Where are the world’s riskiest property buys?

Maybe it’s because I’m a Londoner. But, as I travel the world, I can’t stop thinking about property prices. In fact, my interest in property is only stimulated by my day job as the FT’s foreign affairs commentator. As I stare into estate agents’ windows in cities around the world, I find myself wondering how local political conditions are going to affect property prices.

I have even developed a theory of how global property investors should think about geopolitics — call it “the geopolitical play”. The thing to look for is a combination of good fundamentals and bad times. In other words, a place that should be prime real estate, but that has been messed up by politics. The idea is to buy now, when times are bad, and wait for politics and property prices to improve.

Of course, I am both too lazy and too poor actually to do this myself. But it doesn’t stop me thinking about it. And I have discovered that I am not alone in my preoccupation. In a feature last year, John Thornhill, the FT’s deputy editor, recalled: “When I was studying Russian in Saint Petersburg in the early 1990s, my landlady offered me the chance to buy a ramshackle apartment on a canal near the Mariinsky Theatre for the equivalent of £30,000. I’m not sure how I would ever have financed my purchase, but I have regretted my lack of financial imagination ever since. The apartment is now worth, I guess, at least 10 times as much.”

Thornhill’s guess is probably pretty accurate. Research for this article carried out by Savills suggests that the price of a good apartment in Moscow has indeed risen roughly tenfold since the collapse of the Soviet Union in 1991.

Simultaneously inspired and depressed by this tale, I have canvassed colleagues and friends around the world for similar stories — opportunities missed, opportunities seized and, most important of all, tips for opportunities in the future.

As for opportunities missed, many former foreign correspondents regret not buying in South Africa in the late 1980s. At the time, the country was the subject of international sanctions and threatened by political violence, so it did not seem like a natural place to buy a holiday home. And yet, looking further ahead, it should have been obvious that Cape Town remained one of the most attractive cities in the world. If times improved, it was probably a safe bet that the city would attract people from all over the world. And that, indeed, is what happened. Savills’ research suggests that Cape Town, like Moscow, has seen a tenfold increase in prices since 1991, the year following the release of Nelson Mandela from prison.

However, anybody tempted to make a geopolitical property play needs to keep in mind many different considerations. I would point to four in particular: timing, morality, currency and security of tenure.

The case of Cuba brings together all of these considerations. As a young journalist in 1990, I was inspired by colleagues who had made their careers by having the foresight to move to Prague or Warsaw, just before the collapse of communism. I considered making a similar move to Havana to await the counter-revolution. Thank goodness I didn’t, because I would have been waiting a long time. Since political change has been slow to come to Cuba, Havana, the capital, has not enjoyed anything like the same property boom as places such as east Berlin or Moscow.

However, as John Paul Rathbone reports, things are now beginning to move in Havana with the restoration of diplomatic relations between the US and Cuba. It is still a complicated situation, however, not least because it is illegal in most cases for foreigners to buy property. One popular way around this in Cuba and similar markets where foreign buyers are restricted (such as Sri Lanka, Indonesia and Thailand) is for foreigners to buy through a trusted local intermediary. Yet when large sums of money are involved, trust can evaporate alarmingly easily. There has been a rash of cases in Thailand recently where foreign buyers have become involved in bitter property disputes with their Thai wives.

Currency risk is also often a question. The gains in South Africa or Russia would be even more striking had it not been for the collapse of the rand and the rouble against the dollar and the euro. Over the past three years, property prices in South Africa have risen almost 15 per cent in rand terms, but less than 2 per cent in dollar terms. Of course, that also has the effect of making South African property look very cheap to foreign buyers, with one local agent reporting an “acute, exceptional shortage of stock for sale” in Clifton, one of Cape Town’s most attractive beachfront areas.

Currency risk is often related to political risk and both must be considered by anyone thinking of buying in southern Europe. After years of crisis, there are many apparent bargains to be had in Greece, where prime villas on much-loved islands, such as Mykonos or Paros, can now be bought for between €800,000 and €1.2m. Kerin Hope, the FT’s Athens correspondent, notes that “prices across the board are 50 to 60 per cent below pre-crisis — 2008 — levels”. If and when political and economic stability returns to Greece, prices will surely move back up again. Yet what if the opposite happens and Greece is forced to leave the euro — a possibility that was raised at a recent EU summit? The value of your island villa might plummet, as the new Greek currency plunges against the euro. On the other hand, as Hope notes: “Investing in a villa in Mykonos is like buying fancy wine, which you can always drink if the investment doesn’t work out.”

