The all-time high value of the dollar in many emerging markets, including Mexico, Colombia and Brazil, provides Americans a greater degree of purchasing power overseas. As one of the safest assets you can own in emerging countries, real estate provides an opportunity to investors.
The Perfect Time For Emerging Markets Real Estate
Real estate markets in Argentina, the Dominican Republic and Colombia are examples of why it is the right time to invest in real estate in emerging economies.
From December 2015 to March 2016, the Argentinean peso has depreciated over 56% against the U.S. dollar. In 2014 and 2015, Argentina's inflation ranged from 20% to 40%, which increases the chances of property to appreciate in 2016 and beyond.
Over the two-year period and the one-year period ending March 2016, the Dominican peso lost 5.70% and 1.85%, respectively, against the U.S. dollar. In 2007, the Dominican Republic government passed Law 171-07, providing American retirees an incentive to retire in this emerging country. Beside this law, there are additional reasons why Americans are choosing to retire in the Dominican Republic. The more American retirees that move to the Dominican Republic, the higher the country's demand for housing will climb.
Over the two-year period and the one-year period ending March 2016, the Colombian peso lost 53.06% and 22.90%, respectively, against the U.S. dollar. Publisher of Live and Invest Overseas, Kathleen Peddicord identified the city of Medellin in Colombia as a market in which properties had rental income and investment potential. According to data from the IMF, the real house price growth in Colombia was 4.46% over 2015.
Evaluating Geopolitical Risk of Investment
Emerging economies are subject to geopolitical risk, which is important to consider when buying real estate abroad. For example, Peddicord recommended the city of Istanbul in Turkey as a place to buy a second home abroad.
For the March 2015 to March 2016 period, the Turkish lira lost 11.9% in value against the U.S. dollar. According to data from the International Monetary Fund (IMF), the real house price growth in Turkey was 10.48% over 2015, which makes a real estate investment in Istanbul an attractive option.
However, Peddicord's recommendation was a year before the armed conflict between the Republic of Turkey and various Kurdish insurgent groups throughout 2015, as well as the nearby conflict in Syria. Such events can increase such an investment's risk and require you to choose a higher benchmark to account for the additional risk.
Emerging market real estate investment trusts (REITs), including the SPDR Dow Jones International Real Estate ETF (NYSEACRA: RWX), the Vanguard Global ex-US Real Estate ETF (NYSEACRA: VNQI) and the iShares International Developed Real Estate ETF (NASDAQ: IFGL), are examples of useful indexes to evaluate your investment in real estate abroad, or to minimize your capital exposure in such an investment.
The American Expatriate Market
Another important factor to consider concerning an abroad real estate investment is the appeal of the nation to fellow expatriates. While renting or selling to locals can also be an option, your knowledge of the local language and preference of applicable jurisdiction can sway you to stick to doing negotiations with U.S. expatriates.
Check the annual ranking of International Living for the ranking of foreign nations for North American retirees. In 2015, Costa Rica ranked fifth, and Colombia ranked eighth. Also, review the latest developments in visa pension programs, such as Malaysia's My Second Home, Costa Rica's "pensionado" visa program, and tax refund programs, such as Ecuador's refund of the 12% value added-tax (VAT) on qualifying good and services.
Additional Risks to Consider
Pay close attention to the zoning status of your target property. The permissible use of certain areas may affect the future of your property in case of future real estate developments. For example, a major selling point of your property may be its great ocean view. However, the approval of a high-rise building blocking that view could affect the value of your property.
Obtain a condition of the title report of your property to understand how long sellers have owned the property. Generally, the longer that a seller has owned a property, the more equity and stability that she has built up in it. Through the report, you will also see the price trend of the property's value and be in a better position to estimate future value.
Take the time to personally inspect the property. Trying to buy a foreign property from afar or without using a trusted on-site agent increases the chances of mismatched expectations.
The Bottom Line
The strength of the U.S. dollar makes an investment in real estate in emerging markets a more attractive option for American investors. Argentina, Colombia, the Dominican Republic and Turkey stand out as good investment options for those looking to invest in real estate in emerging economies. Be sure to understand and carefully consider the risks of such an investment, including zoning designation of property and economic policy of the host country, before completing a purchase.