Black Sea beauty: Buying in Eastern Europe

Eastern Europe has been the most successful global region for property investors over the past year. A quarterly league table, produced by UK estate agent Knight Frank looking at the worldwide market, shows Latvia, Bulgaria, Lithuania and Estonia in the top 10.

"The price rises are part of a longer term process affecting countries in the old Eastern bloc," says Liam Bailey, Knight Frank's head of residential research. "Economies are modernising and the countries are growing richer. In most of them, the mortgage industry is maturing so its easier to buy. That all combines to create rapidly rising prices as the countries edge closer to the price levels and property quality seen in similar cities and holiday home locations in Western Europe."

But while the results are welcome for investors and sellers, most property professionals believe the real potential is only just beginning to surface.

For example, Ready2Invest is building 300 apartments on a 30-acre site near the glamorous Sveti Stefan location in Montenegro. Prices range from £160,000 to £1m and the scheme, to be ready next year, will have restaurants, swimming pools, a spa and marina.

Ready2Invest is also building an up-market development nearby at Lucice, a beach location where Russian developers are investing £600m in another new resort. "Montenegro is perhaps the hottest part of Eastern Europe now," says Jonty Crossick, Ready2Invest director."Until independence, the degree of uncertainty involved in investing in Montenegro was factored in to the price and now it's a far better-known quantity. So prices are higher. Clients kick themselves that they didn't buy a year ago." Crossick predicts prices will continue to rise at a similar rate for a few more years.

Another Eastern European hotspot is Poland. Assetz, a property investment consultancy that tracks a basket of small buy-to-let property markets, has seen the country rise from third to first place as a result of lenders halving the deposits required to just 15 per cent.

"This has raised the potential returns and will continue to do so as long as prices carry on rising consistently," says Stuart Law, Assetz' managing director.

Likewise, the Royal Institution of Chartered Surveyors (Rics), which conducts an annual survey of European housing markets, puts Poland in first place with 33 per cent capital appreciation in 2006. Warsaw and Krakow are doing even better.

This came on top of Rics's 2005 report that showed Poland recording an average 28 per cent rise.

"Poland now has one of the fastest economic growth rates in Europe and such a buoyant economy is being reflected in housing market activity," says Professor Michael Ball of Reading University, author of the Rics report.

He adds: "Rising foreign investment interest has added a further boost to demand. Housing finance has also improved with the continued development of the mortgage market, leading to more attractive interest rates and better loan terms."

Alan Forsyth, who runs www.property-investment-deals.com, says because the region has already become popular it is key for investors to look away from the most obvious locations.

"You should find secondary locations, perhaps outside the resorts where there may be a high supply of properties with high prices sold directly by developers," he says.

Forsyth argues that most investors' concerns about Eastern Europe, which at one time was best known for disputed land ownership and banking practices that would have been laughed at elsewhere, are now things of the past.

"It used to be difficult to exchange currencies when paying a deposit or buying a property outright. But not any more. Most of the Eastern European nations now use the Euro and that's a stable currency," says James Hickman, property consultant at exchange company Caxton FX.

There are still some problems however. For example, Hungary's poor performance in the Knight Frank global index - it languishes in 28th spot with average prices down 1 per cent in the year to November - is due partly to large numbers of old, poor quality homes on sale at the same time as higher quality properties. As a result, both sectors cut prices to compete with each other.

In the broader Hungarian economy, austerity measures of higher taxes and expenditure cuts introduced last year are expected to cause a sharp rise in inflation in 2007 and curtail private consumption. "This will constrain housing demand, so the current economic crisis raises concerns over the level of housing market activity in 2007 and, perhaps, beyond" warns Michael Ball.

Likewise there is evidence of an over-supply of properties in the Sunny Beach area of northern Bulgaria, causing rental income and sale prices to drop. Therefore more investors are turning to Bansko, a ski resort near Sofia. However, these are short-term problems with classic free market dimensions - too much supply depressing prices. Gone are the more fundamental problems that used to blight this region, centred around closed economies not allowing foreign investors, or a lack of transparency in the buying process.

Eastern Europe's property portfolio has come of age. And not before time.

Knight Frank (020-7629, 8171; www.knightfrank.com)

Ready2Invest (01273 627900; www.ready2invest.co.uk)

Assetz (0845 400 7000; www.assetz.co.uk)

Royal Institution of Chartered Surveyors (0870 333 1600; www.rics.org)

Caxton FX (0845 658 2223; www.caxtonfx.com)