The morality of buying in desperate or despotic countries is often an issue. Not everybody would have felt comfortable buying a house in apartheid South Africa or Castro’s Cuba. Even when political conditions have improved and prices have begun to rise, some people might still feel queasy about the underlying political situation.

The end of Sri Lanka’s civil war has seen a boom in interest in buying property in some of the island’s more picturesque locations. Earlier this year, the FT’s Avantika Chilkoti reported: “The value of beachfront land on the premium coastline south of Galle has rocketed from $700 for 25 sq metres in 2003 to $15,000 today.” High-end villas near Galle now go for $2m or more, driven by a combination of local and expat demand. Some might regard this an unequivocally good news story as peace returns following the end of a decades-long civil war. Others might take a more equivocal view given the accusations of mass killings and atrocities in the north of Sri Lanka that accompanied the end of the war.

Similar moral issues crop up all over the world. A correspondent in Beirut reports that the city is undergoing something of a property boom as a result of the misery in neighbouring Syria. Lebanon is now playing host to some 2m Syrian refugees and the majority are in a desperate state. Yet enough Syrians have managed to get money out of the country to drive up the price of apartments in Beirut.

Another tricky moral dilemma is thrown up by Crimea. One of the FT’s former Moscow correspondents points out, shrewdly, that the Crimean peninsula perfectly matches the criteria for a geopolitical property play: good fundamentals and bad times. Crimea, he writes, is “permanently attractive to a whole region brought up on its central importance in Soviet life and culture”. Yet an effort to buy property in Crimea now would involve taking a fairly relaxed view of Russia’s forcible annexation of the peninsula from Ukraine. It would also involve violating European and US sanctions on buying property in Crimea. So probably not such a good idea after all.

Anybody considering future opportunities in geopolitical property investment should carefully consider their appetite for risk. For some investors, the riskiest investments are the most attractive. Marcus Edwards-Jones, a British venture capitalist, says: “Being first into a place when the bullets are still flying around is usually what makes you the most money. The important thing is to get your timing spot on, so you are the only place to go to, as foreign investors come in.”

Following this principle, Edwards-Jones made a successful investment in a hotel in the Democratic Republic of Congo (the Kampi Ya Boma), which caters to expatriates working in the mining industry. A couple of years ago, he considered making a similar investment in Mogadishu, the capital of Somalia. The idea was to buy some prime beachfront land and build a camp and beach resort as a safe base for oil companies. As well as being picturesque, the coastal location has the added advantage that “you can leave by sea if you come under attack”. Yet Somalia has, so far, presented too complex a thicket of legal, banking and security issues to allow such an investment to proceed.

For those for whom Congo or Crimea still seem a little too wild, there are less troubled countries and areas that still offer a geopolitical property play. While the threat of expulsion from the euro still hovers over Greece, other parts of the eurozone are well on their way to recovery.

One Irish colleague recalls buying a Dublin apartment the same weekend that Ireland accepted a sovereign bailout in December 2010. It fell in value over the next two years but rebounded strongly, and the property is now worth about 35 per cent more than its owner paid and pulls in a rental yield of 7 per cent — ample reward for the nail-biting years of 2011 and 2012.

Is there more upside to come in Dublin? There could well be, particularly if Britain votes to leave the EU, in which case some bits of the financial industry might choose to relocate to the Irish capital. Spain is also worth considering. For several years, the symbol of the Spanish bust has been the empty housing estates built by property speculators during the boom years. Some of the developments in the remoter parts of the country are likely to remain windswept and vacant for many years. However, developments along the coast will surely remain attractive for retirees from northern Europe.

In North America, the FT’s Anna Nicolaou points to Montreal as a possible geopolitical play. She writes: “Quebec’s ongoing flirtation with separating from Canada has left Montreal’s real estate market in flux for decades. Independence referendums for the francophone province sparked an exodus of business out of Montreal in the 1980s and 1990s, depressing the city’s economy as large corporations moved their headquarters to Toronto.”

In recent years, rich foreigners have snapped up condos in Toronto and Vancouver, while taking a more cautious view of Montreal. Since 2010, home prices in Montreal have climbed 11 per cent, compared with a 43 per cent jump in Toronto and 25 per cent in Vancouver. The average home in Montreal is now priced at $342,010, compared with $602,607 in Toronto and $900,592 in Vancouver, according to the Canadian Real Estate Association. Those who are prepared to take a bet on the political future of Quebec might take a punt on Montreal property. On the other hand, there is a possibility that the strict enforcement of French language rules will continue to put off big business, depressing the property market even if Quebec stays within Canada.

