretched by current global or historical standards," Fitch analyst Edward Parker said in a statement.

The global credit crunch triggered by the sub-prime crisis in the US is a significant shock for these economies, while weaker gross domestic product (GDP) growth in the eurozone will have a further negative impact on exports from the countries affected by the agency's decision.

Foreign investment flows have been instrumental in keeping current account deficits (CAD) financed, but should the capital flows dry up, the four countries affected - Bulgaria, Estonia, Latvia and Romania - would be the ones that would be hurt the worst, Fitch warned.

"External deficits that were easy to fund in times of abundant liquidity and risk appetite may be harder to finance following the global credit shock. The negative outlooks reflect the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment," Parker said.

The credit rating agency estimated Bulgaria's current account gap at 19.5% of GDP for 2007, making it one of the countries with the highest current account deficits among the 105 nations rated by Fitch.”  Sofia Echo 31st January 2008

I have recently read comments that some countries in Eastern Europe are somehow immune from the credit crunch and as such present themselves as a lower risk investment area.  I do not agree with this and clearly neither does Fitch and other informed sources.   The opposite is actually the case.

In the Jet-to-Let Bible, I encourage investors to look at the macro-economic environment in which they are investing.  You have to understand why the credit crunch could potentially have a huge impact on Romania and Bulgaria and the inter-relationships between inflation, base rates, exchange rates, productivity levels, liquidity and deficits.  If you understand these factors, then you would be very cautious about investing in this area for now.

I was also asked in one of the e-mails:

Why wouldn’t you invest in Bulgaria or Romania?

I think there are better risk-adjusted returns elsewhere.  For me, the risks do not warrant the investment when I can have better overall returns with lower risk in another country.

Some of the capital growth figures published by companies selling properties in these areas are misleading.  What relevance has a published figure of say, 100% “return on investment” (ROI) when investors in the same project are selling in the open market at a loss, after costs and negative cash flow?  In many cases the eye-catching growth figures don’t stack up.  I know of numerous cases where investors are sitting on losses in some of these countries, although the marketing companies are still claiming huge gains.
 
I would recommend that investors do their own due diligence and do not rely on over-optimistic figures published in order to sell more properties.

I would also suggest that you ask the salespeople of these companies how many of these properties they own themselves.  I can guess the answer!

I predicted in the Sunday Times a couple of years ago that the wheels would eventually fall off the Bulgarian property market.  The Financial Times carried an article this weekend reinforcing my warnings.  An extract is below:

“British home buyers have disappeared from Bansko, a leading Bulgarian ski resort and until recently a “hot-spot” for people seeking moderately priced properties.
Since the global credit crunch took hold, purchases by UK investors of Bulgarian properties priced between €45,000 ($65,000, £33,500) and €90,000 have fallen sharply, according to Sofia-based estate agents.

Hugh Fraser, of Sofia-based LS Property, said: “Our research suggests that only about 30 apartments were sold in Bansko last month and the buyers were Russians and Greeks.” This compares with sales two years ago of more than 500 properties a month to UK and Irish buyers….”

Property investment is about “opportunity cost” which essentially drives our decision making towards the better investments.  I would contend, for instance, that Jet-to-Let Investments’ recent leaseback scheme in the French Alps is a better all round prospect for a novice or experienced investor than Bulgaria or Romania right now.  Here are some general points:

I could go on, but I think that the brief comparison makes my point.  In terms of investment I would categorise the French Alps leaseback scheme as low risk and investing in Bulgaria, Romania and the Baltic states - in the present economic climate - as high risk and speculative.

Experienced investors can make their own mind-up; that’s what experience is all about.  But first-time, novice investors and those with small portfolios and limited cash reserves should steer clear of these countries for now.  Presently there is too much uncertainty and uncertainty is the enemy of all investors.  However, property investing is a long-term business and if you are determined to invest in these countries, I would suggest putting a purchasing decision off until the economic outlook is more favourable and less speculative.

Speculation and investing are two very different approaches to buying and holding assets.  At Jet-to-Let Investments we look for solid, lower risk investments which will quietly and efficiently get on with making you money.  Being able to receive the profits on some of these investments tax-free is also a major benefit we seek for the serious investor.

The French Alps scheme is a strong investment and ticks all of the right boxes. Jet-to-Let Investments had 10 potential buyers for every property in our latest French leaseback scheme.  If you would like to receive information on our future leaseback schemes before they are released then please e-mail henry@jet-to-let-investments.com and register your interest. 

Or telephone Gina on + 44 151 244 5444