RealTMOR Asset Mgmt LLC and RealTMOR Apartment Mgmt LLP
Buying a condominium unit in a developed country like USA, Australia, UK or Canada is an attractive option for many foreign investors (HNIs with net worth between $1mm-$10mm). Buying real estate in this manner for a specific purpose could be sensible for certain folk. There is some merit to buying a place to stay for a child studying in a foreign country or buying a second home for the family to use for business or pleasure visits. But, buying a single unit as an investment or a diversification tool may not be the most prudent investment option.
Chinese investors have been making significant purchases in Australia and Canada. Russian and Indian investors have been buying real estate assets in the UK (specifically London). Latin Americans tend to favor Miami.
There are many pitfalls with this strategy.
Selecting which “developed/safe” country to invest in is challenging. Most HNIs tend to choose locations that are in proximity to their home countries or have significant connection to their home country in terms of inter-connected economic activity or presence of diaspora. This results in some “transfer” of their home country risk to the foreign location (it may be small). Currently, Australia has strong trade links to China and is viewed by many investors as a “developed country” proxy for investing in China. A downturn in China’s economy has the potential of a higher negative impact on the Australian economy when compared to other developed countries. Miami has a large concentration of Latin American investment and its real estate feels greater impacts of the ebb and flow of Latin American economies, as opposed to other US cities. So, in a certain manner, foreign investors investing in such locations are importing the risk they are trying to diversify away.
This presents the “herd” investing risk in the “familiar” location because the impression of favorability of that location is a self-fulfilling prophecy, among the HNIs within a certain area and of a certain type. This creates additional demand and then prices start moving upwards which then fuels further demand. If demand from a certain group of foreign HNIs have driven up prices, locals could essentially be priced out. If and when things go south in that foreign market and the demand from there dries up, the local population cannot step in to stop the negative price impact, in a timely or reasonable fashion. As attractive as waterfront property in Sydney is, if it was purchased 2 or so years ago it would be a bad investment till date. The miniscule yields that are currently received by owners of real estate in Sydney, Melbourne or Vancouver are due to “over-valuation” of these assets. This results in significant price risk going forward, if there is a price correction the recovery will not be pleasant or quick.
Many developed countries have arduous laws when it comes to real estate ownership. In Europe, the laws are structured to significantly favor the tenant. UK, probably, has the most landlord friendly laws among major European countries and even in the UK evicting a tenant is costly and time-consuming. In France or Portugal, it is an uphill task to evict even a non-paying tenant. City and state code-regulations, in many developed countries, tend to be complicated and very expensive to comply with. Even a truly global and dynamic city like New York City has zoning, code, maintenance and repair rules that makes it prohibitively expensive to operate and manage the property.
Previously, many investors in Canada preferred to keep the properties vacant and forego the rental income. However, that changed the rental market in the city and forced the local government to react adversely to vacant properties by applying a “Vacancy Tax”. Many major cities in Australia, Canada and the UK had significant price gains over the last decade or so. Rightly or wrongly, foreign investment was blamed for the phenomenon and the local population complained bitterly about being unable to buy residences. The governments reacted by setting up higher taxes and fees for foreign buyers and landlords (Canada and UK) or by forming review boards for foreign real estate investment (Australia). Governments in Singapore and Hong Kong have enacted and maintained “cooling” measures to bring down real estate prices and to stem price growth.
It’s important to note that real estate markets are affected by local features even in the most dynamic, largest and safest economy in the world. The recent US Tax cuts, resulted in creating the “SALT” deduction issue which is a drag on real estate prices in NYC and San Francisco. Even the safest of economies can have specific risks, Brexit in UK, slowing economic growth in EU and Japan. London real estate, long the most-prized asset, is now suffering steep declines. Real estate prices in places like Paris and Tokyo have lagged peers for years.
Residential Real estate is an asset class and is prone to bull markets, bear markets, Bubbles and bursting of Bubbles. Buying property at the “wrong time” in ANY market has disastrous consequences. The US real estate bubble burst in 2007/2008 and created the global financial crisis. Even real estate in NYC was down around 20+% from its 2005/2006 levels to the bottom (around 2010/2011). The peak prices were overtaken in 2016 in NYC and San Francisco (8-10 years of NO or MINIMAL capital gains). In many smaller US markets (Tier 2 and Tier 3 cities), capital gains CAGRs from 2000 to the next 15-17 years was an anemic 2%-4%. Even, in major cities like Hong Kong negative returns were the norms for many years after the Asian Financial crisis. Fast growing economies like India are also not immune to price non-performance, Mumbai real estate is having a price correction since 2013. There was a strong bull run in Mumbai real estate from 2006 till 2012 but in a high mortgage rate environment like India (mortgage rate approx. 10%+) the losses stack up or the gains quickly erode. So, if the timing of the purchase is off, the “attractive” property becomes a burden. It is impossible to time the market with an asset purchase or sale.
Real estate purchases involve deployment of large sums of money and, often, use of leverage. Hence, it is better to be in a situation where risk-adjustment is prioritized as against having “naked” exposure. The main goal of real estate investing should be to make money during the good times and minimize losses during bad times. Generally, buying a residential real estate unit, as an investment, is not going to provide huge outsized returns, unlike buying FANG or Biotech stocks, so taking on concentrated risk without downside protection is not warranted.
Multi-country, diversified, income-generating real estate holdings in the residential sector should be seriously considered.