Why buy property abroad?

Reasons to buy overseas
The idea of buying property overseas is a pipe-dream for alot of people, and perhaps alot of people can't imagine doing so because them seldom get the opportunity to travel overseas, and if then, only for short periods. These restraints are understandable 'deal breakers' though for certain people the idea of owning property overseas makes alot of sense. Here is my rationale for buying overseas:
1. Exchange rate benefits - Careful it can go both ways!
2. Holiday destination - Do you really want to go to the same place every year? Does the place meet your lifestyle objectives? Do you know enough about the country to buy? Do you have support if you need it?
3. Investment income - Sure the properties can be cheap, but how are the investment yield, forex variability and interest rates going to work for you?
4. Residence - If you are thinking to stay in the country for a while, you have the capacity to borrow, the local forex rate is strong and the local property market is booming, then why wouldn't you invest?
Grounds for not investing
Well there are a number of compelling reasons for not investing in a country despite the apparent benefits:
1. Legal or constitutional restrictions - In alot of countries foreigners can't own property. In most developed countries foreigners are allowed to buy improved or strata-based property only, eg. apartments and condominiums.
2. Sovereign risk - the country is governed by a statist regime which gives you reason to question whether you will have the right to repatriate your capital, whether you will be exposed to rapid movements in exchange rates or changes in interest rates or the tax regime. We are looking for stable policy, and wishing to avoid poitical instability and military coups.
3. Cultural barrier: When you are looking at buying land overseas, you take a risk if you dont speak the local language, or culture. Being a foreigner can make you a target for theft, public ridicule or torment, so its worthwhile determining people's attitudes to foreigners, as well as the governments. Generally having a local technical language proficiency is desirable because you might need to deal with solicitors, conveyancing agents, plumbers or disgruntled neighbours. Having friends might seem the ideal solution if the friendship remains. For these reasons the Philippines, Singapore and Malaysia are attractive for ENglish-speakers, while Japan, China and many other Asian countries are problematic.
4. Undesirable fiscal controls: Some countries will display laws that undermine investment returns or the functionality of the property. There might be constraint on the uses for the property, such as land use or development heights, licensing or approval processes or delays. Locals might even ignore these laws, but because you are a foreigner you are risking more by breaking the law. Unfavourable tax regimes are another big issue
5. Rule of law: There are several aspects that we are looking to establish from the legal system. (i) Whether the local law is conducive to our investment goals, whether the legal system offers affordable and accessible justice (no long court delays), support for foreign language speakers, no sign of discrimination of foreigners, integrity in the judicial process.
6. Safety issues: You need to know that you and your property are safe, safe against destruction of property and person. This is where a condominium or land makes more sense, or having people say there, but they may well be the culprits, even if you know them, if you are not there to supervise, or have not established the basis for trust/respect.
Positive investment criteria
1. Proximity to your home country: If the place you are intending to buy is in a neighbouring country then you have much greater opportunity to use the property, as well as the ease to sell it.
4. Good information support: When dealing in a foreign market it can make all the difference if you can rely on information from fellow expats who have already dealt with the issues you are confronting. Take care though as some expats you might regard as 'kindred spirits' from the mother countries are actually out to fleece you. There are often numerous forums for people living in each country. Some have local GFs so have local knowledge they can share with you. Its worthwhile to confirm info that looks dubious.
3. Income growth: We are looking for healthy economic growth which will flow through to higher incomes, greater employment, more housing demand.
4. Relaxed monetary policy: We are looking for a positive terms of trade, solid productivity improvements and high capital inflows to support a rise in capital inflows, a stronger currency and a relaxation of interest rates in a low inflation setting. These conditions will increase the capacity of residents to borrow money for property purchases. All the better if the country has previously had a protracted period of tight monetary policy because there will be a bent-up demand for housing.
5. Favourable regulatory controls: Generally we are lament the existence of government controls that inhibit our freedom or decision-making, however certain controls have a favourable impact on property prices. Favourable controls will be those that restrict supply of housing stock, whether because of building height restrictions (Japan) or strict zoning laws (Australia, NZ)
6. Subdued population growth: We are looking for stronger population growth because that will increase domestic demand for property and other goods, as well as boost the liquidity of the labour market. Be advised that whilst a country might display weak or negative national population growth (Japan), their may be significant internal migration into the larger capital cities - perhaps for jobs, or away because of excessive property prices.
7. Building repair infrastructure: I always reflect positively on those markets where there are local building supplies which I can buy with ease.
8. Favourable exchange rate: Forex rates play a big role in your decision because you will likely be holding the property for more than 3 years. Therefore its critical that you know the forex dynamics between your home and host countries. The biggest factors are relative differences in the impact of global growth, fiscal policy and interest rate differentials.
Examples of people buying overseas
Here are some interesting examples of people buying property overseas:
1. Lifestyle seekers: Retired, divorced men buying an apartment in the Philippines, Thailand, Russia to meet and entertain younger girls. Some use the apartment for holidays only, others retire there with the promise of a low cost of living.
2. Expat executives living in Asia who buy a property in their host country because they envisage being their several years, and have the support of a local bank, so are able to borrow in the local currency.
3. Sports fanatics who want to buy ski or trout fishing resort accommodation in the opposite hemisphere to avail of the reasonal benefits involved. eg. Australians are causing a housing boom in Japan by buying new resorts in Nagano and Sapporo areas, close to international airports.
These people are buying properties across a wide pricing spectrum. For instance, you can buy a 1-2br (40m2(townhouse or apartment in the suburbs of Manila for as little as P700,000 ($US14,000) or an prestigious mid-city penthouse for P35mil ($US0.7million). Beach-side land away from Manila in a poorer province might go for P200/m2, but a nice beach close to Manila might be as much as P70,000/m2.

