Place in the sun? Where to invest in undervalued property in 2016

This data reveals where property is cheap relative to long-term, local trends

2:45PM GMT 09 Jan 2016

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If buying a holiday home overseas was not already an inviting proposition, it will become even more attractive from April when second properties bought in this country will attract a higher rate of stamp duty.

Buying a holiday property in Britain will mean paying the usual stamp duty plus an additional 3pc on top. Taxes on purchasing property abroad, however, won’t change.

And whatever your views on the British housing market, the evidence suggests the biggest bargains are overseas.

New analysis points towards southern and eastern Europe as offering the cheapest property – including popular holiday home markets of Italy, Portugal and Spain.

These are among the most undervalued housing markets in the world, according a key benchmark by the Organisation for Economic Development, which measures property prices in relation to local income.

The OECD research, which has been running for over a decade, plots local prices against typical wages and then sets this against the long-term average.

A reading of100 would be in line with that average. At 110, local property is 10pc over-valued against its long-term average.

Britain is therefore 7pc overpriced, according to the data. In Sweden, which is also battling a severe housing shortage, property is 114pc overvalued.

But the long-term measure of value is not an indication on its own of where property prices are likely to go – especially in the short term.

As both Britain and Sweden have demonstrated, a shortage of supply can mean prices rise even where they are already “overpriced”.

Equally, certain of the worst-hit property markets are not expected to recover to pre-crisis levels because over-supply remains a factor.

Uninhabited “ghost” estates, where property developers couldn’t afford to finish developments commenced in the boom period before 2008, are just one side-effect of the economic crisis that property buyers should avoid.

Property in Spain, for example, which the OECD regards as undervalued by 26pc, grew just 1.2pc in the past year largely due to oversupply in the property market.

“In some Spanish cities there’s a lack of infrastructure and no demand for property,” said Tom Walker, a property fund manager at Schroders.

“Before you buy, ask yourself: can you travel around, is there local healthcare and education, like a university?” He points out that without this supporting infrastructure properties will be almost solely used as holiday homes, which could dampen future capital growth.

“If you buy property in a 'ghost city’ that area won’t have the ingredients for long-term value – only buy purely as a holiday home, and not an investment,” Mr Walker added.

Major Spanish banks, which lent heavily to property developers before the market crashed, still have properties on their books which they are eager to offload. Some banks are offering foreign buyers mortgages of up to 113pc of the purchase price – suggesting such properties are being sold at rock-bottom valuations.

The key to getting value out of a long-term overseas home, Mr Walker added, is to “ask yourself why, in five years’ time, for example, would people want to live there".

But Kate Everett-Allen, from estate agent Knight Frank’s global research team, pointed out that property markets in European countries worst-hit by the recession are already showing increases in value.

“Many other European housing markets which saw a significant declines in prices post-2008 are now recording some of the strongest rates of growth,” she said.

Turkey, which saw the biggest growth in Europe with an 18.9pc year-on-year price increase during 2015, is one area tipped to grow further.

“Strong levels of foreign investment, an expanding population and a slowdown in construction explain the upward price movements,” said Ms Everett-Allen.

Scandinavia may lack the hot weather but experts predict strong growth in Sweden and Norway next year.

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Cities with strict planning regimes, such as Stockholm, are especially attractive, because it is more likely that demand will outstrip supply - further pushing up prices.

“Here we are seeing strong demand for properties and the economy is growing and confident,” Ms Everett-Allen said.

Meanwhile, classic holiday destinations like the south of France will retain their value, as the premium attaching to popular areas is as strong as ever, she added.

Can you stil pick up a bargain? “The Algarve is promising,” said Ms Everett-Allen. “Prices dropped 40-50pc below their pre-crisis peak and until now buyers have been particularly cautious. But after a total halt to activity the market is now coming back.”

Currency is another factor. While the pound’s rise against the euro has concentrated potential buyers’ minds on traditionally popular eurozone regions, other currency shifts have been far greater.

The South African rand, for instance, has lost more than 25pc of its value against sterling since the beginning of 2015, while property prices there have shown comparatively little growth.

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