Meanwhile, back in Russia — more than a generation after John Thornhill missed his moment in St Petersburg — my FT colleagues are still wondering whether now is the time to buy.

Jack Farchy, the FT’s Moscow correspondent, writes: “For expats accustomed to boom-time Moscow of the past decade, the collapse in the rouble has raised a tantalising possibility: entering the real estate market at knockdown prices. ‘Business class’ residential property prices have fallen about 45 per cent since the end of 2013 according to Alexander Shatalov, head of IntermarkSavills. That means a small flat in central Moscow, such as the one I live in, might sell for about $300,000. That does not suggest an opportunity on the scale of the 1990s, but it still tempts. Shatalov reckons the market is bottoming out. Nonetheless, I am holding off. The future of Moscow property prices depends more than anything on the price of oil and President Putin’s foreign policy — two variables which I have learnt no one can accurately predict.”

Farchy’s dilemma highlights the salient point about the geopolitical property play. As with all investments, it involves making a bet on the future — a future that can contain nasty, as well as nice surprises. It is just that the surprises tend to come in the form of wars and revolutions, rather than corporate profits and losses.

Gideon Rachman is the FT’s chief foreign affairs commentator

Latin America

John Paul Rathbone, FT Latin America editor

Historically, Cuba has always been a real estate market. You can see that today in plush Havana suburbs such as Miramar, that were built during the 1940s and 1950s in a fever of property speculation and that still extend for hundreds of blocks west from the city’s more famous colonial centre. Even Havana’s defining waterfront corniche, the Malecón, was a US project, built at the start of the 20th century by occupying forces. Some Cubans are shocked when they learn that. But it is true.

Now, with the prospect of US rapprochement, Cuba may become a real estate market again, although with a twist. Two years ago, to research a story, I cruised some Havana back streets one night asking if anyone had a house to sell. It felt absurd, riding in a rusting Lada with the window down looking for property to buy in pitch-black darkness amid another power cut. But the idea had occurred to me after I was hissed at from a doorway by a prospective seller. The last time that had happened to me was during the special period in the 1990s, after the Soviet Union had pulled the plug on the island’s subsidies and Cubans were so hungry that they hunted down street cats to eat. A dubious looking character had hissed at me: did I want to buy some . . . cabbage.

Today, although there is a chronic shortage of housing, lots of foreigners are wondering again if they can buy a slice of Havana, the “Paris of the Caribbean”, as it was once known. Most assume they can waltz up, put money down and watch their asset’s value grow. Prices certainly seem to be spiralling up. But it is not so simple, thankfully. In my limited experience, the best way to get things done in Cuba is by making sure everyone benefits. One legal problem: only resident Cubans are allowed to own property. That means you need to find someone you can trust enough to hold title while you finance the project. Marriage offers some guarantee. But you hear as many happy stories as unhappy ones.

Every place has its ups and downs, especially in Latin America. Five years ago, for example, Ciudad Juarez, a drug-gang-infested Mexican border town, was known as the “City of Death”, and a canny Mexican businessman told me it was a good time to buy. I don’t know whether property prices have since gone up — the last time I visited, a few years ago, I watched tumbleweed roll past a 24-hour funeral parlour. Yet the homicide rate has certainly dropped. Venezuela is another unusual market. “Buy on the cannons, sell on the trumpets” — supposedly Nathan Rothschild’s investment philosophy — means you should buy property in Caracas now. Only don’t. Currency controls and 100 per cent inflation mean that anyone with any spare cash is buying property. In central Caracas, prices have apparently skyrocketed.

Back in Cuba, my family once had a home on an airy rise off Paseo, an elegant avenue in Havana’s embassy district. The house has since assumed semi-mythic status in my mother’s family’s imagination — a still point from which their experiences of exile can be measured and met. I visit it each time I go to Havana, and scratch my head outside wondering what I am doing there. One conclusion I come away with is this. My family once led a privileged life in Havana; then they didn’t. It is a universal lesson. There is no reason to believe the status quo will last always, anywhere. It never has.

Indonesia

Avantika Chilkoti, FT Indonesia, correspondent

Strolling along the built-up coast of Bali or past the colonial-era villas in Menteng, central Jakarta, you cannot help but wonder how the price of these prime properties has rocketed over the past two decades.