That property is cheap seems to be one of the compelling reasons to buy property overseas, the other one seems to be, if there is a compelling reason for going there. Those pursuing vices abroad are advised that non-substantative relationships quickly break down into problems, or otherwise are a basis for disrespect and abuse, and that goes both ways. You can trade value for value or vice for vice - you determine the market and the way your are treated from the outset whether you deserve it or not.
Source: Sermon on the Mount, Act 50.fool.2.75.po

Philippines Property Market

The Philippines has been growing at a fast pace of late, and this has contributed to a strong property and equity market. Its apparent that the economy is growing on global recognition that the Philippines has turned a corner. I see a rosy future for the Philippines with the following reservations:
1. The Philippines economy will only remain strong as long as the Peso keeps rising. The peso is being supported by repatriation of earnings by Filipinos abroad
2. The Philippine peso will only continue to rise if it can boost productivity and its terms of trade. The laxed 'work culture' in the Philippines is a testimony to Spanish influence, and Chinese ownership of most 'influential' business does not offer an attractive model for improvement.
3. There are 3 sectors which are critical to boosting exports - mining, agriculture and call centres. The mining/commodities boom started in earnest in 2001, yet the Philippines really has failed to position itself. There is constant harrassment of miners in this country by environmentalists, politicians and other collectivists. There seems to be an unwillingness on the part of Filippine companies to engage foreign companies to explore their title, which they have long held. It has helped that the Philippine government now requires title holders to meet expenditure commitments. Agriculture is another weak sector, largely because of the lack of institutional support for farmers. One positive development has been the development of a system of 'roll-on, roll-off' ships to facilitate cheaper cartage of goods between islands with multipl handling. These vessels are able to transport farmer vehicles to market. Clearly the 'work ethic' in the Philippines is the biggest problem for foreign investors in food production. In call centres the Philippines has a natural advantage, though I was amazed to realise that Filipinos English is not so good. I had always assumed it was good because they display good fluency and alot of confidence. But they win hands-down over the Indian call centres.

