Buying Property Abroad; The Highs, The Lows, The Benefits, The Fun And The Profits
Investing internationally is not necessarily any more risky than investing down the road. We often magnify the risks of investing far away and minimise the risks of investing close by because we usually have more fear about what we don’t know versus what we think we do know. If it is nearer to home, then we feel more comfortable. This is a bias that is understandable, but can skew the way we look at deals.
When investing internationally it is worth remembering that:
- Sorting out problems can be more of a hassle and more expensive due to distance.
- There are more unknown issues that we need to get familiar with than when investing in areas that we know.
On the upside, I think we can often be more objective about property in areas that we have no personal connection with. It just means we should be extra diligent when reviewing a deal. It does not mean that we should not consider it.
Here is a guide to the issues I look at when parachuted into a market about which I know nothing. Please remember, though, that no issue in isolation is sufficient in itself. In total, a picture is created by reviewing all of them together.
Underpinning all property markets is demand. So how do I find out about demand? The first place I go is to check out that this particular country is growing economically. There are many places to visit for such information. The Economist magazine publishes economic growth stats at the back of its weekly issue. You can also go to the following World Bank page for information: worldbank.org/data/countrydata/countrydata.html.
The rule is that the more established the track record of growth, the more stable the economy. I look for volatility. If a country’s growth fluctuates wildly each year from positive to negative, then I know things could get tricky in this place. If growth is consistent, then I am heartened. If there is no record of growth, then I get concerned and try to understand why this deal is being offered.
For instance, in the case of France there are some rural locations where British buyers have driven up prices while the French are leaving in droves. My conclusion on this trend is that the French property market is not supported by a robust economy. I would observe that money can be made from riding the British buying wave in rural France, but that any deal I do should be an extra good one to compensate for the fact that prices are supported by perhaps one stream of demand ie: UK investors. Like cash- flow, the less variety of demand, the more susceptible it is to a correction.
Types of Demand
As mentioned above, the more kinds of demand there are the better. For example, let ’s consider a deal in, say The Czech Republic. The one I have recently looked at was supported by multiple markets: there are local Czechs trying to buy their first home; there are local Czechs renting before buying their first home; there are foreign firms from various countries wanting to pay more competitive wages and thus looking at more reasonable housing solutions; and there are Czechs with rising incomes in middle and upper management looking to upgrade their homes. In this case, Czech incomes are an important factor in property price increases and future demand. In contrast, some distressed Spain villas I looked at were unlikely to be bought by locals. Likely buyers of such properties are the British, Dutch, Germans or Arabs. Again, these are multiple sources of demand, but different. In the case of Spain, checking the difference of Spanish income per head (which is obviously going down) will be almost irrelevant, whereas checking the growth of Czech income was essential in the case of the Prague deal.
I am still looking for one comprehensive site that deals with incomes (wages) growth in each country. At the moment I find these statistics out in different places each time. I may contact the country’s embassy or chamber of commerce. The internet may lead to some report. Or there is the World Bank and the IMF - always good sources of information. Probably, the most easily accessible site, with as few clicks to contend with to reach decent information, is the Economist, as previously mentioned - economist.com/countries/ and you will find stats and information that will give you great background info and which tackles the income-growth question. Remember, though, that the income growth measurement that counts is the one covering the streams of demand.
Local Market Factors
Now the big issues are covered, it is time to focus on the local market and understand what is happening. Here are some of things to look out for:
Has the local area experienced price increases or decreases lately, or is it an area ready for regeneration? Again, it is all about demand. One area of a city may have enjoyed growth and that, given rentals are now under pressure in that district, prices would be flat or growing slowly. Meanwhile, neighbourhoods in proximity may be ripe for growth. This kind of property ripple effect happens all over the world, not just in the UK; as one area explodes, it will often spill into neighbouring districts.
Watch out for private and public investment pouring in. As ever, new rail, road and airport links will make a difference. I watch out for where Easyjet and/or the ghastly Ryanair is opening new routes. There is no rule that says an such a new route means property price growth - beware of such simplistic myths. It is, though, an indicator and it can be a precursor to investment-fuelled growth. As more and more people visit a destination it becomes “safe” and “known”, which will encourage people to invest in a place that they would have been skeptical about previously.
Find out what retail developments are planned for the area: business parks, tourist attractions, new businesses relocating, golf courses, sports centres and so on. This will all fuel demand.
The more a mortgage market is innovating and developing the rosier the outlook for property prices. Compared with, say, the mid-1960s, where you often had a choice of one product, that was, for its day, extremely expensive, today we are spoilt for choice, even in this recession, with a finance market that rivals any in the world, if not leads. It is a simple rule: the more access locals and foreigners have to debt to finance purchases the more this will fuel demand. This is because it will be easier for people to find the deposits needed to fund purchases.
Currency Fluctuations and Managing Risk
The inescapable fact is that when investing abroad you face two risks, not one. Invest in the UK and your sterling investment will bring sterling returns. Invest abroad and the exchange rate can add or subtract from property price gains. There are a couple of ways to look at this, and some solutions.
If you are buying an off-plan property abroad (although very few people are at the moment, but they still exist) then your main risk will be agreeing to future payments in a foreign currency that could equate to a different amount of sterling when the time comes to pay. If the pound gets stronger, then you will find the deposit monies smaller. If it gets weaker, then you have to dig deeper into your pocket to pay. To avoid this, you could pay all the deposit now and not wait to pay the second or third payment later. Or, you could convert your pounds now and earn interest in a local bank. If you are feeling more sophisticated, then you could buy future contracts which allow you to buy the foreign currency at a fixed rate that is set for some specified future period. This is the foreign exchange equivalent of getting a fixed- interest loan.
