Location, location . . . and the economy too

Thinking of investing abroad? Don't just check out the bars and the beach - research the economy of the country you're buying in if you want it to be a good long-term prospect. Economics Editor Marc Coleman shows you how

ARE you thinking of buying an overseas property? Over half of the world's wealth consists of real estate. Average real estate values are likely to keep rising in many parts of the world for quite a few reasons: the world's population is growing faster than town planners, architects and builders can keep up with and there is lots of money to borrow.

More to the point, globalisation is bringing many economies of the world up the prosperity ladder in the same way it did here. The question is, where in the world to look? Your pension fund might already have its fair share of exposure to the property market; institutional investors now have access to a range of instruments with which to catch this wind in their sails.

And if you don't have a pension already, you should stop reading this article now and get your priorities straight.

Investing in property through funds is a more sophisticated and safer way of accessing a range of opportunities, not just residential but commercial and industrial as well (investors in industrial real estate around Shanghai have made fortunes several times over). It is also a faster and more liquid way of getting in and out of the market, provided you have access to the right investment vehicle.

But we'll assume here that you want to go it alone. If you have a long investment horizon, this may not be such a bad idea: maybe you want somewhere to retire, or you want to combine rental income with a holiday home.

The key thing to realise is that as well as checking the plumbing and the patio, you should do some quality research into "macro conditions" before taking a decision on a house purchase abroad. Like investment at home, location is what you need to research.

It's just that the moment you step outside the Irish property market, that word takes on a new meaning. It doesn't refer to whether your new neighbours drive SUVs or Ladas. Economic stability is what we're talking about.

Political stability is also worth a brief mention. Some distinctions are easy: Croatia good, Chechnya bad. But a few years ago Slovakia came close to electing a rather irredentist president who could have brought political instability and isolation. Slovakia is now politically at ease with itself and has joined the EU.

The absence of serious political discord in a country is a necessary if insufficient condition to making a sound investment, in that it helps underpin confidence in the property market, as well as legal rights and openness to foreign investment.

But the most important "big issue" is the economy. Economic growth can lift property values. Exuberance and policy mismanagement can cause them to come crashing down. Consider the case of Thailand in the late 1990s. An export-led economic boom fuelled a surge in residential and commercial property investments. The value of real estate soared, prompting a building boom, with banks happy to finance construction as long as property values soared.

But by late 1996 an estimated 365,000 apartment units were unoccupied in Bangkok, with a further 100,000 due to be completed in 1997.

As a result of this investment, imports soared and Thailand's current account deficit ballooned to 8.1 per cent of gross domestic product balance of payments. Then Somprasong Land, a Thai property developer, defaulted on a loan and it all came crashing down.

Property prices for apartments collapsed and other property companies found themselves unable to repay the dollar denominated loans they had taken out to fund their investments. But even those who had invested in higher quality property were to be hit by what happened next.

The Thai Baht had been reliably pegged to the dollar for 13 years. But when the property market collapsed currency traders smelled blood and moved in for the kill.

The Thai central bank eventually buckled and the Baht lost half of its value. This caused the dollar denominated debt bomb (accumulated during the construction boom) to explode, causing widespread bankruptcies and a further, demand-led, fall in property prices.

The moral of this horror story is that, at the very least, a casual glance at the monetary and financial stability of the country you are thinking of buying in is justified.

CHINA is a fashionable target for investors these days and, fortunately, the currency there is well managed and likely to depreciate only moderately in coming years, although there are some issues in this country: information on the market (past price trends and likely future demand) is harder to obtain. Property rights may also be less secure.

There are also ethical issues; you could be buying land taken from farmers who were not compensated for it.

The new member states of Eastern Europe are far safer in this respect. The process of joining the EU already required them to fulfil many of the safety checks on their legal and economic system.

The fact that those countries are likely to join EMU in the near future offers another possibility. In some - Hungary, for instance - interest rates are several percentage points higher than in the euro zone, offering some prospect of automatic property price increases as Hungary moves towards euro zone entry and its interest rates converge towards the lower rates set by the European Central Bank.

Once you've established that the monetary side of the economy is well handled, then the performance of the real economy becomes a safer indicator to use. The country's forecasted economic growth rate is a useful first clue to how its property market will perform in the future.

The following websites are just two sources you can use to obtain forecasts of the whole economy, as well as more detailed discussions of its prospects: www.oecd.org and www.imf.org .

Overall, economic growth is no guarantee that property prices will also grow. It is growth in domestic demand, incomes and employment that really matters. One opportunity is to find an economy where overall growth is strong, and where domestic demand hasn't yet taken off but is likely to do so.

In Ireland the economy started to grow in the early 1990s. When domestic demand took off in 1994 the property market was quick to follow.

Look also at demographics. Ireland's rapid population growth has been one of the key drivers of our own property market. Some east European countries, like Poland, have reasonably healthy demographic profiles. But Latvia's population is declining. These considerations matter in thinking how well the property market will do in that country 10 or 20 years down the road.

Finally, don't put all your eggs in one basket. If you're investing in a property of your own abroad, some would say you are doing this already. But there are properties, and there are properties.

The risk of a property investment can be considerably lowered if you can choose an area where there is a diverse range of economic activity.

If you choose one of 10,000 apartments in a town where the only business is tourism (as many have done), then you'd better hope that the tourism industry in that town holds up.

But if you can choose a property that is both close to the tourist scene and to other commercial activity, you have an asset that you are likely to be able to sell at a better price when you want to.

To sum up, when investing abroad location matters from three angles: the stability of the monetary and exchange rate regime, the strength of the national domestic economy and the diversity of the local economy. It gives a new slant to the phrase location, location, location.