The Philippines property market has some similarities to Japan, but otherwise its more western in its institutional framework. There is one important exception. The ease with which land is offered for development in the Philippines means that there is a great deal of surplus land, though its mostly controlled by the developers (eg. SM, Robinsons, Ayala, Filinvest, etc). With property magnates driving development in this countriy, its hard to make good investment decisions. Nevertheless I offer the following advice:
1. Buy apartments for lifestyle reasons - not for investment yields. Apartments on the surface look like great investments because their prices are going up. But having looked at the offerings I would caution. There is some inflation in the asset price rises, rents tend to fall as buildings age, the quality of the construction, particularly the facade is not particularly good. The best buys are apartments connected to the bigger, newer shopping malls and rail networks, as well as those along the waterways.
2. Buy land based on existing patterns of land usage: There is a lack of clear planning in the Philippines because the government appears to adjust its development plans to suit developers. You can however grasp a sense of future developments for railways and even shopping malls, so you should be attempting to buy land in those areas. You need to anticipate where future buying will occur.
3. Anticipate future changes in investment: The biggest change in the way Metro Manilans will live is likely to be in transport. It seems likely that pollution is here to stay for another 20 years, but regardless there is another compelling reason to buy outside Manila. They are: Beaches and cool mountain retreats. We can already see that property prices in Tagaytay and Baguio are already very high, and we can expect prices will rise as transport conduits improve and incomes rise. But these are not the only areas offering potential. Places like Antipolo and Lipa are relatively 'cool' places to live. Beaches in the Philippines for expats are nothing to write home about...even Boracay is just OK. There just isnt enough 'wave action'. But thats OK, there are other ways to create a lifestyle, and at the end of the day, you are looking for areas with a 'high-end classy' trend going on. Alabang is a little like that, but is too controlled by developers. It really lacks atmosphere.
4. Identify future development centers and corridors: In the Philippines, most commercial development seems to be centered on Manila, Batangas and Subic in Luzon, and Cebu-Mactan in Cebu. Clearly these areas have infrastructure advantages that make living or buying along their corridors attractive. These are the first areas to attract road upgrades and rail lines. If you are buying for lifestyle reasons, take care to avoid busy centres, but you can still focus on satellite centres of development, which are cheaper.

Expect the property market to get stronger in the Philippines as the investment fundamentals have never looked better. The attraction is the sustainable inflow of earnings from Filipinos abroad that is driving an investment and spending boom. The implication of this is a stronger peso and rising incomes which is boosting foreign and domestic demand for property. New investment is creating jobs, and combined with a strong peso, ensuring that inflation stays low. The implication is interest rates are going down as inflation falls. The Philippines has had a very weak currency and high interest rates for so long, that there is pent up demand for property. For that reason, as interest rates fall and the capacity for Filipinos to buy improves, expect banks to be offering much cheaper and competitive loans. That will spark alot of investment and rising property prices, just as we have seen in other countries.

I just dont think the property boom will be as big as other countries because the Filipino work culture and Chinese anti-intellectual management culture in the Philippines will constrain improvements in productivity. for foreign investors, I would be pouring into Vietnam when they open up that market. Focus on the estuaries (for land) and lakes (for apartments) around Hanoi! I particularly like the estuaries because I can see in a few decades there will be house boats plying the Red River to get to the Halong Bay area. This area must be one of the most under-rated tourist attractions in the world. A few years ago I stayed on Catba Island for just $US4/night....actually $2 because I was such a tight bastard then, that I sharedwith an Australian I met on the ferry.

But back to the Philippines market. If you are going to buy property here, take a look at the offerings of foreclosed properties. Not the over-bid listings by the major universal banks that advertise in the newspapers, but the smaller rural banks that dont even have websites or marketing departments. They work through local agents with no idea about property. The serious agents are in Metro Manila. But there are opportunities in rural areas. eg. Filipinos can buy land in estates for P2500-6000/m2, but actually there are more appealing offerings.

Japanese Property Market

Western property markets have nearly exhausted themselves. You know this is the case when even the `no growth` markets are even growing, and sometimes rapidly. Consider NZ and Tasmania (Australia). These are areas with no population growth and few jobs, but a rapacious property demand driven by dreamers in far-away cities who hope to profit or retire there in 20 years. A crash always shakes out those types of investors, and if that doesn`t the prospect of declining property values is the clincher.

But what of other markets? The Czech property market is booming because of economic reforms, a huge influx of tourists. And I dare say its the same in many of these countries. My guess is that neighbouring Europeans (seeking a cheap holiday house) or ex-pats Czechs living in western markets are reinvesting in their home market boom.

