When HNWIs are considering all the different investment avenues which are available to them in this modern age, property investments may not be very high on their lists. This may be due to the negative reputation gained in 2008 with the US housing bubble and subsequent recession. However, this reputation is undeserved, and there are many reasons why you should consider investing in real estate
One of the reasons for investing in real estate is for the competitive risk-adjusted returns, in fact in the 10 year-period between 2000 and 2010 the private market of commercial real estate provided an average return of 8.4% to investors. It also have low volatility rates in comparison to other investments, even though some would claim this is simply due to the lower number of transactions resulting in a smoother rate of return, in comparison to real time markets which are vulnerable to sudden and unexpected incidents, for example the “Flash Crash” in May 2010 in which USD 1 trillion was erased in a 15 minute period.
Another attractive feature of real estate investments is that the entity in which you are investing has physical, tangible existence. Real estate, in practical terms, will always be valuable and required. This means the total worth of your investment is not dependent on the reputations of other external players such as managers and debtors.
It’s also relatively stable in comparison to other investment options – there will always be a tenant willing to pay to rent your property, which over time will help to earn you return on your investment. Whereas if you invest in stocks, you are investing in a company’s performance, and there is no guarantee that they will prosper as you would hope they would.
For those HNWIs who like to invest in numerous areas, adding real estate to the list will help to diversify their portfolios even further. The addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
Once it has been decided that real estate is an area in which you should add to your investment portfolio, the question then arises: where should one purchase real estate, and should one consider purchasing real estate abroad? For our readers who are seeking to gain citizenship through investing in other countries, the latter question is an important one, and we will now offer some advice in regards to it.
There are two main factors which should be taken into consideration by the prudent investor looking to invest in real estate abroad: these are both the political and the economic climate of the country where the real estate is located.
The economy of the country you are considering purchasing real estate in is important as it is indicative of whether a country is going to be able to pay back its debts. You should ensure the country has stable finances and a strong economy as if the opposite is true you may risk running a loss on your investment. You can investigate a countries economic status by looking into their credit ratings, such information is provided by various large rating agencies such as Moody’s, Standard & Poor’s for example. You should also look into the county’s gross domestic product, rate of inflation, Consumer Price Index and in general the structure of the country’s financial markets.
The political climate of the country is also very important. For example, if you decide to invest in a lovely holiday villa in a destination to rent out to holiday goers and suddenly a civil war breaks out, it will become a lot harder to find potential renters to your property. Unethical or laws which are perceived as immoral to a large proportion of outside commentators will also affect your returns, as many people will be unwilling to travel to and stay in a country whose government and philosophy they do not agree with.
There are numerous ways in which you can measure a country’s political environment. Two excellent and objective sources include information from the Economic Intelligence Unit and the Central Intelligence Agency “World Factbook”. These sources will give you a wide and unbiased (as is possible) view of the country’s from an investors interested perspective. For updates in country’s political climates as they happen, your usual news sources are valuable sources, for example online websites such as CNN, Al Jazeera or BBC News. Keeping a close eye on these as well as perusing through more general information will give the HNWI a clearer idea of the country’s situation before deciding to purchase real estate there.
In general, the decision to purchase real estate may be dependent on whether you want to invest in already developed markets or whether you would like to invest in less developed markets which are fast emerging in the investment world. The advantages behind purchasing real estate in developed markets are that in general they have political stability, excellent standards of living and prosperous industrial markets. However, the downside of developed markets is that the common trend is for slow and steady economic growth, which may not be the ideal scenario for HNWI seeking faster return on their investment. On the other hand, making the decision to purchase real estate in a less developed country, although a lot riskier for you investment, can earn the largest and the fastest return if the country is on a fast track toward prosperity and growth.
Real estate investments, although often overshadowed by other investment options such as stocks or bonds, should not be dismissed by HNWI seeking a return on their investment. With its relatively low volatility rates, tangible stability and potential to further diversify your investment portfolio, it is an option which should be met with much consideration. If it is decided that real estate investments abroad are for you, then you should thoroughly research both the economic and political climate of the country you are seeking to purchase real estate in to ensure your investment is as guaranteed to provide a fantastic ROI as is possible.