Real Estate Trend Alert

Post-Crisis EuropeWhere and How to Play

Recovery in the Old World

n the early and mid-2000s, Europes real estate

markets embarked on a massive tear. Just like what
happened in the U.S. when cheap credit was dished
out. Values rose. People re-financed, often to buy a vacation
home or make a speculative investment in Europes sunnier
locales.
It became a gold rush. A mad frenzy not to miss out.
Values rose and roseuntil everything stopped.
Europes economy slowed before unraveling. Credit
dried up. The market imploded and real estate owners found
themselves deeply under water.
The psychology of a distressed real estate market is a lot
like a grieving process. There are various stages of denial and
anger until acceptance is reachedacceptance that your real
estate is only worth what someone is willing to pay for it.
Psychologists have clocked this cycle at nine years. So
Nine years since the start of Europes crisis, at what stage do
we find the continents real estate markets and where are the
opportunities for profitable real estate investing?
By 2009, with a small number of exceptions, Europes
real estate markets had stopped. Not crashed. Transactions
simply stopped. Markets went no bid. The gulf between
sellers expectations and what buyers were willing to pay was
so great that there was nowhere for them to meet.
Now markets are moving again. An added plus is the
current strength of the dollar. As I write this, your dollar
buys you 24% more euros than in March 2014. Now, Im
not a currency guy, and Im certainly not making a call on
future euro-dollar exchange rates, but it makes European
opportunities all the more attractive today. For example, a
100,000 property that would have cost you $139,000 last
March, will cost you $105,000 today based on currency
exchange rates alone.

Ireland: Yields Reaching

Double Digits
Europe doesnt have a quick, clean bankruptcy process.
Foreclosures are difficult legally. And banks can be slow to
foreclose even when they legally can because theres a lot of

public resistance. This means that it takes a long time for the
distress to be reflected in prices.
When real estate transactions just stop something needs
to happen to bring activities back to the marketa liquiditytriggering event. For example, in the case of Ireland, that
was the arrival of distressed real estate auctions in 2011.
This was quite the price-discovery process. Sellers finally
realized how little buyers were willing to pay. It brought
liquidity to the market.
Ireland was the first of Europes real estate markets to
slide into crisis. After a decade in which prices rose by as
much as threefold, prices peaked in mid-2006. The market
stalled as word spread that the government might be set
to reduce stamp duty (the transfer tax paid when buying
in Ireland). Everyone sat back and waited. Then in 2008,
confidence in the economy plummeted and unemployment
rose. In 2009, the economy dramatically unraveled,
culminating in a massive bailout.
Ireland was then the first market to show signs of
liquidityand recovery. The real estate market in Ireland
stayed no-bid until fire sale auctions came to the market
in April 2011. We were there.
I recommended condos to RETA members close to
central Dublins financial services center and city center.
The case was compelling. Ireland was in crisis but these
locations were still attracting companies like Google,
LinkedIn, and Airbnb. Some sectors were losing jobs while
this mobile multinational sector continued to show strong
growth.
Employment in Dublins financial services center, which
enjoys tax designations, remained robust. Dublin was still a
vibrant university and capital city. RETA members who acted
have done well. Values on the condos I recommended at
140,000 have risen by 60% or more. Rents have increased
from levels that already commanded double-digit yields.

Dublin Housing CrisisA New

Opportunity?
Now theres a new crisis in Dublin. There arent enough
homes for people to buy or rent. At the heart of the problem

are supply shortages and supply constraints.

The supply constraints are permitting and protection
regulations. Dublins desirable areas are typically wide
tree-lined streets dotted with protected period housing, that
you cant knock down. And, there are limited opportunities
for infill. Secondly, where you have green field sites,
development can be challenging. The permitting process is
long, drawn out, and expensive.
Theres a lot of land around Dublin that has permits. But,
the land is tied up in bankruptcy processes post the crisis.
Or the permitting includes a mix of homes and condos. The
market is looking for homes. According to the permitting,
you cant build the homes if you dont build the condos.
With strong demand chasing limited supply, Dublin is well
on track for another period of fast-rising values in the more
desirable locales.
Is this an opportunity for us? I expect prices will
rise further. But, its not a market I want to play. I dont
like chasing real estate with a bunch of other folks who
are emotionally and practically attached and invested in
making a deal. These folks will bid things up too high.
We might see short-term gains. But, I prefer shopping in
the hidden placeseven hatedbut where the underlying
fundamentals are still strong.
Even if you missed the opportunity in Dublin its
important to pay attention to how it played out. Parts of
Spain are playing out in a similar way, except two years
behind. Spain could be a second chance to play this wave.

