National currencies in Europe vs. the Eurozone

Cheap investments in Europe can be found in countries located outside of the Eurozone

Dateline: Bratislava, Slovakia

It’s been almost four years since I took my first day trip to Bratislava from nearby Vienna.

In many ways, the two cities – the world’s closest two national capitals – are world’s apart. Bratislava has been the butt of jokes for years, while Vienna is cited as one of the most beautiful cities in Europe.

However, while I’ll put Bratislava in the “underrated” category, it’s not the most exciting city, and it’s not a place I’d recommend dropping everything to move to.

Certainly not with nearby cities in the Czech Republic and Poland offering some of the cheapest living in Europe.

Part of the reason I can’t recommend Bratislava is that it’s not exactly cheap. No, it’s not nearly as bad as socialist Denmark, but it is not as cheap as Prague or Warsaw, either.

For example, a simple chicken Caesar salad at my hotel set me back $22 yesterday. A simple cocktail at a halfway decent bar cost $12. Not wallet-crushing prices, but nothing like the $2 vodka-and-Cokes advertised at respectable bars in Poland.

The reason for the higher prices and higher cost of living in Bratislava is simple: the Euro currency.

A few months ago, I suggested investigating an investment in Lithuanian real estate as a play on Euro appreciation.

Historically, almost every country that adopts the Euro currency sees real estate prices go up. In Italy, prices in some areas doubled in just a few years. In Estonia, the average price increase has been nearly 60% just three years after Euro adoption.

Estonia’s neighbor Latvia is also seeing the beginning signs of Euro-based real estate appreciation ever since it dropped its Latvian lat currency in favor of the Euro this January.

The alleged “strength” of the Eurozone has helped make a lot of European property owners rich merely by their dropping their disastrous currencies (remember how $1 used to buy thousands of Italian lira?) in favor of the Euro.

However, countries that adopt the Euro also see pricing increases across the board. In the Eurozone’s emerging markets – including Slovakia – I hear a lot of complaints from locals about how prices have gone through the roof ever since the Euro became the national currency.

Doing business in the Eurozone makes things more expensive, and the cost of operating under the European Union banner drives up costs. Historically, when countries switch from a national currency to the Euro, shop owners also tend to take advantage of the situation.

It may seem simple, but a Coke that used to sell for 60 cents denominated as 15 units of some local currency doesn’t seem unreasonably priced as 80 euro cents. It seems downright cheap. Anecdotal examples like this are much of what locals complain about.

While some property owners get rich when the Euro comes to town, buying property after the post-Euro appreciation has played out can be rather expensive. And as an investment, it can be downright weak.

For example, only two countries in the Eurozone have GROSS property rental yields exceeding 4.5% – Estonia and Slovenia. While Slovenia is beautiful and Estonia is a corporate tax haven, I’m not convinced there is a ton of appreciation left in these markets.

Countries like Poland, which uses its own Polish zloty, offer gross yields as much as 30% higher than their Eurozone neighbors.

Look across Europe and you’ll see that some of the best markets for investment and for living are EU members that do not use the Euro as their currency. Here are a few examples:

Poland

Nearly one year ago, I spoke to a group of British investors who have positions all throughout Europe. They told me that one of their favorite places to park cash for the mid-term was Poland. I actually interviewed one of them on my radio show.

It’s true that Poland recently dipped its hands into private pension funds under the guise of “pension overhaul”. While that shows that the Polish government isn’t exactly the most honest, it simply puts them in the league with… well… every other government.

Confiscating retirement accounts the way Poland did is not likely to lead to expropriation of real property from the private sector, and property prices in Poland are substantially lower than where they were several years ago. I’m not necessarily issuing a recommendation to buy there, but your dollar will buy more property in Poland than in most neighboring countries using the Euro.

And as mentioned above, gross rental yields in Poland aren’t spectacular, but they are higher than any Eurozone country.

Also, Poland is an excellent place to live if you lead a location independent lifestyle and want to live in Europe. Prices in Poland are downright cheap. You can eat out every day without paying much at all.

Drinking is even cheaper, not just for widely available Polish vodka but on almost everything. When I saw an $18 charge on my credit card, I almost forgot that it was from the six drinks I bought a few nights earlier. (Don’t worry, they weren’t all for me.)

Czech Republic

The Czech Republic, which uses its own Czech koruna (“crown”) instead of the Euro, recently replaced its flat tax with a progressive tax scheme. However, Prague is still a haven for entrepreneurs, boasting a robust start-up scene.

Czech Republic real estate can be downright cheap. In Brno, the country’s second largest city, I saw decent flats selling for as little as $50,000. On the whole, the Czech Republic is the only non-Eurozone country in central Europe with anemic rental yields, but there are pockets that offer good returns.

For real estate investors, there are certain areas that are prime territory for the many students who come from around Europe to study, lulled in by Prague’s reputation as one of Europe’s most beautiful cities. There is also a small but growing tourist rental market, where property owners cash in on the country’s bustling year round tourist scene to rent apartments for five times what they’d rent to locals for.

Prague is a city that, if you know what you’re doing, could be an excellent place to play a game of real estate arbitrage. Flats near the city center are dirt cheap compared to what similar real estate would cost in other highly touristed European capitals.

However, the rental prices for tourist accommodations aren’t that cheap even compared to Eurozone countries. I recently priced out a five-star hotel in Lisbon, Portugal or $103 a night, $1 less than what I paid for a halfway decent basement apartment in Prague.

Meanwhile, you can rent a nice apartment a few kilometers outside of Prague’s city center for as little as $400-500 a month; for three bedrooms, prices start around $750. That means you could live on the cheap while renting out property you purchased for cheap for high prices.

Southeast Europe

Obviously, the further away from “developed” Europe you go, the better the potential opportunities. Earlier, I mentioned the high rental yields in Slovenia, which does use the Euro.

Slovenia’s neighbors in southeast Europe boast even better potential returns as well as a promising start-up scene of their own.

Montenegro is one country I will be in next month which many suggest offers a lot of promise. While it still has a lot of conditions to satisfy, Montenegro is currently on the path to European Union ascension. That is part of the reason why investors, including wealthy Russians, are snapping up real estate along the country’s gorgeous Adriatic coast.

While Montenegro already uses the Euro as its currency despite lacking ECB approval, investors believe Montenegro’s entrance into the European Union could cause huge property gains.

Romania also offers excellent returns on rental property as well as a cheap, highly educated workforce that has drawn employers to tap Romanian talent, especially in the tech space. Romania has some of the world’s fastest internet speeds and is one of my favorite places to hire a virtual assistant from.

Other European countries like Hungary, Serbia, and even Kosovo are cheap alternatives to countries using the Euro. While its hard to compare Kosovo to the United Kingdom, the opportunities in these non-Eurozone countries are superior in part because they haven’t jumped on the Euro bandwagon.

As in the real estate example, I do believe these countries’ future adoption of the Euro could bring outsized gains in some sectors, but I also believe it would likely be wise to take those profits off the table once that happens.

Taking advantage of these countries’ presence in Europe at lower prices points than Eurozone competitors is an interesting mid-term strategy to evaluate for living and investing.

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Andrew Henderson

Andrew Henderson

Andrew has been internationalizing since 2008, and has learned what works and what doesn't work when it comes to reducing taxes, increasing personal freedom, and creating wealth. Click here to work with him personally.
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