The past few years have seen a great deal of change in the property investment world. 10 years ago the average home owner would not really have considered buying a house in a foreign land for a number of reasons - not least for the lack of information but also likely due to the complexity of it all and the general all out hassle one would have expected to encounter gaining enough information to make an informed decision.
With mass marketing, the internet and high profile seminars and promotion though, the West took it upon itself to explore foreign property investment from every conceivable angle - Buy to Let, Off Plan, REITs, Funds, Buy to Sell and so on. For many, sadly this has come back to bite them on the proverbial as it were, largely due to getting caught up in the investment trends at the time with the masses flocking to property in the belief it would make for early retirement.
Lately though things have changed - I don't think I need to point out the state of the economy in most Western countries - the press in general seems to be a doing a sterling job in the doom promotion department on a global scale. The main change has come from the other side of the world - China. Shrouded in a very carefully structured political system, designed (whether one likes it or not) on the back of what the West regards as communism, China was always seen in the past as a place that made great takeaway food, some jolly fine tea and dangerous but cheap Christmas presents. Little else was really known.
From an investment angle, China has been seen as only for the very brave, the general consensus being that if you choose to invest there, it should be done through a western-based entity (and to a degree, that would largely still be the best path to follow). However, it would appear that there is a lot to be learnt from China, what the Chinese are up to and the potential outcomes from such goings on.
In the West, there are fairly standard perceptions of wealth and the storage of it. One could say that in the somewhat horrendous 80's that a huge filofax and a wedge of banknotes would mean that you are doing ok. These days however, cash is rapidly becoming not worth the paper it's printed on, and I doubt there are any 20 year olds that have a filofax or even know what one is.
Whether or not the filofax was big in China I have no idea, but one thing that does seem to be changing in China is the storage and display of wealth. In the UK at the moment, the general consensus of opinion is to rush off and buy gold and stocks. True the market is doing ok for the time being in both areas, but, both markets have inherent flaws - extreme potential volatility.
Meanwhile, it would appear that the Chinese are up to very different things, things not seen in the West for many decades - if at all. They appear to be using property as a store of wealth; basically much of the spare cash they have under the bed is being used to buy property. Despite various government efforts to clamp down on property speculation from within the country, the ever-inventive Chinese are going to the extent of having the water and power connected to the properties and using it to give the appearance of occupation. Whilst property in its own right is less tangible than more mobile and liquid investments than say gold or stocks, it is unquestionably a more stable asset to hold it would seem.
If you think about it for a moment, everyone and their dog has been harping on about the recession, house prices crashing, the need to help first time buyers, and greedy Buy to Let landlords and how house prices should return to the levels of the 1960's to do everyone a favour. Whilst this might be in theory a nice idea, it isn't going to happen. If it was, we would have seen far more significant drops in value than we have. A few percent drop in average house prices (which in its own right is somewhat of a misnomer) is not a crash. The NASDAQ dropping 30% in 40 days as it did at the end of the dot com boom - that's a crash.
What does this tell us?
Well, I am not going to suggest that everybody zoom to China and buy a house, which is certainly not the answer. Aside from the fact it's a bit of a way to go, there are restrictions on Johnny Foreigner owning anything there if you are not a resident anyway. The other point to consider is that there is no real credit structure to speak of in China anyway which would fox most overseas property investors due to their reliance on credit and leverage. What it tells us is something very simple. Property (in most of its differing forms) is an asset that will hold its value for the most part, and even if it does take a hit, the fall is unlikely to last too long, and will recover more predictably than more liquid assets.
Could it all go wrong in China?
In an extreme case it could but it would need to be an incredibly extreme situation. Granted, in theory if the Chinese keep on building, logic would suggest that all they will do is further dilute the market place and reduce the average unit value. Given the rate of construction that has been going on, this would have had some effect by now, which it clearly hasn't.
If reckless lending comes into play, it would likely have a negative effect for a while, but if you consider the amount of hard cash being thrown at China at the moment for its exports, this too is an unlikely scenario.
One possible scenario is that China could open up the doors for the Chinese to invest abroad - allowing all its hard-earned cash to flood out to other countries and buy up foreign assets in flailing economies. Those that are connected to Hong Kong (usually only the very wealthy anyway) are already doing that. Many properties in major cities in London and the US are being bought up by the Chinese. If the Chinese government opens that door too wide, all the money will drain out of its economy faster than beer out of a barrel on a binge drinkers night out.
So how and why have the West got it so wrong?
I don't know that the West has got it wrong, more a case of "lost their way". If you take the UK and the US as two prime examples and wind the clock back 40 years, both countries had a lot of exports, and did very well at it. Growth happened until "pseudo money" turned up from the banking sector in the form of excessive loan to value mortgages and other baffling finance products that promised the moon but returned only a visit from the debt collectors. Exports died as the developing countries realised there was money to be made in such activities and preceded to undercut prices off the back of low production costs, leading developed countries, like the UK and the US to replace exports with imports in the false belief they were saving money.
Ok, so the Chinese might have got it right, but how the hell do I take advantage of it?
The reality is that not only is it incredibly difficult to take advantage of it, but more a case of the answer in the short term is very sedate and boring I'm afraid. Wait. House prices are still due some further correction in the West - no doubt about that. If you own a property and prices are falling, hold on to it unless you absolutely have to sell. The market will recover, it might be slow, but it will recover. If you can afford to buy, buy into property, its track record is far more stable, and it has shown very good resilience to the "crash mentality" that the press would try to have us believe.
If you are going to buy into property though, think very carefully. Interest rates are going to rise, and continue to do so for some time to come. Like it or not, borrowing is going to get very expensive. Buy to Let on the short term or buying in bulk and flipping is not the answer. Buy into the mechanism, not the asset.
The old idea of "other peoples money" (OPM) investments sounds fantastic. No money down and other such piffle sounds like a great idea until the repo-depo roll up and take away everything you own including the kitchen sink, but as many have found out, such investments are not as great as they may have sounded.
If you buy a property for investment, you immediately inherit a sizeable number of variables that are far from your control (interest rates being the main one in this case).
On the other hand, if you buy in at a lower level that you can afford as part of a bigger picture (such as REITs or Funds) you avoid over-exposure to an uncontrollable lending market, and you are afforded liquidity at the same time. The returns might not be quite so high, but the risk is lowered substantially.
Of course, if you are sat on an enormous pile of cash under the bed, buying one or two properties outright, as opposed to 10 or 20 with mortgages would be advised - this way you avoid ever-increasing lending costs. Don't, however, expect to be making a profit in the next 12 months. We have a rocky ride ahead and it will last a while. Property has rarely been a quick capital gain, and that isn't going to change any time soon.
- Wednesday 17 November 2010