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The Warsaw Voice » Real Estate » February 6, 2008
The Real Estate Voice
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Real Estate Is a Safe Bet
February 6, 2008   
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Robert Chojnacki, president of redNet Property Group, offers some bear market investment advice:

"Real estate investment requires a lot of care. The great Polish real estate bubble has burst, and 2007 saw a return to stability."

Stock market investors have been spooked over the last few months. Warsaw Stock Exchange indexes have been tumbling and nervous investors have been selling at a loss. Trading remained slow and turnover was modest during the last few days of January. People are understandably cautious after the losses of the past couple of months. This has led investors to inquire about alternatives to the stock market. Treasury bonds are about the safest investment vehicle there is but they tie up money in the long term and offer very small returns. Real estate may be another safe alternative.

Real estate investment requires a lot of care. The great Polish real estate bubble has burst, and 2007 saw a return to stability. During the first six months of last year, developers finally turned their attention to Poznań, Katowice, ŁódĽ and the Gdańsk-Sopot-Gdynia TriCity, and these places saw prices shoot up. Markets stabilized during the second half of the year, and there were even corrections in some cities. A lot of consultants are still predicting increases of 10-15 percent in Poland. This just creates an artificial demand for properties which cannot justifiably be expected to increase in value. People should treat these forecasts with skepticism and either choose their property very carefully or look for investment opportunities abroad. Bulgaria and Romania were a big hit with investors once they joined the European Union. But it soon became apparent that prices were already at a high level given the glut in supply and were therefore unlikely to yield the sort of returns we've witnessed in Poland. The legal environment was also unfavorable and this created further difficulties.

Poland's next-door neighbor Slovakia was somehow passed over. Today, it has proven to be an investment El Dorado. In Zakopane in the very south of Poland, real estate costs on average zl.10,000-15,000 per square meter. This is twice the going rate in Warsaw and three times as much as you can expect to pay just across the border in Slovakia. The Investor's Club purchased a 40-square-meter apartment in an attractive Slovakian tourist location for around zl.192,000. If you compare this with prices in Zakopane or Bratislava, which are comparable to those in Warsaw, you can see that properties in the Slovakian Tatra mountains have to increase in value. The fact that Slovakia will be adopting the euro within 12 months further raises the potential for appreciation. Slovakia is not the only option. People need to broaden their investment horizons.

Axis Crown in Malaysia was Investors Club's first offering to its members. This development, located in a prestigious part of Kuala Lumpur, had no trouble finding buyers. The market looked on to see how this would affect the Malaysian economy. Local prices were up 20-25 percent six months after the initial offering, and a similar boost is expected in the near future. This means that investors can make 50 percent on their investment simply by selling on completion.

Rentals can cover the costs of borrowing while waiting for that big increase in value. Profits can even reach 7-9 percent of the value of the investment. The Orient is profitable, but we ventured even further afield. Apart from Malaysia, we currently recommend Margarita, an as yet undiscovered corner of the Caribbean. Margarita is exceptionally favorable to investors. There are few of the taxes prevalent elsewhere like VAT and customs duty while capital gains tax is a mere 0.5-1 percent. The additional costs associated with buying and selling real estate are likewise very low. The legal regulations on this Venezuelan island are very friendly to foreigners. There is virtually no limit on the amount of real estate foreigners can purchase, and the procedures are very straightforward. All new developments come with a 10-year building warranty. Because the island lies in a duty-free zone and gas is cheap, Margarita offers 60-70 percent lower living costs than the rest of the Caribbean. Margarita can be compared with Spain 10 years ago. The soaring prices of vacation residences we witnessed there give some idea of what Margarita has in store. Analysts are predicting real estate to increase by at least 30 percent over the next 12 months. Margarita is in a pre-boom phase compared with the rest of the archipelago where prices are at least 50-70 percent higher. So it is no surprise that Investors Club's two Margarita developments are drawing an enthusiastic response.

With the current bearish situation on the stock exchange, the American recession and high inflation eating up earnings, real estate investment may be a safe bet.
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