Indonesia’s transition to democracy began in 1998 with the toppling of Suharto, the authoritarian president who ruled the country with an iron fist for 32 years. The political upheaval paved the way for daring investors to take a bet on what is now Southeast Asia’s largest economy.

In the wake of the Asian financial crisis, major real estate developers were struggling with inflated debt and Indonesia’s banking sector faced drastic reform. Hasan Pamudji, at Knight Frank in Jakarta, says Indonesia’s property boom began in 2009 when rapid population growth and urbanisation started to reflect in property markets.

Land prices in greater Jakarta and Surabaya, Indonesia’s second-largest city, have since risen at a compound annual growth rate of about 35 per cent, according to a report by DBS Vickers Securities, published in December.

Despite laws generally barring foreigners from buying real estate, many have cashed in on the boom, making purchases through nominees or local businesses.

Yet Pamudji warns that using these legal loopholes is “not highly recommended”. There are plenty of stories of nominees claiming ownership after a foreign owner passes away and disputes with local communities reluctant to see their land fall into foreign hands.

Ahead of his election as president last year, Joko Widodo suggested allowing expatriates to own high-end apartments in a bid to raise tax revenue, and analysts expect rules on foreign ownership to be eased in the coming months.

Yet investing in Indonesia may remain unattractive in comparison with neighbouring markets such as Malaysia and Singapore, thanks to the hefty duties on real estate, plus the steep sales tax on high-end goods, as well as 10 per cent value added tax and 5 per cent income tax.

West Africa

Tom Burgis, FT investigations correspondent and a former correspondent in Africa

There is a school of thought that francophone Africa is slouching towards a renaissance. After decades in which each suffered from various combinations of war, famine, dictatorship and disease, countries such as Niger, Ivory Coast and Guinea are broadly on the up. The property speculator might thus be tempted by their principal cities, respectively Niamey (enchanting provided you like sand and camels), Abidjan (known before a period of ruinous misrule as the “Paris of west Africa”) and Conakry (potentially a conduit for exports from a vast iron ore deposit, though not for the faint-hearted).

But the Democratic Republic of Congo, the chaos at the continent’s heart, remains a western Europe-sized disaster. Corruption has engulfed politics. The mineral-rich east seethes with militiamen. The copper mines of Katanga have just had their most recent run-in with the commodity cycle. Nestled by a bend of the Congo river, the capital Kinshasa retains some mystique from the days when it hosted the Rumble in the Jungle in 1974. Yet under Mobutu Sese Seko, its decline was long and steady. War removed the dictator but hardly helped the city, even if a few uptown quarters have made it one of Africa’s more expensive cities.

Today, a geopolitical play on Kinshasa might seem insane. Joseph Kabila is showing every sign of wanting to blow a hole in the constitution to extend his presidency beyond term limits. The national fuse has been lit once more.

But what if Kabila, for years said to be happier playing computer games than engaging in matters of state, stood aside instead? That is conceivable, if still a long shot. Congo just might stage a respectable transition. Its many fine minds might be unleashed. Kinshasa has the style, the music, the bars. It is a dash of tarmac and some hydroelectric power away from really humming.

One model lies across the border in Angola. Luanda has in recent years been ranked as the world’s most expensive city for expatriates, above Tokyo and Zurich. Locals tell of the legendary $100 melon and other fruits of an oil boom. Rent for a decent apartment starts in five figures — a month. The investor who snapped up a chunk of real estate in 1991 would have had to endure another decade of civil war but would now be as flush with cash as Luanda’s streets are crammed with traffic.

But be warned. In places such as Luanda (or London, for that matter), real estate is inequality rendered in bricks and mortar. Angola has one of the worst records for turning economic growth into improvement in living conditions. On the capital’s seafront, shimmering new high-end hotels look out over slums whose residents are being forcibly booted to the outskirts.

Angola’s political class, like its counterparts in Nigeria, Equatorial Guinea and Africa’s other petro-states, has reserved prime chunks of real estate for itself. Ask a punter who had bought an apartment in Benghazi, Libya, in 1991 whether they thought such a crony-capitalist property market was a recipe for sustainable returns and chances are they would chuck a brick at you.

Illustration by Lucy Cartwright

Photographs: Getty Images; Justin Foulkes/4Corners; Thomas Grass/Getty Images; Konstantnos Tsakalidis/Bloomberg; Dan Kitwood/Getty Images; Kostadin Luchansky/Alamy; Alain Jocard/Getty Images; Dima Tanin/Getty Images; Adrien Barbier/Getty Images; Ian Berry/Magnum Photos