Play the Hated Sector

I still see an opportunity for profit in Ireland.
But, its far off the radars of the mega-groups
buying up in Dublin.
The big idea surrounds apartment rentals
in secondary cities and big towns. Its a hated
sectora sector thats still licking its wounds.
Investors lost their shirts as values tanked by
80% or even more. Banks got burnt. The quality
of tenants lowered as supply increased. Rents fell
and became more difficult to collect. A whole
generation of landlords, beaten down, gave up
or retreated to managing what they had. No one
wants to be in this business now. No one is taking
their place.
But we can Rental markets are back on a tear
in secondary cities and big towns, particularly near
major hospitals, universities, and colleges. Buy
really cheap, play this market, and you could do
well.
Just like an opportunity I told RETA members
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Real Estate Trend Alert

about last year that came up for sale at fire sale auction. A
little block of eight apartments and Duplexes came under the
hammer with a reserve of 380,000. The units are close to
the University of Limerick, Limerick Institute of Technology,
and about 10 minutes from Limerick regional hospital.
They would rent for 62,000 per year as is. Spend another
100,000 to upgrade them and they could throw off 80,000
a year. Replacement cost for a building like this would be
in the region of 1 million. It sold at auction for 475,000.
Demographics and employment trends will keep driving
demand.
You wont have competition from new rentals until
developers can build and sell them at a commercially viable
price. Im seeing the early stages of strong recovery for this
type of opportunity. The yields are just too strong to pass up.
The best deals come up at auction and sell fast. Stay tuned to
your email alerts for the best deals.
Irelands other hated sector is rural cottages and holiday
homes. Values have hit rock bottom in Irelands most scenic
locales along the coastlines and in Irelands lake country.
Locals frequently opt to build a new house rather than
renovate a traditional farmhouse or cottage. There is almost
no demand from Irish people to buy a vacation home. They
are happy to rent when they want to use.
In the meantime, many want or need to sell homes they
borrowed to buy during the boom. Some buyers from Europe
and the U.K. are returning but this is mostly at the high end
of the market.

The Future is Bright in Malta

Malta is on the up and bucking all the trends of decline in Mediterranean Europe. Its an international
location and the future is very bright.
You hear Finnish and Russian spoken on the streets and in the plazas. English and South African accents. Its
welcoming of mobile people and their money. South Africans and Russians are coming. They feel secure keeping
assets here. And, they can get residence. Scandinavian gaming companies are locating here. Financial institutions
are choosing Malta as a base for back office functions.
British expats continue to come for affordable prices and winter sun. Chinese come for residency or to invest
in businesses that will give them access to European markets irrespective of what happens with global trade
negotiations. Malta, a member of the European Union, is also positioning itself as a gateway to North Africa.
Europes crisis hit the Mediterranean by far the hardest. Not little Malta. It registered a bump. Thats it. These are
an island people. They have survived by looking out for and doing business with whoever suited them most at
any given time in history.
Malta is small and the business and residence environment is flexible. Business is done through English and
the commercial legal system taken from Britains. They have identified niches in international commerce where
they can excel and copied Ireland by using low corporate tax rates to attract expertise to make it happen.
There are new ambitious plans to build a major international technology hub not far from St. Julians. Im
watching this closely. Im planning a visit here in the coming months to check on its progress. If this materializes,
there could be opportunities here for us.

Portugal: Preparing for Bank

Fire Sales
Foreigners started buying second homes and retiring
in Portugal in the 1960s. Expat communities slowly and
tastefully began to build up. Golfers and sun seekers started
coming. Then, in the lead-up to and after the introduction of
the euro, the party really got started.
Lots of cash flooded in from Europes rich core into the
periphery including Portugal. Northern Europeans, Brits,
and Irish in particular, came armed with fat pocket books
from refinancing real estate back home. Resort developers
leveraged up. It was a perfect storm.
Prices were silly high, but nobody cared. Banks were
handing out 100% mortgages. Then the music stopped and
the market went no bid. Then nothingfollowed by a gentle
nudge down in valuesthen nothing.
Portugals over supply situation is less severe than
Spains. Banks have been able to sit on big losses, so far.
They are getting ready to start fire selling good inventory.
We havent had a bank fire sale opportunity here yet, but I
expect this will happen this year.

Greece: Keeping a Close Eye

on Opportunities
The situation in Greece at the moment is bleak. The
economy is a mess and debt and unemployment levels are
unsustainable. They have just elected a government that

promises to rip up arrangements with their financiers.

