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Buying Property Abroad In Emerging Markets
The Association of International Property Professionals’ ‘International Property Market Report’ found that around 30-35% of British money spent on overseas property is spent in emerging markets. But how is this figure likely to compare now that there is a globally understood downward trend in real estate investment?In this article we look at buying property abroad in emerging markets and try to determine whether it makes fiscal sense or not to go out and buy a home overseas in a non-established marketplace given the current fiscal situation.
Clearly it can make sense to invest in property in emerging markets where the numbers add up! I.e., where there is either short-term demand for real estate units that is surging and creating a situation where you can buy off plan and flip the property back for sale on the open market before even closing on it. Or where you can pretty much predict and foresee long-term rental demand no matter what the global financial markets are doing. So, places that are attractive for this investment approach include those where there is a growing professional class who will want to long let your property, or where there is perhaps a growing tourism market that you can short-term let your property to seasonally.
But you shouldn’t just be guided by price, after all the price of a property is a reflection of demand, affordability, quality and risk - and no would-be investor should ever forget this!
So, where you can buy cheaply in nations such as Vietnam, China and in parts of India where urbanization is creating a mini-boom in terms of demand, those who are prepared to take a gamble can win, however, an investor has to look to the longer term to ensure there is sustainability in a market in terms of growth, demand, affordability etc., and they shouldn’t just buy in because the price is right as this is too risky.
There is a danger in such rapidly developing markets that there will be a boom bust situation leading to financial pitfalls for investors. In other words, an investor has to be sensible and either think about an investment approach where they make money in the very short term by buying low and flipping property back onto the market at an inflated price – naturally this only really works in a market where there is strong enough demand. Or else if they see long-term sustainability in terms of demand and affordability then they can take the approach of longer-term rental income generation.
Adding to the danger of buying property abroad in emerging markets is the news from the executive vice president of the World Bank’s Multilateral Investment Guarantee Agency, he has said that total foreign direct investment into emerging market economies will likely drop to some USD 600 billion in 2009, from a peak of USD 1 trillion last year due to the credit crunch, and this drop in FDI will have an effect on foreign property investment in these markets too.
Foreign property investment is also going to be negatively impacted by the so called ‘credit crunch’ as well, simply because many investors will be unable to raise mortgages and investment funding. This will restrict their activity. But at the same time, those who have got the cash to move will clean up in certain property markets where sellers become more and more desperate to off load stock and where historically there has been a strong property market. This is because where there has historically been a strong market it’s likely the underlying fundamentals supporting the market can become strong again over time, and those who buy in very low today and cash in on the financial crisis will reap the dividends over the long term.
Finally, in terms of general advice for anyone planning to invest in an emerging market we at Shelter Offshore would just like to say that you should tread carefully, don’t believe marketing hype, look at what’s supporting the market today and what needs to be in place for the market to thrive. Ensure those fundamentals are strong. Never try and guess the market. Buy well – in terms of price – in TODAY’S market, it’s the only market that counts. Get a lawyer, get developer guarantees written in to a water-tight contract if buying new property – and remember, take a very short OR a long term view.