Is the prospect of a great return what drives all investors? When the investment is real estate, this is certainly one important factor, but far from the complete story. Like other major life decisions, people enter real estate transactions with their own unique set of needs and wants. Here are some of the major factors driving today’s global transactions.
1. Investment Visas
Global investors often look for more than an investment vehicle when choosing a destination for their money. The right to stay and travel in a country for extended periods is a powerful motivator for certain individuals. Many countries recognize this and have created visa programs that offer additional benefits to foreigners investing in properties or businesses in their countries.
The EB-5 Visa
Many foreign-born investors would like to live and travel in the U.S. for extended periods, but can’t because of visa restrictions. The EB-5 visa is a powerful tool for attracting foreign-born entrepreneurs and investors who are looking for a fast path toward U.S. citizenship and the ability to live here on a conditional permanent basis.
The program’s central focus is job creation. Foreign-born individuals who can invest $1 million, or as little as $500,000 in some instances, in commercial enterprises that generate at least 10 American jobs over two years can receive a green card. In addition to job creation, the program benefits the U.S. real estate market because EB-5 card holders must maintain a U.S. residence. (For more details on the EB-5, review the April 2011 issue of Global Perspectives.)
Investment Visas in Other Countries
Many other countries also offer visas designed to woo international investors. Some programs are structured to attract specific types of investors, for example entrepreneurs, while others seek cash flow into sectors the government most wants to encourage. Countries may require applicants to meet net worth requirements, others require certain standards of language proficiency and management experience.
A particularly attractive incentive in many Eurozone countries is the ability to travel freely in the Schengen Area, created in 1995 under an agreement signed in Schengen, Luxembourg. Twenty-six European Union countries function as a single country for international travel purposes, creating open common borders. Of the Eurozone countries, only the U.K. and Ireland have opted out of the agreement.
|Comparing Investment Visa Requirements|
|Country||Required Investment||Visa Rights|
|United States||£300,000 new business or £750,000 government bond||
|Ireland||€500,000 contribution to a public project, or at least €1,000,000 in bond or business investment||
|Latvia||€150,000 property purchase in city or €72,000 property purchase in other areas||
|Australia||AU$1,500,000 government bond, net worth of AU$2,250,000, and management experience||
Several European nations seeking international investment in their depressed property markets have leveraged their rights under the Schengen Agreement to attract global funds. Latvia, Spain and Portugal, for example, either have or are in the process of announcing programs that dictate minimum investments in residential properties for attainment of a visa good throughout the Schengen Area.
Other countries maintain higher requirements in return for fewer benefits. For example, to earn an Irish visa you must contribute to a public project benefiting the arts, sports, health or education; or invest in a new or existing Irish business; or invest in a low-return five-year immigrant bond; or in residential property and a government bond. However, because Ireland is not part of the Schengen Agreement its visa only offers travel to Ireland and the U.K.
Australia’s investor visa program is more similar to the U.S. model. In return for a sizable investment in the nation’s economic growth, investors gain residency so they can enjoy the Australian lifestyle and quality of life.
2. Return on Investment
Most investors expect to achieve some level of return on the money they commit. For some, realizing the greatest return for their risk preference is the primary purchase driver. Markets across the globe offer many choices.
ROI-driven buyers often look for opportunities in residential properties they can rent year-round including single family homes, condos and townhomes. They may be interested in properties in distressed markets which provide appreciation over short- or medium-term timeframes. Commercial office or retail space in hot or up-and-coming urban areas can offer great returns. Hotels and restaurants may appeal to investors with deeper pockets.
Cambodia, for example, has seen huge increases in foreign direct investment. In fact, last year Cambodia received more FDI per person than did China. As China’s wages have risen and the labor force has begun shrinking due to the “one child” policy, multinational companies have shifted manufacturing further south to reduce labor costs. People in the Mekong Delta are being lifted out of poverty as employment has grown.
“Phnom Penh is hot right now,” reports Herb Jahnke, a real estate attorney and broker with China United Global Real Estate Group who is seeing large companies snap up space in the center of the city. Cambodia’s rising GDP, expected to grow 7.2 percent in 2013, and inflow from foreign investors is driving supply and demand in the city’s office center. Most space in the city has been Grade C, but developers are working on increasing Grade B space and will soon introduce prime Grade A properties.
Appreciation and income potential are not the only factors determining ROI. Exchange rates can greatly affect expected return depending on which currencies are exchanged between the buyer and seller, and the strength of one currency versus another. In Turkey, it’s common to transact in multiple currencies like euros, dollars, pounds or the Turkish lira. Buyers and sellers agree to deal in a mutually advantageous currency instead of being tied to one set of exchange rates.