We have seen property booms in Thailand and China....but I can`t say I`m familiar with other Asian markets except the Philippines and Japan, so I will comment on those markets.

Japan
The problem in Japan is that suffering is a virtue. And people are likely to suffer longer because they have low expectations of what constitutes the good life, not to mention a fairly narrow concept of what constitutes `their` responsibility. They are functional people, but its a narrowly defined identity, much like you have `worker ants` and `soldier ants` in your typical ant hill. Those Japanese that have retired are on a much better deal and I guess they can help their children to some extent - if they are still living with them. The whole system is geared to keep companies profitable, and those levers are wearing this, not because Japanese companies are not profitable, but because they are not profitable manufacturing in their home markets. Japanese job growth is flat - and service orientated. There is not the income growth to justify higher levels of spending or a property boom. They are increasingly having to move their manufacturing offshore, where the high tech robots can`t compete. That paradigm still works in Japan. But with so many developing countries opening up, such opportunities are less common.

One might be hoping that the Japanese consumer might relax - overcome their stress about the economy - and just start spending, but the consumer knows that something is amiss. There are few Japanese who are prepared to take things easy....except retirees. This is just not a culture where you can enjoy yourself without being sossed. Consider that the demand for holiday houses was huge back in the 1980s when you could buy a basic Swiss-style chalet in the mountains, with onsen (hot spring), next to a golf course for Y25million ($US250,000. Today, 20 years later that same holiday house is not used, overgrown by shrubs, and selling for Y1million. I looked at one such foreclosed property in the mountains, just 4km from a train station and the coast and 2hrs from Tokyo.

I was thinking Japan might once again regain a better balance between work & play, but this seems less likely, at least for the Japanese. Fortunately, I'm not Japanese, so there are no such expectations on me. For the Japanese, there is just too much virtue in suffering, and there are just too many inefficiencies in the market to permit the high levels of productivity growth required to get this economy back on the rails. The `sufferance` virtue stems back to their childhood education, and its deeply entrenched. Those that would reflect tragically on it will leave the country, substitute it with a feeble `national pride` or decline into a state of cynicism, saying things like `shouganai` (It can`t be helped` or `that`s life`).

That`s not to say there are not opportunities in Japan. I am less positive about a great change in lifestyle which might result in a huge demand for holiday houses, but consider the following opportunities:

1. Growth propositions: There are just a few prefectures and metropolitan areas in Japan which are growing in population - Tokyo, Kanagawa, Saitama, Nagoya, Osaka and Okinawa. The reason is that this is where the jobs, convenience and income growth is, but it will remain feeble income growth as long as there is no substantiative reform of this highly regulated economy. On a promising note, historically when Japan has changed, it has changed a great deal. But Koizumi, despite being enormously popular, has not achieved anything, except improved his dance steps with Richard Gere and restyled his hair.
2. Lifestyle propositions: For those with money, or care little for it, this creates a great `lifestyle opportunity` in the houses vacated in rural cities. eg. Sendai, Fukushima, Niigata. The more remote - the cheaper the house. Mind you some of these cities are buried in snow during winter, so choose wisely (east coast). Many Australians have bought houses in the northern island of Hokkaido because its close to an international airport and its skifields are empty, and its complimentary to their skiing interests, and its great snow. The benefit is that rural population has fallen, so the quality of infrastructure remains good. The hospitals, shopping centres, etc are still there. And the internet may just allow those salarymen to return.....if they dislike the `buzz` of Tokyo. The lifestyle alternative seems to make sense to retirees, but Japanese are shy and value friends and family, so they are more inclined to move into a new apartment close to services. Poorer elderly will tend to patch up their existing 40yr home and hope they aren`t engulfed in fire and collapsing debris in the next earthquake. The other alternative is:
3. Combo lifestyle: There are opportunities for a combination of city and rural life. Wealthy Japanese can live in the rural fringes of Tokyo and commute on the `very fast` shinkansen train service to Tokyo at 32okmph. Tickets are about Y2800 ($US35 each way), but there are monthly discounts. Some have the good fortune to be able to live & work in these fringe areas of Tokyo, whether on the very average beaches or enjoying the harmony with mountain streams. Areas around West Tokyo like Hanno, Ome, Takou are very close to the West Tokyo satellite cities of Hachioji, Tokorazawa, and to the north there is Kawagoe and Kumagaya, though further away from Tokyo. West Tokyo has the better train services, but they are crowded, and can feel crowded even if you have a seat.
4. Lifestyle change: Eventually the internet will bring considerable changes in our lifestyles. No longer will people have to concentrate themselves in cities. Already there are certain jobs where you can work from home, eg. graphic designers, computer programmers, traders, writers. The list is slowly expanding, but these people will still want services/infrastructure, and will want proximity to Tokyo. There are considerable benefits for businesses to contract employees to work from home in terms of lower overheads. The problem is getting Japanese motivated to work from overseas. They are not self-directed people, so a cultural change would be required. Another approach by some businessmen is to buy a very small (15-18m2) apartment in Tokyo for overnight stays.