The debt aspect of your property is less of a concern, as your income (rents) and your mortgage payments will both be in the local currency. Thus, they will both move up or down in pounds together. The rental profits and profits from sale will only be affected once you repatriate your money to the UK.
As ever, it helps to get good counsel. This could either help you make money and/or save you from disaster. Some people in Spain have suffered, as they failed to get advice on urbanisation zonings. In short-hand, some investors have bought some rural ideal only to find that the local council is not only compulsory purchasing some of their land at agricultural prices but also forcing them to pay for new services to be installed for the urbanisation programme. These horror stories should not scare you off; just get a good lawyer. And make sure that the lawyer has been recommended by someone experienced. Another UK investor who has bought one property does not constitute a proper recommendation, as this person may not be experienced enough to make a judgment. Only take a recommendation from a serial investor. Also network and read to find out the bad stories. Then you are better equipped to ask the right questions, and your lawyer will take you more seriously.
When renting out your property I would apply the paragraph on legal issues almost exactly to management issues. Do not be tempted to choose your rental agent on price alone. If a highly recommended agent charges 2% more than an unknown agent, then pay more.
Always verify the price of a property against local comparables. The method is pretty much the same as the UK, except you need to tread a little more carefully, as the information is less familiar. I look for three actual sales of a similar property in a proximate location. Do not take estate agent prices as comparables; they are just price tickets. They can be the final price, but in this market there is no guarantee.
So, how do you find out sale prices reached? Just ask. It is amazing what being polite and friendly will achieve. I work in the local currency per square metre, or per square foot when doing comparables. This makes it easier to compare a 175-square metre villa with a 205-square metre one. Then, I make adjustments for variables such as:
- Number of parking spaces; Floor level, if it is an apartment; Views
- Plot size (determines the size of the garden)
- Semi-detached v townhouse v detached v apartment
- Is the property built to a shell finish, or ready to go?
- I will often work out how much to compensate for these differences by asking three local estate agents how they would adjust for these changes. I then take an average.
This can make a big difference, but remember that if property prices do not increase, then this can be academic. Don’t just invest because taxes are low. One key is to check out whether there are double-taxation treaties and withholding taxes. The headline tax rate may look attractive, but check out with an accountant whether it is as simple as this and whether you will be sent a further bill from HMRC as well as the local tax authorities. Use the same criteria choosing this tax expert as the lawyer mentioned above.
The main thing to remember is that it is not necessarily riskier investing abroad. They key is to do your homework and break the problem down bit by bit. Every big problem becomes easier when split up into chunks, and investing overseas is no exception.
Where To Settle Abroad
No wonder almost 5% of Britons have moved overseas in the last twenty years. We work far longer hours and take at least ten days less holiday than the French, Germans, Italians or Spanish. Meanwhile, our comparatively high average after-tax household income is eroded by the highest prices in Europe, bar Scandinavia. London is easily the EU’s most expensive city. So which countries offer better quality of life? Here are five of the most popular destinations. Spain: In financial terms, Spain is the pick of the European destinations. Spain has the lowest food, drink and tobacco prices in the EU, followed by Portugal, Italy and France. Low prices offset taxes and low incomes, giving Spanish families (at least those who have jobs) the best living standards compared to their French, German, Italian and British counterparts - and with 46 days of holiday a year, they can make the most of it. The state health service has improved enormously and waiting times for operations are down to an average of 61 days. Secondary schools require fluency in Spanish, so many Britons opt for English language private schools. But finding a job will be no mean feat, as unemployment is rocketing and fluent Spanish is a must, except in parts of the Costas, where over half the population is foreign.
Italy: Food, wine and a rich cultural heritage - a UNESCO report claims that it owns 60% of the world’s most important art - are Italy’s most compelling attractions. An average weekly shop for a family of four is one of the lowest in the EU. The healthcare system is similar to the NHS, although waiting lists are shorter, but state schools are often shockingly bad. Many expats send their children to private international schools, which typically cost £7,000 a year. Italy’s unemployment rate is one of the highest in the EU, although English teachers are highly prized. Be prepared for an army of bureaucrats at every turn and several weeks of form-filling when you arrive.
France: The tax system means that a large family can end up paying less than in Britain, while a single high-earner would pay significantly more. School standards are generally high and the healthcare system is the best in the world. Establishing a career in France can be a struggle: 25% of migrants return home within eight years. Builders and electricians should have few problems, but the B&B and holiday-let market is overcrowded. The medical, engineering and legal professions are hard to enter because local qualifications are required.
Portugal: Portugal may have some of the last uncrowded beaches in Europe, but many find it hard to learn the language and have been disappointed by the rudimentary healthcare facilities. Private insurance often fills the gap and this adds to the cost of living, which, measured by a basket of supermarket goods, is higher than in France, Italy or Spain. The average annual salary is the lowest in Europe, while schools are good, but on a par with Britain twenty years ago.
Australia: Australia’s major cities all rank in the top 35 for overall quality of life, with Sydney at No. 4, behind Zurich, Vienna and Vancouver. Australia boasts one of the world’s best healthcare systems and a high standard of state education. The main drawbacks are an over-valued Aussie dollar and very tough restrictions on entry. You need either a resident relative who can sponsor you, or a scarce skill. The most sought-after workers currently include nurses, accountants and IT managers. High taxes are a common complaint.