Of course the tax environment also plays heavily into calculating expected ROI. Property, income and estate taxes, as well as the cost of repatriating funds to the buyer’s home country could make Latvia more attractive than the U.K., for instance.
3. Higher Education
Wealthy buyers may decide to invest in areas where they would like their children to go to school. For example, buying a house or a condo for four or more years in the depressed American market could be a smart move for the parents of an international student. They may save on boarding expenses while also expecting the property’s value to appreciate.
“U.S. universities and colleges are considered among the best in the world,” says Jahnke. “Additionally, the current weakness in the dollar may make schools in the U.S. more attractive to some buyers.”
However, price may not even be a consideration for high net worth individuals (HNWIs). Families with several generations of wealth may prefer one school over another simply based on family tradition. Status is another factor. HNWIs may want their sons or daughters to attend one of the world’s most prestigious universities to help establish their connections within the upper tiers of international society. (For more on international investment in university areas, watch for the August 2013 issue of Global Perspectives.)
4. Quality of Life
Factors that make life more enjoyable, safer and more stable can be primary motivations for selecting an international destination, particularly during certain stages of life. For example, middle-class families looking for holiday and second homes might be driven by climate, proximity to nice beaches, availability of shopping, entertainment and restaurants, the cost of living, a clean environment and low crime rates.
Russia now has a vast middle class that is investing in international real estate. A surge in personal income and newly available consumer loans and mortgages has created a group of buyers that now accounts for the majority of Russian overseas investment transactions (though not total amount invested).
The Russian middle class has been primarily interested in holiday accommodations for family use. In Turkey, Spain, Latvia and Bulgaria they are buying flats ranging from $150,000 to $500,000 and many seek credit from local banks. Quality of life is a major driver in the decision to buy abroad. Russian buyers often look for good climate, vacation or seaside locations, low crime rates and peaceful settings in which they may retire later.
Retirees around the world are motivated by quality of life factors. They may be searching for a location with good weather, services and transportation for older adults, a reasonable cost of living, recreation suitable to a less active lifestyle, safe and secure properties, and the availability of health care. “Medical costs in the U.S. are driving retirees to Mexico where they can find great hospitals and quality medical services at affordable prices,” says Linda Neil, ABR, PIC, President’s Liaison to Mexico, and co-founder of Mexico’s first escrow provider The Settlement Company® in Michoacan, Mexico.
Prestige of location and/or size of property may be more important to some buyers than ROI. Especially where luxury residences are concerned, international buyers are a significant portion of the market.
Properties in New York and London provide cases in point. The most expensive resale property sold in New York last year went to an international buyer for the full asking price of $88 million. London’s highest price topped New York at $121 million, also paid by an overseas buyer.
Trophy properties in major international cities continue to rise in price even when other parts of those markets fall in value. The luxury residential real estate market has followed trends in the luxury goods market, which emerged from the global recession largely unscathed and reaching new heights.
There is strong demand for and a scarcity of high-end inventory in the most attractive international cities, the largest of which tend to be at the crossroads of capital, technology and culture. HNWIs buy in these locations for cultural and leisure purposes, not appreciation when the property is sold.
Status at an Affordable Price Immensely popular in the early-2000s, fractional ownership programs reached a peak of $2.3 billion in 2007 but were hit hard by the recession. Since then investment has migrated to the top end of the market toward luxury and resort ownership.
For a relatively small investment, a buyer purchases title to a fraction of the ownership in a luxury hotel, resort or development for a fixed time. The buyer is part owner of a company which owns the property. Under the fractional ownership agreement, investors can also use the property annually for vacations, rent out their share of time, and can sell their share of ownership at any time.
“It’s a different concept than a timeshare,” says developer Robin Barrasford of Barrasford and Bird Worldwide. “The buyer actually purchases and has title to bricks and mortar. They are not buying the right to stay in a property for fixed time periods over a given number of years.”
Understanding International Investor’s motivations, including these and other factors, is one way agents with the Certified International Property Specialist (CIPS) designation distinguish themselves on the world stage. As international investments flow to worldwide properties from more people and more countries than ever before, global agents are increasingly likely to discover a piece of real estate somewhere in the world that may be perfect for a future client.
More on Investment Visas
China United Global Real Estate Group is one of NAR’s strategic partners operating in China. Their website (caiyouju.com) includes a compilation of investor visa programs around the world. Click on the Overseas Investment and Immigration Information tab to view details for 12 different countries.