Property Investments Overseas – Tips and Tricks
Restricting property investment to your own domestic market can mean limiting your returns. After all, what is the chance that the country you reside in currently has the best market to invest in? British residents, for example, have seen the Bank of England raise interest rates and is expected to continue so. With a mediocre forecast on the property market for many major markets, looking abroad to smaller and less saturated markets has been an increasingly popular strategy.
Not only is there more choice when opening up your options to abroad, but it is now easier than ever to perform investments remotely, and it is cheaper than ever to hop on a plane, too. Overseas property investments are a weapon of choice for many of the world’s richest and most successful people.
Holiday Homes Abroad
It can be a holiday destination too for some. Perhaps buying abroad will be a way of saving money on holidays and increasing life satisfaction in general. Additionally, if the property is in a popular holiday destination, then the rental potential can be vastly superior to your standard residential lets. However, it will, of course, be seasonal.
Particularly in less economically prosperous cities, there is the opportunity to buy low-value property because of the cheap residential market, but it may be commercially lucrative. The investors local to that region may not be in enough numbers to take full advantage of all the commercial potential as it often requires additional time and costs, not just buying the property.
For people who come from living in Hong Kong or London, for example, will be used to low-average yield property with an average price of half a million. Compare this to Greece, which is around 4 times as cheap, and suddenly foreign property opportunities appear much more attainable.
Of course, London rents are also high, so they incoming cash flow may perhaps not be shallow from letting, but the bigger mortgage means more money wasted in interest. Not only this but as previously mentioned, cheap residential properties in holiday destinations like Greece can give great short-term rental income in the summer, even comparable London in some circumstances.
According to data from GlobalPropertyGuide.com, the average rental return in 2022 varied widely across different countries. The highest yields were seen in Georgia (10.73%), South Africa (9.06%), and Kazakhstan (9.70%), all of which were rated as “spectacular” or “excellent”. At the other end of the scale, some countries had very low yields, such as Hong Kong (2.78%) and Monaco (2.49%), which were rated as “very poor”.
Many other countries had yields in the moderate to good range, including Armenia (7.84%), Bahrain (7.87%), Ireland (7.38%), and Morocco (7.23%). In terms of the largest economies, the United States (6.12%) and United Kingdom (6.21%) were rated as “moderate to good”, while Germany (3.12%) and France (3.97%) had much lower yields rated as “poor”.
There will, of course, be some instances of higher yields in many places, this is just a rough average. What is also important to remember here though is that many of the places mentioned have nominally low prices, making the investments more affordable.
If you are looking to perhaps buy a property and turn it into a hotel, either on your own or through a syndicate, or perhaps renovating a property into a holiday let, then looking at a city’s average yield will not get you very far. Instead, these are unique and sophisticated investments that require more in-depth research. These are the investments that can return a much higher Return On Investment (ROI) because they are not as accessible to retail investors – therefore the market isn’t saturated and the opportunities are not snapped up as quickly.
This is why it is worth spending the time to build expertise in the area before jumping into it. Below are some tips to get you started.
Global Real Estate Trends
The UBS Global Real Estate Bubble Index 2022 reports elevated imbalances in global metropolitan housing markets, with prices out of sync with rising interest rates. Toronto and Frankfurt are the top markets with pronounced bubble characteristics, while risks are elevated in Zurich, Munich, Hong Kong, Vancouver, Amsterdam, Tel Aviv, and Tokyo. The five US cities analyzed (Miami, Los Angeles, San Francisco, Boston, and New York) are in overvalued territory. Stockholm, Paris, Sydney, Geneva, and London also rank in overvalued territory. Other overvalued markets include Madrid and Singapore, while fair-valued markets include Sao Paulo, Milan, Warsaw, and Dubai. House price growth in the 25 cities analyzed accelerated to 10%, the highest increase since 2007. There was an increase in household debt and outstanding mortgages in virtually all cities.
Lingering impact of COVID and central bank actions?
