Hot times in a cool capital

If sweltering climes aren't your cup of tea, a holiday home - or investment - in Iceland could be just the ticket. Christine Rush reports

If you've returned from your summer break with a back blistered by sunburn, a wallet depleted by overpriced, over-oiled tapas joints and a firm resolution never to venture near the Costas again, then a place in the sun may not be high on your agenda. "The great thing about Iceland is you never need sunscreen," says Sveinn Oskar Sigurthsson, the eternally upbeat manager of Reykjavik real estate agency Eignaval.

If you've returned from your summer break with a back blistered by sunburn, a wallet depleted by overpriced, over-oiled tapas joints and a firm resolution never to venture near the Costas again, then a place in the sun may not be high on your agenda. "The great thing about Iceland is you never need sunscreen," says Sveinn Oskar Sigurthsson, the eternally upbeat manager of Reykjavik real estate agency Eignaval.

Indeed, with an average daily temperature of 14C in the summer, the Icelandic capital could hardly be accused of being tropical. But the tiny country - population 300,000 - more than makes up for its lack of size with epic, moon-like landscapes, golf courses, fishing, geo-thermal wonders, a beautiful coastline - and a property market with plenty of room for growth.

Despite its northerly situation, the winters are surprisingly mild, with temperatures rarely below freezing and no substantial snowfall for more than five years. All this was beyond the wallets of most Brits, however, until budget airline Iceland Express started twice-daily flights from London Stansted two years ago. Since then, visitor numbers to the country have surged by some 20 per cent.

And it's not only the natural wonders that are a powerful draw: Bjork, the film 101 Reykjavik and Damon Albarn's enthusiastic patronage of clubs (the Blur singer now lives for part of the year in a sprawling hillside pad) have all put it on the map as a European party spot. "You can drive 15 minutes and you are in the countryside," says Sigurthsson. "An hour away is the original geyser. Everybody speaks English. We even have the same sense of humour." Even the four seasons-in-one-day climate can't diminish his enthusiasm. "Icelanders always like to talk about the weather. If you like just sunny days all the time, it's like eating the same candies. If you come here you get more choice of candies."

So far, so familiar. Although the market hasn't enjoyed the giddying increases of parts of Britain, a 10.7 per cent rise in the past year represents quite a bubble for this small, stable economy. "If we look at the past four to five years, then things look good," says Gretur Gudmundsson, a business journalist on Iceland's largest daily newspaper Morgunbladid. "Of course we've had our ups and downs, but the positive thing is that the whole financial market has changed with our entry into the European Economic Community." (Like Norway and Switzerland, Iceland is not a fully fledged member of the EU.)

Indeed, the nation's new-found wealth could be a downfall for the potential buyer-to-let. A government housing fund used to give loans of up to 70 per cent for all Icelanders, and 90 per cent for those on a low income. Although the rules have since been tightened, the government's largesse still makes it relatively easy for first-time buyers. "I'm not sure it's wise for British to buy to rent because it's not that difficult to buy a flat," Gudmundsson continues. "I've a son of 20 and I could easily get a loan and help him to buy an apartment."

Despite this, there is a flourishing rental market in the downtown area for the determined investor, aided by a large student population of about 10,000. Rents have increased 50 to 60 per cent in the last 10 years, and Sigurthsson recommends that buyers interested in short-term rentals for the burgeoning budget tourist market make contacts with Iceland Express or a hotel; a two-bed furnished tourist flat in the downtown area will earn Kr60,000 (£470) a week. For long-term rentals, estate agents will take the first month's rent as their fee for managing a property. A typical 80sqm apartment with balcony in downtown Reykjavik will fetch Kr100,000 (£780) a month.

One major difference in the buying process is that all conveyancing and even the mortgage paperwork is handled by the estate agent, who must be a registered property broker. British buyers used to the bla- tantly unethical behaviour of certain estate agents could be entitled to be sceptical about such an arrangement - but it seems Icelandic agents are made of different, perhaps purer, ore. "We have to see the deal through from A to Z, otherwise we would get sued," says Sigurthsson, who joined forces with another agency to create Iceland's first English-language property website, www.icelandichomes.is. "Our firm and all our employees are insured, but we can't afford to make mistakes."

A buyer must arrange the loan before putting in an offer. Once this is made and accepted, there is a two-day period before it becomes binding. Unusually, the seller has up to a year to make the full payment (six months in more popular areas). A description of the British practice of gazumping is met with horror - "that's definitely not allowed. After two days, it is binding."

Stamp duty is rather more complicated; there is a 0.4 per cent tax on the official valuation; 1.5 per cent of the mortgage goes to the district commissioner; and 1 per cent of the value of the loan goes to the Housing Financing Fund. The agency's commission ranges from 1 to 2 per cent.

Another thing to bear in mind when perusing newspapers and websites is that a flat advertised as being "two rooms" means one bedroom plus living room; a three-room flat has two bedrooms plus living room, and so on. As to prices, Eignaval has a charming 56sqm one-bed flat in a period building a couple of blocks from Laugavegur, the main shopping street, at Kr12m (£93,000).

For a budget alternative, you could buy a Canadian kitset "chalet" for about £15,000, an acre of land from Kr500,000, and hey presto: you have a Scandinavian summer house of your very own.

At the other end of the spectrum is 101 Skuggi, a luxury development in downtown Reykjavik with views of the mountains and sea. Designed by the Danish architects Schmidt, Hammer & Lassen, it will eventually comprise a mix of 18 low- and high-rise buildings of 250 apartments, a 10-minute walk from downtown. Sigrun Thorgrimsdottir of the Husakaup estate agency says the bulk of the buyers so far have been downsizing retirees and 29 flats remain in the first phase. Prices start from Kr15m (£117,000) for a 65sqm apartment. Parking is including and the monthly service charge starts from Kr12,000 (£90).

www.icelandexpress.is

www.icelandichomes.is

www.husakaup.is

www.101skuggi.is

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