Foreign Real Estate – My Thoughts

So stocks are scarring the average person, because of all the volatility we’ve seen (40% fluctuations a year, anyone?). Bonds are terrible too, as they pay next to nothing.

So the obvious question is, should you invest in real estate? The two choices you have are: American real estate, and an international investment property.

My thoughts on American real estate.

Obama, through previous mortgage incentive programs, has made sure that all those who wanted to buy a house buy it last year. So basically, he collected all the housing demand we would have for a few years, and put that demand all into the time frame of one year (when the mortgage incentive program was still available). So what happens now? Where’s all the housing demand supposed to come from? The sky?

Now with all this talk about a double dip recession, what would happen to American real estate if the economy did indeed slip back into a recession (not that we got out of one, in the first place)? Owning a house is completely discretionary spending. One can put off having kids, move in with family or a friend, etc.

Also, I’m a firm believer in cycles. Real estate cycles tend to last pretty long (13-20 years). This housing bubble that just burst back in 2006? Could take a while before the secular bear market for American real estate is over.

Foreign real estate.

Obviously, one would ideally want to buy bmv property (below-market-value-property). However, the value of real estate in the first place is hard to judge. Back in late 2008-early 2009, the real value of many homes in America was $0, because no one wanted to buy them. So how do you judge an the value of real estate in a foreign nation? Truth is, you really can’t. Real estate is a highly localized investment, and unless you live in the area, you wouldn’t really understand how much the land should be valued at. That is why, as a real estate investor, you have two choices.

a) Understand the area yourself. This is very difficult, unless you are a full time real estate investor, and have been monitoring the area for years.

b) Hire someone (like IPINglobal) that understands the area. A key part about real estate investing is to understand the law in that country.

So here are my thoughts on real estate in foreign countries.

China: The real estate bubble there is deflating, albeit very slowly. On one hand, you have Chinese businesses that want Chinese real estate to maintain its’ value (they’re using that as collateral for debt). On the other hand, you have the Chinese central government that wants real estate prices to drastically decline, so that the average person has enough money to buy a home (home ownership is very important in Chinese culture). Right now, all eyes are on early 2012, when China changes its leaders (new president, new prime minster, new minster of finance, etc). If the next set of Chinese leaders holds a tough enough stance against the property bubble, prices will have no choice but to fall. In China, that’s the power of the government.

Australia: Australian real estate is red hot. Bubble, BUBBLE, BUBBLE! You want to know why? China! All the rich Chinese people are buying vacations homes by the truckload in Australia.

Canada: Canadian real estate is also red hot. Canada is a nation that rely’s on natural resources. With the commodities boom, people in Canada aren’t really feeling the economic recession (what recession, eh?). But once commodities collapse, you can guess where Canadian real estate is headed.

Europe: I honestly have no clue.

Africa: Not worth the risk. A key problem with real estate is it’s lack of liquidity. The instant market clouds start brewing, liquidity instantly dries up. Real estate isn’t an investment where if I wanted to sell right now, I’d have cash in the bank within seconds. It takes months. Sorry if I sound a little biased, but the political situation in most of Africa isn’t exactly safe. Which means that you could be in a serious trouble if your money is tied up in an illiquid, African asset.

The above was a sponsored post, but all ideas are my own. So, readers. What do you think about foreign real estate investing?

6 Responses to “Foreign Real Estate – My Thoughts”

  1. Garth Wilson November 28, 2011 at 9:38 am #

    Every market has upside & downside. The US & Europe seem rather depressed at the moment and we are seeing CRE yields out to 10% plus in some cases with suspect covenants whereas in South Africa, a market we know intimately, you may experience a degree of political risk but CRE yielding 10% is supported by some superb covenants. The market is also extremely sophisticated in terms of tenure and the law.

    We agree with Lukasz; continent categorising is a folly. Seek opportunities in various markets across continents, mitigate the risks, have an effective exit strategy and use expertise in the market you are investing in…either JV or top end professionals on fees.

    Fear of the unknown does not mean that the unknown is not lucrative. Ask Donald Trump, Richard Branson, Amazon and the like why they ventured into South Africa.

  2. Lukasz November 14, 2011 at 6:42 pm #

    Agree with all the points above, except for one, which is putting all of Europe into one basket and all of Africa into one basket. Switzerland differs from Greece much more than US from Canada, not to mention the difference between South Africa and Nigeria or Mozambique. You can still find nice markets for investment on both continents.

    • Tony Chou November 15, 2011 at 6:12 am #

      True. I am a little biased. But I prefer going after big markets.

  3. Naples homes November 2, 2011 at 2:07 am #

    Advancement of technology can offer us enough information we needed to fully understand this topic and I think we should grab these opportunities to participate well in this process.

  4. Cherleen @ The College Investor October 31, 2011 at 12:52 am #

    I guess Australia and Canada are good investments. Europe may be too expensive. And definitely, I wouldn’t invest in Africa!

  5. krantcents October 30, 2011 at 8:18 pm #

    Real estate is local. I would rent it out, therefore I want it it close to home.