Yields on property in Japan are very good because of the dfeflationary 1990s. That trend appears to be turning, though there are still alot of costs that are inflated, eg. utilities, food. These are not dollar inflated, but plausible structurally inflated costs which can offer future productivity benefits. The higher yields are in the countryside, but the population growth is in the city centre, but I wonder for how much longer. I think Hanno/Ome offers a rare lifestyle combination which is reflected slightly in the higher property values there. Might its values be the cause of its own destruction (ie. over-population?).

The best opportunity to buy property in Japan is in the distressed (foreclosed) property market, as properties are sold at deep discounts compared to foreign markets. There is a suspicion that the yakuza (Japanese mafia) control the sales, but in fact the process is strictly controlled by the Japanese local governments through the courts. My girfriend and I have bought to properties at near minimum bids on the fringes of Tokyo where the market is less liquid. Its important to seek strategic opportunities as the 'conventional' properties in the city are well bid.

Philippines

The Philippines property market has long been recognised as a great story, but maybe always will. Its a beautiful tropical island paradise. Populated by litter and fumes in the city, that is not the case in the countryside. Unfortunately foreigners are only allowed to own condos there, but they are cheap at $40-200,000. I steared away from the Philippines because it seemed too risky to undertake any of the adventure activities I like doing. Didn't want to risk encountering bad people in remote areas.

Since foreigners are generally not able to raise finance domestically, and interest rates are very high at 19-29%pa (bank to vendor finance), cash is king, but its not alot of cash. Despite the high interest rates the property market is doing very well. Most popular of all are semi-rural estates, condos and shopping malls. The industry is supported by expat Filipinos and those at the top of the pecking order - making alot of money at others expense, because the Philippines is not yet making much money. Terrorists have suppressed tourism and dubious mining law has undermined investment, but that is changing. There are 3 sectors which will help the Philippines:

1. Mining - rural based
2. Tourism - rural & city based
3. Property - rural 6 city based

There is a pro-reform agenda now in the Philippines with talk of constitutional reform. But is changing the constitution enough? Is it a distraction? Certainly President Arroyo has recognised the path of thailand, and is keen to follow it. Will the vested interests gathering against her - share it. Its a market to watch over the next few years. Little Indonesia - it could be another growth story. But it might take a little time yet. They are really quite rapaciously immoral people. Blatant hypocrites really!

US Property Market - Sept'05 Outlook

The peak in US equity markets peaked long ago, but since the property market is booming, and about 30% bigger than equity markets, and much more alligned to the consumer perception of wealth creation (ie. wealth effect), its inexstricably tied to consumer spending. I have always said that the US economic boom will collapse when US property prices peak. That point is not far away for the following reasons:

1. Sales of existing houses in the US dropped by 2.6% in Jul05
2. The Fed Reserve is increasing short interest rates, though they are not yet flowing through to long rates for reasons mentioned in another essay. It will ultimately be inflation that drives interest rates higher.
3. Oil prices are continuing to defy economists arguing that oil prices fill fall back soon. They said they would fall back to $28/bbl about a year ago, now they are saying $50/bbl. Its all double-speak....`watch the cards, not my hands`. Oil prices were never supposed to go above $50/bbl and now they are $68/bbl and heading for $US75/bbl. This is having a big impact on US and global consumer spending.