During the COVID-19 pandemic, house prices in most advanced economies rebounded due to the expansionary fiscal and monetary policies. The trend in house prices was due to several factors such as change in buyers’ preferences due to confinement and teleworking, fiscal policies cushioning the impact on household income, low interest rates, and accumulation of “forced” savings. The impact of COVID-19 on prices was uneven across countries, with Canada and Luxembourg having the fastest growth, while some countries showed a change in trend compared to previous years. The low interest rates, as a result of monetary policy to stimulate the economy, had a decisive impact on rising house prices.
Drill Down on Real Estate in 2023 & bubble risks from UBS
According to the 2022 UBS Global Real Estate Bubble Index, Frankfurt and Munich are the Eurozone cities with the biggest risk of a property bubble. The two German cities have seen property prices double over the last decade, with growth slowing to 5% between mid-2021 and mid-2022. The housing market in Munich is supported by low vacancy rates and a growing workforce, but the German economy presents a challenge. In Amsterdam, the housing market saw the strongest price growth at 17% in nominal terms. Madrid saw property prices increase after the pandemic, but remains overvalued. Milan’s price growth is supported by post-pandemic recovery and fiscal incentives, while Paris’s housing market stagnated and remains overvalued.
In the rest of Europe, index scores have decreased or stagnated in most cities outside the Eurozone, with a wide variance in risk. Zurich is in bubble territory due to negative interest rates and strong growth, while Warsaw is fair-valued. Geneva lags behind Zurich in price and population growth, but the housing shortage is likely to persist. Stockholm’s housing market is overvalued due to tighter monetary policy, while London’s is overvalued due to a structural housing shortage and post-pandemic demand. Housing prices in Warsaw have increased by 10% annually driven by excess demand and scarce supply.
In the United States, cities have experienced higher price growth since the pandemic compared to previous years due to low mortgage rates, income growth, and household formation. Despite this strength, there have been several reasons why imbalances have not risen further. Prices changes in most cities (excluding Miami) trail the nationwide average, rents have recovered from their pandemic-induced weakness, and income growth is keeping pace with rents. However, the high level of affordability may take its toll in all markets.
In New York, price growth has been the lowest of all cities analyzed and continues to be less affordable compared to other cities. San Francisco saw strong price increases, ending a period of weakness since 2018, but its outlook for house prices is more subdued. Boston had the highest income growth among cities in the study, but rising interest rates and house prices will impact affordability. Los Angeles saw house prices rise in line with the booming US market, driven by its strong labor market and structural housing undersupply, but unaffordability has reached near all-time peaks. Miami continues to benefit from inward migration and foreign investment, recording the strongest annual house price and rental growth rates, but affordability has worsened sharply since 2019.
In Canada, real house prices in Vancouver and Toronto have more than tripled in the last 25 years due to urban housing shortage and strong population growth, and falling mortgage rates. Property price growth has accelerated to its highest rate in five years, with bubble risk highly elevated. The recent rate hikes by the Bank of Canada could be the last straw to break the camel’s back as new buyers and owners will need to pay higher interest rates and provide more income to qualify for a mortgage, leading to a price correction.
In Asia Pacific, Hong Kong once saw the strongest price growth among cities in the study, but this phase ended with the onset of the US-China trade war and civil unrest. Singapore has seen steady price growth, but the outlook for property prices has become more uncertain due to the economic impact of the pandemic. In Australia, a slowdown in price growth is expected due to the economic fallout of the pandemic and weak consumer sentiment. In China, property prices have continued to rise, but with growing concerns about the economic slowdown, the outlook for property prices is becoming more uncertain.
Top 10 Tips for Buying Property Abroad for the First Time
Buying a property, particularly if it is for investment purposes, is a stressful endeavour. There can be long chains that can cause deals to fall through, there are macroeconomic conditions to worry about, being approved for a mortgage, communicating with agents and so on. Buying a property abroad makes almost every single one of those factors even more difficult. Here is a top 10 list of things to do to make the process easier, more secure and perhaps more lucrative.
- Perform strong research. While this may be obvious, different people have different amounts of research that they would consider sufficient. Well, there can never be enough done, in fact. And the quality of research is important, too. Try and stick to Governmental and highly reputable sources when it comes to looking at statistics, the economy and studies. Viewing blogs alone is not sufficient, but can be a great way to understand other people’s experience and tips.
