It’s easy to take for granted the scope of “international real estate,” which lumps all the real estate markets of the world—193 countries, to be exact—into a single category of three words. While we recognize that a detailed guide to investing in international real estate could easily fill a book, NuWire has managed to summarize some of the basics into a short list of what investors should know before venturing into foreign real estate.
1. International real estate investment can offer excellent diversification of assets
Investment in international real estate offers diversification, which is “a superior investment style,” according to Ross Moore, senior vice president of Colliers International USA. Diversification effectively distributes risk among multiple markets and can optimize potential for return.
Because real estate market trends are cyclic, “we may have a down-cycle here in the United States, but [there may be] excellent opportunities in Argentina or Europe, [which] are in the beginning of an up-cycle,” Tyler Clay, president of FIABCI-USA, or the U.S. Chapter of the International Real Estate Federation, said.
Large, commercial real estate investors usually need a large amount of capital in order to acquire and maintain a global portfolio, according to Moore. However, small investors have the opportunity to diversify their assets on a microcosmic level, such as purchasing residential property in markets that show considerable potential for upward growth.
2. Currency exchange rates can enhance or impede profit margins
International real estate investment essentially combines property two types of assets: property and foreign currency. The value of a foreign currency can profoundly affect the amount of return made on an investment, as it increases or decreases relative to the U.S. dollar.
For example, a small office building in Europe worth €1 million six years ago would have equated to $920,000 U.S. dollars, when the Euro traded at 0.92 Euros to the dollar. Since then, any appreciation in the building’s value might have been compounded or negated by changes in exchange rate. In this case, the exchange rate would have added to the returns: With an appreciation of 10 percent, the newly valued €1.1 million office building would be worth $1.65 million— almost twice its original value in U.S. dollars.
Foreign real estate investment mixes property and currency
Conversely, a strengthening dollar may slow down appreciation in a European property. Experts intuit that the value of the dollar may be at a cyclical low, and may soon begin to climb again.
“If I buy now at €1.54 on the dollar...but I think the dollar will be a little bit stronger [five years from now], that’s going to eat into my returns,” Clay said.
Investors who would prefer not to deal with the volatility of the foreign exchange market, or forex, at all “can hedge almost any currency and...really take currency out of the picture,” Moore said. “Then you’re investing purely on your expectations for [a] specific [real estate] market.”
HiFX, for example, offers investors services related to the forex market, and can give investors better exchange rates than banks.
However, hedging currency becomes more difficult when investors hold on to an asset for a long period of time, Moore added.
For more information about investment in foreign currency, please read our previous article, Forex Investment Market.
3. Legal technicalities (or the lack thereof) may increase risk
Navigating the legal landscape of a foreign real estate market can be daunting, especially in developing countries that have only recently opened their property markets to limited foreign investment. For markets in China and Southeast Asia, for instance, foreign investment and real estate ownership laws are changed or added rapidly, as their respective governments try to stabilize their growth.
Some countries, such as Vietnam, limit the amount of currency that can leave their borders, Clay said. Furthermore, title insurance is a relatively new product for many countries, and U.S. title insurance companies have only begun to establish a presence abroad in a limited selection of markets. Other locations, such as the United Kingdom, do not require or provide licensing for real estate agencies, which can leave the door open for fraud and predatory practices.
4. Foreign investment opportunities abound in Latin America
Construction continues to boom in Buenos Aires
American investors can take advantage of a broad range of foreign real estate investment opportunities without leaving the Americas. Latin American real estate markets can be especially favorable, offering affordable property prices, government initiatives meant to attract foreign capital and exotic, beautiful landscapes, without having to traverse more than three time zones.
“I think South America is highly overlooked and underrated,” Moore said. “We produce a global office report...and it’s remarkable to me how transformed most of those markets are in a relatively short period of time.”
In the course of three to four years, for instance, vacancy rates shrank from in the mid-teens to less than 5 percent, Moore said.
In addition, countries such as Mexico and Panama are becoming popular among American expatriates, especially retirees, largely for their lower cost of living, according to Clay. (For more information on this, see our previous article, Beyond Florida.) The lower cost of health care, which fuels the medical tourism industry in many Latin American countries, is an added benefit for retirees.
“Panama City has a John Hopkins hospital right in the middle of town [which is] about three years old,” Clay said.
5. Working with international real estate professionals is an important first step
Regardless of the type of investment in foreign real estate, whether it may be in commercial real estate in an emergent economy or a vacation home in Mexico, investors should seek professionals who are knowledgeable about global markets and are well-connected with a network of localized real estate agents. Embarking on one’s own in unfamiliar territory can be a dangerous move.
“The devil’s in the details, and I think that’s especially true when you talk about global investment,” Moore said.
Colliers International, for instance, specializes in commercial and business real estate, and has 293 local offices in 91 countries. Smaller-scale investors can seek advice from FIABCI or a Certified International Property Specialist (CIPS) based in the U.S.
6. The U.S. real estate market is not necessarily a “bad” place for investment
The state of the U.S. housing market might be unnerving for many investors, but those who follow the traditional “buy low, sell high” mantra might see opportunity where others see cause for concern.
“I personally think that the U.S. real estate is actually a great place to invest, notwithstanding the next six to nine months where it’s going to get pretty sluggish,” Moore said. “Already you’re seeing opportunities today that nobody would even have dreamt of...nine months ago.”
Does this mean that investors can look forward to a potential up-cycle within the next year? At the least, U.S. real estate might seem like a more promising alternative to more expensive markets overseas.
“I look at the pricing on a lot of offshore or foreign markets and it’s pretty pricey,” Moore said.