Should prime property buyers avoid the Eurozone?

It’s a question that many investors are poised to ask themselves: is it worth buying property in the beleaguered Eurozone?

With some very notable exceptions (Spain, Ireland), many prime property markets in the euro area weathered the 2008 credit crunch reasonably well, with relatively small dips in value. Over the course of 2010 and 2011, the most exclusive markets, such as Paris, even managed to buck the trend and see a dramatic increase in both prices and demand for luxury real estate, despite the sovereign debt crisis affecting Greece and Italy.

Although market pressure on distressed Eurozone countries has lessened in early 2012, the persistence of the crisis, coupled with slow growth projections and a political performance by EU authorities and Euro governments that is widely perceived as ineffectual, is now beginning to cast shadows on the wisdom of investing in prime Eurozone property.

Some signs are positively discouraging: many euro-wealthy are taking their money out of their countries to put it into safe havens such as London or New York—for example, Ueli Schnorf of Wetag Consulting estate agents in Switzerland says that he has seen “a steady move of Eurozone citizens” towards his country. And for the first time, analysts are saying that a break-up of the Eurozone could happen, although it is unlikely.

If the Euro were to implode, the impact on property prices across the 17 countries that share it could be devastating—not to mention that nobody can predict what currency these prices would be expressed in and what value these currencies would have. As a result of this uncertainty, some wealth managers and private bankers in emerging countries are advising their clients against purchasing Eurozone properties.

For example, American advisor John Oleksik, who specialises in undervalued and distressed properties, says that he us “more careful in PIGS countries” even though his niche is relatively less affected by economic fluctuations.

That said, many Eurozone destinations still fit the fundamental criteria for prime property investments: they are sought-after locations with scarce supply, transparent legislation and high resale potential—and some of them still offer exceptionally good value.

Demand for prime properties in the French Riviera remains high despite the Eurozone crisis. Image by Melga

Many ultra high net worth and high net worth individuals from emerging countries are also becoming more familiar with these locations and showing a growing interest in buying property there.

“In developed countries, they are scooping up companies cheaply but they are also increasingly interested in real estate,” says Ribes Bas. “This comes in two forms: luxury properties and commercial real estate. The first often leads buyers to such locations as New York, Paris, London and the Rivieras in France, Italy, Switzerland and the US. But as Asian and Latin American buyers become more familiar with buying in developed countries, their geographical focus will naturally expand to places like Madrid, Barcelona, Vienna, Berlin, Rome and newer rivieras.”

Indeed, fellow Spanish agent Diana Morales, who specialiases in luxury properties on the Costa del Sol, noticed an increase in enquiries from Russian, Asian and Latin American buyers (as well as the usual influx of Northern Europeans) who see the area’s significantly reduced prices as a great investment opportunity.

Charles Weston Baker of Savills believes that the degree of caution with which the global wealthy approach the Eurozone depends on their reasons for buying a property.

“People buy residential property abroad for three main reasons: relocation, investment and enjoyment,” says Mr Weston-Baker. “Often, the drive is a combination of the latter two.

“Lifestyle buyers, or lifestyle and investment buyers, are not particularly concerned about the Euro. They are happy about the locations they are buying in and know they will hold value whatever the currency. They are taking the longer-term view.”

As an example of this attitude, he quotes “very good sales” in Portugal’s Algarve and France’s Riviera, including a €85 million (£71.1m, $112.3m) villa in St Tropez.

Sandrine Palmier of Burger Sotheby’s International Realty has seen the same attitude among her clients: “Here in Cannes, we are still seeing HNW and UHNW seeking to buy property throughout the Côte d’Azur. Growth in property prices, together with excellent seasonal rental potential will ensure the continued popularity of the region. Buying into the [Riviera] lifestyle is also an important factor for those buying luxury property in the region. Just before Christmas we closed a sale on a villa with a Russian client, with a price of €19 million (£15.9m, $25.1m). He was convinced that buying in the South of France made excellent financial sense, offered return on investment and was somewhere that he and his family could also enjoy.”

And Tim Swannie of Home Hunts reports that January 2012 was “one of the busiest ever” with high demand for Riviera and Parisian properties from British, Eurozone and emerging market buyers (Russia, China, the Middle East), as well as Swiss and Australians who are taking advantage of their currency’s favourable exchange rate against the euro.

Investment buyers on the other hand are more likely to sit on the fence when it comes to Eurozone properties, according to Weston Baker. “They know that property isn’t going anywhere fast and because the market is slow they are happy to wait and see what happens with the euro.”

At the same time, however, more risk-prone investors are taking advantage of the Eurozone woes in the hope of making a killing: “We have had people taking interest in Greek property on the grounds that if Greece withdraws from the euro or goes into a floating euro these properties may offer tremendous good value.”

In short, it would appear that buying a Eurozone property makes greater sense if you are:

1. buying for lifestyle as well as investment reasons
2. taking the long-term view
3. choosing sought-after locations, such as Paris or the French Riviera, which have an established prime property market and offer solid resale opportunities
4. focusing on prime properties in the best settings, which are more likely to retain or increase their value in any market, rather than more mainstream real estate.

What’s your view? Would you buy prime property in the Eurozone today?