Risk in International Real Estate

Risk in International Real Estate

Domestic investors find market risk and credit risk to be their primary safety concerns in the USA. Whenever investors cross international borders these risks are usually increased and other risks are added as well. Some of the risks considered are property risk, political risk, economic risk, currency risk, title risk and personal risk (to the owner or others).

A basic rule of international investment is that “Capital flows to the highest yield with the lowest risk.” The perceived risk will influence the yield that an investor requires. In many markets information is very difficult to obtain or unreliable. This also increases the risk premium in most cases.

In the more sophisticated markets insurance is available to deal with property risk. These policies are often limited in ways that may cause the risk to remain with the property owner. Sometimes insuring against these risks may be cost prohibitive. Examples of property risk are flood, fire, mudslide, riot, war, adverse possession, etc. Adverse possession can be especially damaging in many areas. There are organizations such as “Campesinsos sin Tierra” that specialize in taking land by adverse possession. In most of the countries where they operate there is no political will to evict them after they have taken a property.

Political risk cannot be insured against. Eminent domain is a universal risk. Some countries pay fair value when they take properties and use a transparent process to determine the need for taking and the fair value. Other countries do not use a transparent process or sometimes do not even pay for the properties. International law requires payment for properties that are nationalized. Enforcing this law can be so expensive that a small property owner has no affordable access to justice. In many Latin countries, the government has the right to take “underutilized” property. In Venezuela the definition of “underutilized” has become extremely hazy.

Economic risk comes from severe changes in the economy that could cause the income from the property to disappear or become un-collectable.

Currency risk is closely tied to economic and political risk. The economy and politics of a country or a region can cause the currency to depreciate against the economy of the home country. This can seriously affect yield. The template for calculating IRR that was offered in an earlier blog, has a feature for the investor to input projected currency fluctuations. To get this template just send me an email requesting the “analysis template”.

In many areas property titles are not secure. Some countries do not even have land registries. Other countries have extremely good land registries. In Panama and Latvia for example the government guarantees title. In Greece there is no central land registry. In the USA the registries are maintained on a local basis and quality could vary from location to location. Cheap title insurance is available throughout the entire country. Title issues should be considered everywhere before property is acquired.

Personal risk can be a function of crime rate or of political instability. This risk usually carries the highest premium. The risk premium is usually based on the perception and perspective of the investor. Accurately understanding the risk in a market or sub-market can be an extremely profitable activity. Often the only way to have the necessary information is to spend time in the marketplace and know intimately all of the factors operating in that marketplace. In future blogs individual countries and markets will be discussed.


David Segrest is a REALTOR in Charlotte, NC

David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
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