Mind you housing prices in the US have not ceased to rise, but one does get the impression that its not far anyway. Some economists argue this will be a soft landing because of the strong economy and full unemployment, but they are the conditions that precede a fall. ie. Pride before the fall so to speak.

Recently I have been considering the prospects for a housing-led recovery in Japan....but this seems less likely as the US slows because the Japanese economy is still in low gear. There was always the promise of high property yields and record low interest rates stimulating the housing market and consumption, but incomes are not rising significantly, and its mostly tied to export growth (US & China). They are also being hit by high oil prices. Economic reform was always a possibility, but for the short term, it has died with the LDP party`s internal opposition to Postal Savings privatisation. This is perhaps the least contraversial reform that the government could make, so being stalled on this issue pushes back any likelihood of productivity-based stimulus to the Japanese economy, but it will come eventually. There are encouraging signs of a pro-reform agenda developing which will see significant structural reform over the next 5 years - and this will feed into the next economic boom. During this period Japan, China, India and the rest of Asia will be leading consumption - with or without the EC. The US will be replacing its bandages - recovering from its indebtedness, but after 5years, higher savings levels will mean its better positioned to recover. The early part of the cycle will be slow....until the US and EC join. The EC is also running a reform agenda but because it encompasses many governments - it will be slower, but the Eastern EU bloc should perform well.

US Property Market
Due to fierce competition, banks are under tremendous pressure to lower their mortgage lending standards. If they don’t, they will quickly lose market share in the mortgage business and that means lower earnings and falling stock prices (for the banks), which they don’t want. The banks don’t mind easing the lending requirements for new mortgages because after writing up a new mortgage they turn around and sell it to an investment bank that packages similar mortgages into securities (called mortgage backed assets) that are then sold to pension funds, hedge funds and other investors. As interest rates on government and corporate bonds declined the demand for mortgage backed assets has increased, thereby supplying more capital to fuel the real estate boom. But during all this the systemic risk has increased dramatically.

Its questionable how long this can last since there are other compelling reasons for property markets to fall. And there is little scope for US government stimulus after recent tax cuts, rising interest rates on debt (40% owed offshore - causing alot of money to leave the country), declining tax receipts (due to softer economy), not to mention a deficit-burdened public and private sector. Consumption will need to be cut GREATLY in favour of savings and eventually tax increases.

Latests Statistics
The US property bubble appears to have come to an end – or is it just a pause in the face of poor economic data and natural disasters. Home construction fell for the 2nd consecutive month and new building permits declined in Aug’05. The National Association of Home Builders’ New Home Sales Index for single family homes fell in Sept’05 reflecting a decline in sentiment among US home builders. Of more concern, the 30-year fixed mortgage rate rose again and the supply of new houses for sale increased suggesting an overhang in the market. The median price for a new home fell in July’05. Does this all suggest that the US market has topped?
Change in sentiment is a big concern because rising home prices have driven corporate earnings as well. Bonds and equity values are highly priced at the moment. Its not an easy call to pick the top of the market – but rest assured its going to correlate with home prices or contraction in money supply. In as much as money supply requires the liquidation of credit, this indicator requires a rise in bankruptcies, so is likely to be a lagging indicator.
According to the Fed, interest rates need to be raised to a point where economic growth is neither promoted nor hindered. US consumption is financed by credit – but the money supply only grows because:

1. Chinese & Japanese creditors are rewarded with higher import penetration into the US market.
2. Chinese & Japanese creditors receive a high yield on their bonds, ie. They feel they are receiving an adequate risk premium.
3. US households believe property is a good investment because sentiment is positive, incomes are rising, employment levels are stable, interest rates are low.

Certainly households are likely to stop buying property if prices start falling…..but will Asian central banks stop financing US consumption? It might be expected that central banks will buy more gold and diversify away from new US treasury issues causing global interest rates to rise. Higher interest rates will cause US consumption to slump, reducing the need for foreign financing as well. Asset values will fall – gold will remain strong as a safe haven against bursting asset values and a lower $US. A falling $US will eventually be inflationary since imports become more expensive, but eventually losses will be absorbed by Chinese exporters and US distributors (corporations), since they will lack pricing power.