Greece leaving the euro is back on the cardsthats
why we need to watch carefully how this plays out. If that
happened the likely scenario would see bank accounts
being frozen, capital controls introduced, and the Greek
government would print their own currency (the value of
which would drop like a rock on the first day of trading).
We have a playbook for this, though. Just think of what
occurred in Argentina over a decade ago. Folks bought real
estate of great intrinsic value (historic apartments in Buenos
Aires) for a song.
If the new governments fragile arrangements with the
Troika (the three international organizations representing
the bailout creditors) unravel, it could herald a Greek exit
from the euro and an Argentina scenario. This is a market to
watch. And if things unravel, the play will be to buy intrinsic
value really cheap. Buy the nicest villas on the nicest islands.

Spain: The Recovering

Real Estate Market
Something big happened in Spain a couple of months
ago. A block of 150 condos just outside of the Costa del
Sols heart of Marbella went on sale by public auction.
Anyone could come and bid on the 150 condos.
A fund of Norwegian money out of London came along
and made the highest bida mere 47,000 per condo. (The
condos are pretty much complete. They just require some
finishing touches.) The location is excellentjust west of
Real Estate Trend Alert

Marbella along the western corridor that I have been

telling you about. This is where the Path of Progress rolls
through San Pedro. This is where you find supercars,
mega yachts, and beautiful people. This is a ritzy, jet-set
hangout. Boats, condos and even mooring berths come
with seven figure sticker prices. Stroll along the seafront
boardwalk for 35 minutes (two miles) and you hit San
Pedro.
San Pedro is a sleepy Spanish town of leafy squares
and pedestrian streets. It turned into a commuter town
as Marbella (12 minutes away by car or 25 minutes by
public bus) grew. Three years ago, a new tunnel brought
the highway (and all its traffic) under San Pedro. Where
there once was rush-hour congestion, a multi-million
euro regeneration project is taking place. San Pedro is
being transformed.
Past deals by banks and the countrys bad bank,
SAREB, have been done behind closed doors. A pungent
whiff of (at best) cronyism wafts from many relationships.
Transparency in the fire sale of buildings like this means
that more serious groups will take partgroups like
Norwegian hedge funds. There will be more sales and
we will know how much buildings have sold forjust
as happened with auctions in Ireland four years ago this
could be a liquidity triggering event. Groups that have sat
on the sidelines because buying was difficult will now
take part.

New Condo Opportunities

I first visited Spain in search of fire sale opportunities
in 2009. I have built up an unrivaled network of contacts
and resources over the past six years. The ink was barely
dry on the Norwegian funds contracts when we were
connected with them.They want to pre-release some of
these condos to our little group with special membersonly pricing and terms. This will be a killer deal. The
Norwegians bought well and they will be selling on at a
profit. But, their margins will be lowest with us.
Because of the value that our group brings to the table,
Im writing special terms into the contract for members
of our little group. These condos need some cosmetic
finishes. Im asking for any deposit we make to be held in
escrow until the final occupancy permit (the final permit
that confirms all building requirements have been met)
is released. That means that our money is protected. It
protects us from the risk of a delay or issue with the
occupancy permit.
This is the second positive liquidity event-creating
opportunity for us in Spain. The first was the start of
bank fire sales that created the opportunity for us close to
Puerto Bans and west to La Duquesa. Then something
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Real Estate Trend Alert

happened. The best deals sold fast. Values rose. Then the
supply of good deals dried up. Fresh deals cross my desk every
other day. Almost none cut muster.
All of a sudden pricing direct from bank fire sales has gone
too high, or they are holding back the best inventory until
values rise higher.
This new route to inventory means that we can quickly and
cleanly get pre-release member access to strong opportunities.
These are large comfortable condos and our price might be as
low as 75,000 ($80,000). Up to 60% finance is available to
non-Europeans.

Baby Boomers Looking For

a Place in the Sun
Spain is still weighed down under massive unemployment
and an oversupply of housing that could be as high as 2 million.
Spain isnt a buy, but the right deals in certain pockets of Spain
are a buy. This is Europes sun belt.
The trends enticing people here are growing stronger. Like
the U.S., Europes population is aging. Europes baby boomers,
in particular from the north, are looking for their place in the
sun. Thanks to technology business people, freelancers, and
employees are more mobile. The Costa del Sol is centered
around Marbellaa place pulling people in from all over.
Luxurious Puerto Bans, west of Marbella, where you could
pay up to $60,000 per week to rent a home. The condos Im
telling you about are in a nice neighborhood just a 15-minute
drive from Puerto Bans.
I know this neighborhood but I havent visited these
condos yet. Ive asked my lawyer to review the paperwork for
this project. Im awaiting word from my lawyer. I expect to
send you my actionable report in the coming weeks including
our members-only pre-release deal.
The upturn in markets were beginning to see will present
opportunities during 2015. We dont want just any opportunity,
we want best in class in an attractive location where we can
get in at a low price point. Opportunities are washing through
Europe again and we need to be ready to actstay tuned for
the full details.

Ronan McMahon