LM Legal Services Blog

Jessie Hewitson, The Observer

Back in 2006, Andrew and Pat Pryce decided to buy an investment property in Bulgaria. With retirement looming, they were hoping for rental income to supplement their pension, and a flat they could eventually sell on at a profit. When they read on the internet about the Mechi Chal mountain lodge in Pamporovo, advertised by overseas property agent Someplace Else as “the most exclusive in Bulgaria’s booming ski resorts” and offering a guaranteed rental yield of 7% a year for the first three years, they put down a deposit of £19,485.

It was a year later, in 2007, that they had the first inkling that something might be wrong. No one was asking them for more money, and there seemed to be no evidence that building was taking place. By 2008, they were so concerned with the lack of progress that they went to Bulgaria and drove around Pamporovo to investigate for themselves.

“We couldn’t see any sign of the development,” says Andrew. “On a second visit we attempted to locate the agency’s Bulgarian office in Plovdiv, but found it inhabited by another company.”

Having lost faith that the development would ever be built, the Pryces asked for their deposit to be returned. They say Someplace Else agreed to this more than a year ago but, despite being promised the money on three occasions, they have received only £2,000. They have now consulted a lawyer.

The Pryces are not alone. Since January 2008, the Association of International Property Professionals (AIPP) – a voluntary organisation with 376 members – has received 116 formal complaints from buyers unhappy about purchases abroad.

The number of people who have lost money in projects around the world is likely to be far higher than most realise, partly because nobody is keeping a record, and partly because those who have lost money are too embarrassed – and upset – to talk about it.

John Howell, senior partner in the International Law Partnership, specialising in overseas property purchases, estimates that 20% of those who have bought off-plan in the past two years are likely to run into “significant difficulty”. According to AIPP estimates, in 2007 193,600 of us bought property in the 10 countries most favoured by British buyers. This means more than 38,000 may be in hot water from just a single year’s overseas property purchases – and some may not even realise it yet.

The collapse of Churchill Properties Overseas alone meant about 340 investors, mainly British and Irish, lost deposits worth an estimated £4m. The company, which sold property in Estonia, Cape Verde and Goa, went into “voluntary liquidation” last summer.

Out of pocket

Another high-profile company, Bulgarian Dreams, closed at the end of 2008 and is currently being investigated by the City of London Police economic crime department. It is impossible to know exactly how many of its investors – who have bought in more than 40 developments in the eastern European country – have been left out of pocket.

Some of the estimated 100-150 investors who, like the Pryces, bought off-plan apartments in the Mechi Chal lodge, are leaving desperate posts on property forums and seeking legal action to get their money back.

Ben Mason, a partner of Someplace Else, says the delays have been caused by the local water authority rescinding permission it had previously granted. He is hoping to get it reinstated. “Providing this happens in the next two months, we can get the first phase finished by December this year and the second phase completed by December next year,” he says.

Mason admits the development is hard to find, but claims that the foundations are in place for phase one, many of the houses have been built off-site and when they do get water permission, the Bulgarian office will reopen.

As for the Pryces’ deposit, he says: “Due to the current economic climate, it has taken us longer than we expected to make this refund from the UK … however, there is no question of the Pryces not receiving the balance of their deposit, with interest, over the next few weeks.”

Howell notes that the developers in trouble are not typically local but British would-be Donald Trumps, and new to the game. “Many of these developers probably started off with good intentions but soon got in over their heads,” he says. “Whether it was fraud or bad economic times is a moot point, frankly, because the end result is the same: people lose money.”

Bad lands

Derek Smythe (not his real name) is more than aware of his predicament, and resigned to losing the £30,000 he invested in 2006 into a company that promised to buy land in Montenegro, get planning permission, build and sell on.

“Since investing the money, I’ve had virtually no communication from the directors [both British],” he says. “There’s no evidence that the money was used to purchase any land at all – I have absolutely no idea what happened to it. It’s been pretty miserable – and the worst thing is, it’s all my fault as I didn’t ask enough questions.”

The sums of money being lost are vast: Howell recently met 70 people, mainly Britons, who had sunk an average of €80,000 (£70,000) into a troubled development in Bulgaria.

He also has clients who regret buying in Dubai. “The problem is that all the major building companies belong to the royal family, and you won’t find a lawyer who will sue.”

The range of people losing money this way spans class, gender and age: young, old, working class, middle class, the gullible, the naive and the greedy are all suffering alike.

“I’ve got clients who are working-class people who invested the £20,000 equity they had in their home, and high-flying professionals who frankly ought to have known better,” says Howell, adding that one client who got stung was a partner in a chartered accountancy firm.

Many of these problems would not have happened if the investors had sought the advice of a good lawyer – something that many of the people interviewed for this article bitterly regret not doing.