- Have a local partner where you’re buying. There is perhaps nothing more helpful than having a partner local to the area you are buying into. Their ability to communicate in that language, their understanding of the market, their understanding of regulation and the law. No amount of lone research could match their knowledge – so this is a great advantage. A partner can help increase the capital of your investment. More capital can lead to more sophisticated investments that are out-of-reach of retail investors – i.e. hotels. This could lead to much higher returns.
- Using a solicitor who is dual-lingual and dual-qualified so he can be accessible to you but still handle the transaction will be a massive help. Being able to communicate effectively will not only save a lot of time but will reassure you that everyone is on the same page. The problem with property investment is that there are many people involved in order for your purchase to go through – which means a lot of what goes wrong is down to communication.
- Using money transfer companies. Buying abroad means having to purchase the local currency with your own before purchasing the property itself. Traditional banks may seem like the safe option, but their currency exchange margin is around 2% to 5%. This, in conjunction with the transaction fees, can lead to thousands in losses when exchanging your money. Money transfer companies instead seldom take a fee, and their margin is often less than 1%. This is the best way to not let the currency exchange eat directly into your investment.
- Consider taking a mortgage locally where the asset is located. You are able to get a non-resident mortgage in around 60 international property markets. The advantage of this is that the local mortgage companies will offer more variety of mortgages, and possibly at a cheaper rate. When communicating with them, they will have vastly more knowledge on the local regulations and laws surrounding property investment and can be very helpful to you in a similar way to having a local partner. Additionally, it may work out preferable to have the mortgage debt in the local currency, especially if the rent will directly go towards mortgage repayments. This will avoid the costs of fluctuations in currency rates.
- Don’t get sucked into investments aimed at foreigners. Some investment projects are purposely made for wealthy foreigners. They will advertise their Greek properties in Hong Kong for example, in order to charge higher prices because the investors in the foreign country may be wealthy, and less knowledge of the foreign market may mean they can be overcharged. It is possible they charge more than even the neighbouring identical property. Don’t be a victim of such price discrimination. It is best to visit in person or have a local partner in order to find genuine local investments that are not tailored to foreigners.
- Find a professional real estate agent. With or without a local partner, making use of real estate agents that are local to the area can be invaluable. Be careful of everything they say, of course, as they still have an agenda. They will likely be the most knowledgeable people you can come across regarding your investment though, so hunting down the highest-reviewed agents online and using them could be a great advantage. Furthermore, just because you have used them and they’ve helped, it doesn’t mean you have to stick with them.
- Translate the documents. This may sound obvious, but use a reputable, professional translator to translate the foreign documents to your own first language. This doesn’t mean using Google translate. These documents could have very particular wording and small print that may cost you down the line. Be aware and do not skimp out on this part of the process. Perhaps pay for a local legal representative to read through them, too.
- Be aware of the macroeconomy. When you live in a stable developed country like Germany or the U.S., you may not realise just how bad things can get more many countries. The 2008 crisis may have left some in negative equity, but the debt problem affected smaller countries like Greece and Lithuania much, much more. Losing a home was suddenly a much truer reality for these citizens, and understanding just how vulnerable the nation upon an economic crisis (i.e. it has unstable amounts of large debt) may not be worth the risk.
- Low volume. Property investment is already filled with any third parties and middlemen getting their cut. Abroad investments is even more so, with losses made through currency margins and extra translators/legal representation. Using your capital for a single investment can help reduce the losses from investment transactions, compared to a higher volume of smaller investments. A single larger investment which is meticulously planned may be a great way to reduce the risk of many mistakes, too.
There are many more things to consider when purchasing a property abroad, and many ways that you can end up spending more, too. Perhaps the most valuable advice there is, is to make use of money exchange companies in order to reduce that exchange margin loss. Searching for the best company to use is easy, too, with many online review websites.
We at MoneyTransferComparison.com strongly advise using a commercial Foreign Exchange firm to transfer your funds abroad. Specialists which are geared towards large international money transfers allow much greater flexibility thank banks in several factors: pricing, locking today’s rate, paying in instalments, and the specialized ones like TorFX and Currencies Direct even offer property-specific advice on other things such as taxation and processing. While banks provide a number of services (and usually not that well as our Natwest bank review tells us), foreign exchange firms focus on one thing – getting you the best currency deals.
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