Globalization may make the world feel small, but it’s still an enormous place. With diverse regions, peoples, and markets, investment returns vary wildly depending on where you park your capital.
Investors are wise to diversify their portfolios into foreign markets in this increasingly connected world, especially with many yields in the developed world failing to outpace inflation.
Colombia’s Antioquia region, where Medellin is located
Equity markets are frothy and top-heavy, bonds can’t compete, and Covid-19 has rained on the urban real estate market’s parade. So where should an investor park their money?
Foreign property, especially in places like Latin America, is one of the best diversification strategies for 2021 and beyond.
The Big Three
Real estate is a vast category, and when you’re considering buying property abroad, the space becomes even bigger. To make things a bit more manageable, let’s narrow down the foreign real estate market to three major categories – multi-family, commercial, and rural.
Many Folks, One Roof – Multi-Family Property
Multi-family properties are a convenient option for most of the developing world – urbanization is on the rise, and these accommodation styles are often less costly than standalone homes. In Colombia, the relatively young and educated population may translate to a spike in demand for multi-family housing.
They’re great for families and investors alike – less capital up-front, lower risk of total vacancy, and you’ll save time on management.
Additionally, repairs are often less costly – replacing the roof applies to all tenants equally. Vacancy also rarely results in a total loss of income. After all, what are the chances of all your tenants moving out on the exact same day?
Price Per Square Meter for Apartments in Selected LATAM Cities (Source: Statista)
Conversely, there exist unique challenges with multi-family real estate— managing multiple units means a larger time commitment.
Despite the convenience of having all tenants under a single roof, dealing with diverse schedules, multiple tenant groups, and various sets of appliances is a demanding reality.
Imagine all the noise complaints you’ll have to answer.
Perhaps intuitively, a multi-family property will generally cost more capital upfront than a single-family residence. The capital requirements for multi-family properties mean investors must carefully consider their preferred time horizons for profitability.
The diverse challenges associated with multi-family properties can be richly rewarding. That’s likely why economists project the global multi-family market to experience a 10.5% compound annual growth rate between now and 2030.
However, many multi-family property owners urge investors to have significant property investment and management experience before purchasing their first international multi-family property.
Make Business Your Business – Commercial Property
Commercial properties include a diverse range of structures such as industrial properties, office space, and warehouses. International real estate investors are wise to explore the many use-cases and potential benefits this type of real estate can add to their portfolios.
In general, commercial property is incredibly durable – both structurally and economically.
Businesses have intrinsically long time horizons, which makes them great tenants.
Besides, business owners benefit from the pristine appearance of the property. For that reason, improper property care issues are often non-existent in commercial real estate.
The vast majority of businesses operate at daytime hours, meaning commercial real estate investments leave more time for property owners. In other words, they work when you work. As such, emergency calls are often relegated to business hours and outsourced to third party companies.
Investment in commercial real estate is not without challenges, however.
First, the high foot traffic of commercial properties increases investor risk should a visitor get injured on the property. While injuries are unlikely, this reality manifests in elevated insurance costs.
The Covid-19 pandemic has seen a diaspora of laborers who now work remotely or from smaller office spaces in general, decreasing the overall demand for office space.
On the flip side, foreign commercial real estate likely won’t feel the brunt of the Covid-19 fallout. With rapidly growing economies and often lacking in reliable telecommunications networks required for remote work, foreign commercial real estate is intrinsically more durable than its counterpart in the developed world.
An office building in Santiago, Chile
In addition, Covid may ultimately draw high-income earners (who can easily transition to remote work) out of the San Franciscos of the world and toward the Bogotás and Medellins of the southern hemisphere.
“The expat community has been growing steadily in Colombia for the past few years,” reports Santiago Rico Calderón, managing director of Engel &Völkers in Bogotá. “A number of them choose to buy local properties, as they see this as a strong investment option.”
For a property investor, that means they can charge higher rents, and see their property value appreciate with the influx of expats.
To win with commercial property, you’ll need patience. However, emerging market growth is outpacing that of the developed world. You won’t need to wait too terribly long to see positive ROI if you play your cards right.
Wild And Free – Rural Land
One of the most underexplored segments of foreign real estate is rural land. The appreciation and yields are there – it’s finding a well-managed and accessible opportunity that can pose a challenge for would-be foreign investors.
Rural real estate represents an excellent opportunity for investors seeking maximum diversification. Timberland, annual crops, permanent crops, silvopasture – rural foreign real estate is the Swiss army knife of property investments.
Additionally, the comparatively cheap valuations of rural land in emerging countries give investors a fantastic chance to enter the market on the ground floor.
After all, land may be cheap now, but they’re not making any more of it.
Some emerging markets are offering incredibly fertile land for pennies on the dollar. For example, only 35% of Colombian farmland is currently under cultivation, demonstrating the massive latent potential of international rural farmland investments.
Rural real estate can be a tricky category to navigate. Often, the valuation of property is unclear. In developed markets, it’s easy to get an idea of what a property is worth. Not so in emerging markets, where land may not have changed hands for decades.
This can be a blessing in disguise, however. Rural landowners in developing markets may not have a full understanding of the financial aspects of their property, and how much it could appreciate in the future. In addition, farming practices are often underdeveloped, which creates an opportunity to add value through modern farming techniques.
Incorporating best practices is a key part of adding value to foreign rural land.
The opportunity in rural land in emerging markets isn’t just to buy and hold. It’s an opportunity to use the power of capital to bring technological and commercial advancement to developing regions. This isn’t simply an altruistic endeavor – it’s a process that can create real value as supply chains integrate and grow.
Foreign Property: Accessing Assets
Real estate in emerging countries is a diverse asset class and presents many benefits and challenges to investors. As an uncorrelated asset class, real estate offers investors an excellent hedge against economic downturns. Additionally, the strong performance of emerging markets means that international real estate offers portfolios a double benefit.
But foreign property isn’t right for everyone. People who want to stay in their city or town and aren’t interested in looking for value in unexpected places might want to stay away. Foreign property is for the intrepid, for those who are willing to look a bit more thoroughly for opportunity than the rest. Click here if that sounds like your cup of tea.