It’s interesting how completely some markets disappear from view in a downturn. While we’re still hearing about France and Spain, the ‘next big thing’ Bulgaria seems to have sunk without trace – and a Google News search for 2007 ‘hot’ prospect Montenegro calls up almost nothing. But although a practical news blackout on some of the more exotic property markets suggests they’ve all suffered the same fate as Bulgaria, a little research shows that’s not by any means the case. Ray Withers of Property Frontiers believes the distinguishing factor is whether markets were purely driven by speculative interest, or have strong local fundamentals. He says, “The markets which have proven most resilient against the downturn are those with good local demand. The Eastern European ‘horror’ markets are those where it was all driven by the holiday market and by foreign investors, so when the downturn hit, there was nothing to keep the market afloat.”

For instance, Bulgaria was driven entirely by speculative investors banking on its status as a holiday destination. There was very little investment in new development aimed at Bulgarian residents in the main cities. The market was already showing the cracks before the rest of the world’s property markets started to turn down. Stuart Law of Assetz International calls it “horrific” and still advises investors to steer clear of the market. House prices in Bulgaria fell by 9.7 per cent in the second quarter of 2009 – only a slight improvement on the country’s first-quarter fall of 12.4 per cent, according to the Knight Frank Global House Price Index Q2 2009. The registry shows that transaction volumes have fallen 35 per cent – suggesting there’s not going to be much resale market, even at lower price levels.

Ukraine is another market that has performed poorly. Ray Withers says, “We never really got into it, though we were approached by a lot of people. Politically, it’s not a market I’d invest in.” Battles between the Russophiles and modernisers are endemic and Russia is always able to turn off the (gas) taps. Besides, the contraction of the Russian economy has hurt Ukraine badly – trade with Russia accounts for 28 per cent of imports and just over 20 per cent of exports.

According to Cris Kamtsios, managing director of Dragon Asset management, stock has been dumped as developers panic or run out of funds. Most developments were highly leveraged, so the credit crunch has hit hard. Prices have fallen 30 per cent in the residential sector, with many projects frozen. While long term he’s still a believer in prospects for the country, the short term is tough. The one investment that does appear to make good sense in Ukraine at the moment is agricultural land. Obelisk International is offering leases on arable acreage at a low entry point (USD 2,800), allowing investors to benefit from high wheat prices and strong demand for grain.

Montenegro was another of the ‘hot’ investment areas in 2007. It seems to have dropped off the radar. But there are things happening, according to Daniel von Barloewen at Savills, who points to developments at Sveti Marko Island that will start selling this year. But while it’s still expected to sell well, it’s expected to sell mainly to Russians, who make up 80 per cent of current foreign purchasers in the country. Not surprising perhaps when the developers are Russian. Savills still expects prices to rise by five per cent this year and over 12 per cent in 2010. But as far as UK purchasers are concerned, Montenegro seems no longer to be actively promoted – and it seems to be only the luxury resorts, like Sveti Marko and Porto Montenegro marina, near Tivat, that are now proceeding.

Some observers wonder why anyone needs to head to ‘exotic’ markets for value, when the mature markets offer such attractive bargains. Ray Withers comments, “Why would I buy in Slovakia, when I can buy in Florida at a massive discount to peak values?” Distressed properties in the mature markets – the US, France, Spain, even the UK – now appear undervalued. Investors looking for price appreciation are more likely to consider the attractions of a Spanish property at ‘half price’ – assuming the market will eventually recover – than the blue sky potential of an investment in an emerging market.

“That’s where the demand is, in the developed markets,” Ray Withers says. “Before, people were looking for higher returns – now they’re looking for safety. That’s why off-plan’s pretty much dead.” Besides, he believes, liquidity is coming back to these markets, and though there is still little finance available in the US right now, mortgages in Portugal and France are not difficult to get. According to market research house Clear Capital, the US real estate market is beginning to turn. Its July Home Data Index showed a small quarterly increase throughout the US – the first positive figure for three years – and this had accelerated to September, which showed 7.3 per cent quarterly price gains. Add to this the recent recovery of sterling against the dollar and you have a situation where UK investors can do quite well. Stuart Law of Assetz is particularly impressed with the claims of Florida – with its huge tourism infrastructure and distressed prices.

South America too had some interesting markets. Panama had particular attractions, though it’s a market perhaps better known to US investors than British ones. It has a strong economy, with a huge free trade zone leveraging the country’s geographical hub status and the Panama Canal and stable government (which can’t be said of all South American countries). It also has a retirement programme with tax and other advantages to attract pensioners from abroad.

However, Panama has suffered from oversupply of new developments at the high end of the market, some of them vastly over-ambitious and directed at wealthy foreign customers rather than at the local market. That fails Ray Withers’ ‘local interest’ test – one reason he’s always had a soft spot for Argentina, rather than Panama. Many projects have now been scaled down or mothballed. The condominium market in particular was the subject of intense speculation, with many purchasers looking to flip their investments, and it appears to have suffered accordingly. Sales have ground to a halt – there is no transaction volume at all. While there’s no available index, developer Sam Taliaferro, author of the Panama Investor Blog, says he has one development where he’s dropped the price by 46 per cent and it’s still not selling. However, surveys of Panama real estate companies show 46 per cent believe prices have stayed level, while 34 per cent believe they’ve dropped only ten per cent. That might, of course, be true of asking prices – but sellers don’t appear to be achieving what they’re asking for, if Taliaferro is to be believed.

That doesn’t mean the more ‘exotic’ markets have lost all their attractions. Ray Withers points out that plenty of the Asian markets have substantial local demand – in fact they depend more on the fast growth of their emerging economies than on tourism or holiday home demand. For instance, Vietnam has seen property prices increasing by 20-30 per cent since earlier this year – more in some areas. That’s the result of rapid economic expansion, with GDP growing by 7-8 per cent, and high amounts of foreign investment in industry.

Many people may have thought Property Frontiers was mad to feature Mongolian property last year. However, Ray Withers says, “A lot of people who bought in Mongolia and China have got a decent return. Mongolia has been relatively unaffected by the global market downturn.” The Mongolian property market is driven by local requirements, rather than tourism – and the local economy has been growing strongly, at 7-9 per cent a year. The country’s mining industry has benefited from high commodities prices – it accounted for a third of total exports in 2007 – and investment in new facilities. Ray Withers says, “The fundamentals there are good – there was a lack of decent quality housing for the local market, and it’s quite a thriving economy.” The capital, Ulanbaatar, saw rental yields hitting 18 per cent and capital appreciation running at 15 per cent a year, according to Mongolian Properties, a development company. Whether that can continue is a moot point.

So it seems a simple ‘stick to Europe’ approach, though tempting, is wrongheaded. Whether a market looks exotic or not has nothing to do with its investment performance. Some long-haul markets have performed well – some short-haul, mature markets have done spectacularly badly (think Spain). The difference in performance reflects the domestic economy and domestic demand of the countries in question – and whether the property markets matched domestic demand, or were instead driven primarily by speculation. Investors would be well advised to start looking at the boring economic statistics that the World Bank and OECD issue, and go back to first principles in assessing the market, rather than looking at developers’ brochures.