The slowing down of the Bulgarian property market is most obvious at the Black Sea resorts, namely the Sunny Beach and the Golden Sands, and in the mountain ski resorts like Bansko and Pamporovo. The price of properties there have reached their peak levels and the number of purchases has been falling. There is no demand for such properties, while the the properties on offer are many. This is the reason why the Bulgarian banks avoid financing such purchases, as well as the construction of properties along the coast. According to leading business and legal advisers, the prospective investors can not  rely on off-plan sales at the moment. Many hotels along the Bulgarian Black Sea coast have been put up for sale and there are no prospective buyers interested in them. This means that most of them will be acquired by the Bulgarian banks which credited their construction. In the long run if the intensive construction does not stop, many hotels along the coast will have to be demolished like in Spain. However, in order to do this, a new legislative framework needs to be introduced by the Bulgarian parliament, and leading solicitors have been investigating the Spanish experience and preparing the necessary amendments to the current Bulgarian laws. Generally, the lawyers and the law companies seem to be more occupied than anybody else involved in the construction business.

Away from the Black Sea and the mountain resorts, the Bulgarian property market keeps moving because traditionally Bulgarians consider buying a property not only an investment but  most of all a form of security.

From The Economist

After a good run, Eastern Europe faces an economic slowdown

IT HAS gone on splendidly for years, and the party isn’t quite finished yet. For a decade or more eastern Europe has benefited from exceptional (and mostly unforeseen) good fortune. Economic and political stability, including for ten countries membership of the European Union, has boosted investors’ confidence and cut borrowing costs. A big pool of cheap and diligent workers, along with the unleashing of entrepreneurial talents, has produced thriving new private businesses. In most countries, growth rates have been stellar (see chart).

Inevitably, it could not last. Wage costs are creeping up. Labour shortages are biting. Out-of-date infrastructure, such as Poland’s notorious roads, is clogging trade. In several countries inflation is rising. And world markets, both for raising capital and for exporting, are looking tougher. In the face of all this, growth this year has been surprisingly strong. That is partly because the euro-area slowdown has only just started; partly because domestic demand has been rising; and partly because intra-east European trade has started to make up for softer exports westwards.

The big exceptions are the Baltic countries of Estonia and Latvia, home to colossal current-account deficits and breakneck growth in recent years. Now their bubbles have popped. In Latvia, for example, retail sales fell in June by 8.3% on a year earlier; industrial production is down by 6.4%. The construction industry has imploded. Inflation remains high at a whopping 17%. For a country with a pegged currency, that is scary. Yet the gloomiest predictions have so far proved unfounded. For example, Latvia has not been forced to devalue. The foreign banks, mainly Swedish, that own most of the financial system seem largely untouched by the credit crunch elsewhere in the world. And there is no sign of the contagion spreading from the troubled (but tiny) economies of the Baltic to the rest of the region.

In the biggest economy, Poland, things look better. Growth in the first quarter of 2008 was a sprightly 6.1% on a year earlier. Many Poles who left to work in Britain and Ireland are coming home, tempted by higher wages. Unemployment, which was 20% in 2003, has all but vanished in most parts of the country. But growth is now likely to slow, particularly if interest rates keep rising: they were 4% in 2007 and are 6% now, with another rise likely. That will strengthen the zloty further; it has risen against the euro. That may be a reason why Poles are returning from Britain, but it hurts Polish exporters.

Critics say the government should now do more to reform public finances, especially pensions, and get big infrastructure projects going, before a contraction in the labour force kicks in during the next decade. That would also improve the country’s chances of joining the euro, which it now seems unlikely to do before 2013. So far, Slovenia has adopted the single currency and Slovakia will do so next year. No other country looks close.

The biggest worry is Hungary, which is the country most dependent on the continuing confidence of the capital markets. A shaky government has done surprisingly well in restoring macroeconomic stability after the near-disastrous spending and borrowing splurge in the early years of this decade. The budget deficit reached a yawning 9.4% of GDP in 2006; Neil Shearing of Capital Economics, a consultancy, reckons it may be down to as little as 3.5% by the end of 2008.

This has come at a heavy price, both in the government’s rising unpopularity and in a near economic standstill last year. The economy has picked up a bit since then, but inflation remains troubling at over 6%. The question is whether the government has the stomach for another round of fiscal tightening. Public spending is still over 50% of GDP, the highest in the region. A further worry is the looming slowdown in the richer half of the continent. The Hungarian economy depends heavily on exports to western Europe, which account for nearly 40% of GDP.

Despite the EU’s worries about corruption and organised crime in its newest (and poorest) members, Romania and Bulgaria, their economies have been growing fast at around 7-8% a year. They are now leading candidates for a hard landing. A property bubble in Bulgaria seems to be on the verge of bursting, though this has still to filter through to the rest of the economy. Yet for now, few seem worried. Having dodged sanctions from Brussels (not fully in the case of Bulgaria), politicians in the Balkans seem to think that defying the laws of economic gravity is a cinch.