Montenegro: Is it just too good to be true?

Could this tiny country become the next big thing for second-home buyers?

Some of Europe's cheapest homes, unspoilt countryside, empty beaches, plenty of sun and few new developments to mar the view. Is Montenegro too good to be true? The answer is no - and yes.

This tiny east European country 1,000 miles from London may eventually turn out to be the most beautiful and profitable of the emerging second home markets for canny British buyers.

The northern coastal area is already popular although it has the more expensive properties, while further south in the hills, there are fantastic bargains. But anyone investing there faces sizeable risks because of Montenegro's violent past and uncertain future.

Firstly, very few people know where this Balkan state is actually located, and when they find out they must overcome negative perceptions created by its volatile neighbours - Serbia, Bosnia, Albania and Croatia. Secondly, over 30 per cent of its 650,000 residents are jobless and live below the poverty line. Thirdly, although a decade of armed conflict in the Balkans has ended, there is a widening rift between Montenegro and Serbia which may jeopardise the former's ambitions of joining the European Union and propelling its economy into growth. Fourthly, and most practically, there is no direct year-round air service from the UK, so most visitors fly to Dubrovnik in neighbouring Croatia, then get a bus or hire car to Montenegro - not the stuff of easy, impulsive weekend visits to a holiday home.

These sound formidable deterrents, but so far an estimated 1,000 Britons have taken the plunge in the hope of big potential gains.

"If you'd asked me a year ago how many Britons knew where Montenegro was, I'd have said none. Now it's very different," says Andrea Marston of Berkshire-based estate agency Dream Montenegro. She reckons prices have risen by 20 per cent in 2005.

She says: "There aren't many new developments there yet, so Britons tend to buy older stone houses or renovation projects. There are lots of houses needing work at extremely low prices, although you must find a project manager to supervise work."

She says country cottages needing restoration begin at £10,000 although most will set you back perhaps £20,000 with another £15,000 to £20,000 for the work. Large houses with little work required are on sale at £70,000-plus, while coastal cottages begin at £75,000. Most of these are stone properties originally built by artisans.

The big attraction is a location which in pre-communist days was a paradise for celebrities like Princess Margaret, Richard Burton and Sophia Loren, but has remained unfashionable and frankly quite dangerous for much of the past three decades.

It has a 283km Adriatic coastline with 117 beaches, parkland, the world's second deepest canyon, ski resorts, 40 large lakes and 240 days of sunshine a year.

There is little doubt it will be a growing tourist location, providing tenants for holiday lets - at the moment there are very few good quality hotels - while increasing familiarity will stir up western demand for second homes and in turn push up prices.

The country is ambitious, too. It is slowly privatising state firms while the government has designated tourism as its biggest economic growth sector. It wants to become a member of the EU, and even voluntarily adopted the Euro as its currency in 2003. Developers and investment companies have snapped up cheap land now before it increases in value, but individuals and families wishing to put their money into new build schemes need to accept that these are early days for the property market.

For example, Ready2Invest, a British company, is selling off-plan properties on the mainland at coastal Lucice and also near Sveti Stefan, a pretty island on Montenegro's Budva Riviera, once an up-market tourist destination.

Investment inevitably involves risks, and new build prices are set to be high by local standards.

"The culture of the market is different there. Our architect is still drafting plans for villas and apartments to submit to planners," says Raoul Teague of Ready2Invest, which is now seeking interest from early buyers. When the properties go on sale formally in the spring, prices will be about £1,700 per square metre - equivalent to a hefty £340,000 for a medium-sized 200sq m villa.

"Apartments two or three lines back from the beach with obscure views to Sveti Stefan already command prices of around £1,700 per square metre while seafront properties are charging anything up to £3,000 per square metre," claims the firm.

Agents operating in the country say the likely property hot spots will include Bar, a small port with good rail links to the capital Podgorica and a ferry service to Ancona in Italy.

Also tipped is Kotor, a historic coastal city damaged by an earthquake in 1979 but since renovated using United Nations funding and now designated a World Heritage Site.

Herceg Novi on the country's northernmost coastal strip is an attractive resort where there is likely to be a marina built in the next few years.

There is clearly no shortage of opportunity in Montenegro - but what is missing is certainty. How many people are willing to take the risk required to buy in Montenegro now?

Dream Montenegro on 01753 831 182, www.dreammontenegro.com; Montenegro Living at www.montenegro-living.com; Avatar International on 00 38 1 6925 5333 or www.avatar-international.com; Ready2Invest on 01273 627 900 or www.ready2invest.co.uk

The lowdown

* The market is very basic. Some prices are calculated on euros-per-square-metre rather than UK criteria such as bedrooms, location, views, and so on

* Remember, few estate agents in Montenegro have websites and be wary of some British agents making unsubstantiated claims about future prices

* There is a formal land registry but it has not been compulsory to log land or property details, so disputes can arise

* Use experienced, independent conveyancing solicitors - some property is bought freehold while land may be leasehold, so experts are required

* Ensure searches and ownership are clear before paying the 10 per cent non-refundable deposit - make sure all paperwork is translated into English

* Purchase tax of 2 per cent (second-hand) and 17 per cent (new builds) may be payable, and capital gains tax has been introduced on profits at re-sale

* If you rent out, use a reputable agent