Danger ZoneWhat does Europe’s debt crisis mean to investors?

The last time finance dominated the news was back in 2008, when some of the world’s biggest banks were crashing, getting busted for misbehaviour and the world went into an economic tailspin. Fast forward to 2011 and Europe’s sovereign debt crisis (a good deal of it the result of government bailing out banks in 2008) is the lead story.

For the last year we’ve been inundated with data about perceived bad guy Greece’s economy on the brink of collapse, rioting in the streets of Athens and France and Germany finally riding to the rescue. The euro has taken a pounding too: just a few years ago, 1 euro cost about 13 Hong Kong dollars. Today it’s just under 11. Not a huge difference, but enough to make vacationing in Europe more attractive. But there’s more at play than staying in Paris “cheap”.

The latest out of Europe is that France and Germany, two of the EU’s economic engines, have brokered a deal to help Greece avoid defaulting on its debt payments and stop the bleeding. Things got muddier when Greek Prime Minister George Papandreou briefly toyed with the idea of putting the bailout to a referendum vote. A lot is riding on what happens in Greece, with Belgium, Italy, Spain, Portugal and Ireland also flirting with disaster.

Does this mean anything for property investors? Yes and no according to Liam Bailey, head of residential research for Knight Frank in London. “When you have a sovereign debt crisis it tends to flow into the banking sector, because the banks are exposed to sovereign debt,” he begins, noting banks are reacting the same way they did in ’08. “No one was really sure where the risk was, so the banks became nervous about lending to each other. What you tend to see is a flight from risk. Then lending to consumers becomes more difficult. The markets become much more static because it’s hard to get loans and loan finance and the cost of that finance increases.”

While some Mediterranean countries are popular vacation home locales, the property investment industry is now in a wait-and-see position. The only real activity in Europe right now is in the UK, which is outside the Eurozone and so is untouched directly by its troubles. The key word there is “indirectly.” The perception of increased risk elsewhere has meant mortgage debt there has risen, despite the base-rate remaining unchanged. “UK banks have lent money to European countries and they hold bonds and so forth, so the UK is exposed to the Eurozone crisis,” Bailey explains. Ironically, as cautious as UK banks are being, the UK’s property market and its investors are in a position to benefit. “I think the big trend, as the crisis has become more pronounced over the last 18 months, has been the flight to safety, or the flight to quality,” Bailey points out. “So we’re seeing increasing numbers of European buyers purchasing property in London.” The pound is favourable (it fell sharply against the euro in ’08) and London is a perennial wise investment choice. On top of that affluent investors holding euros have been moving into different currencies on the heels of the crisis. “If the euro did collapse and [states] reverted to national currencies, it would fall badly in value.”

However, the $64,000 question still hinges on whether or not it’s time to panic. Is it time to dump European real estate? Is it time to pick up bargain villas from skittish owners? “I don’t think people will start dumping properties. In most markets prices are lower than they were a few years ago, so it’s not worth it. Some people may be trying to sell, but the market isn’t deep enough for people to sell en masse and get a reasonable price … Certainly there are investors looking for opportunities,” remarks Bailey, particularly in islands where prices have dropped up to 60 percent over the last few years independently of the Eurozone crisis.

Finally, will this last? Bottom line, we’re talking about Europe — civilised, progressive, highly developed and socially advanced. “Germany is still the largest exporter by value in the world. Half the continent has a Grade-A economy. The problem is the other half, the Mediterranean states where there hasn’t been a control on spending, starting with Greece. It’s not an easy process to manage,” Bailey notes. Any rescue package will be subject to the demands of domestic interests that foreign states simply cannot understand. But the EU is more likely than not going to get its act in gear. “I suspect that in terms of the long term the future is relatively positive. If you’re looking at property investment the problem to bear in mind is what governments are likely to do to raise finance. Taxes. So you get a property in Greece because prices are dropping, fine, but you might be at risk for higher taxes down the road.” Some things never change.