Investment: Reducing Risk

Overview

Firms dealing with the emerging markets will often encounter clients worried about the security of their rights to purchased property. Dubai and China are the most common countries of concern. The opportunities for capital growth in China are enormous but potential buyers worry about the constitutional protection of property. Chinese law says that the government can confiscate land for other uses, provided that they pay fair compensation.

What many buyers don’t realise is that similar laws are in place in many other countries where property rights are considered perfectly safe. The US government has similar powers to confiscate private property and is now in the middle of a debate about these rights, which are known as “eminent domain”.

The truth of the matter is that most risk lies in ignorance. Investing in almost any part of the world can be safe provided that you know what you are doing and that you take due care and consideration. At a property level, the risks are rather limited, beyond the obvious dangers of buying something which is falling down or that you don’t actually own. Most risks exist at a market level; some predictable and therefore avoidable; some aren’t. Some risks just have to be accepted; who knows if there will be a natural disaster which could ruin a particular property market for years.

At a property level you can manage your risks by using a lawyer, commissioning a survey and by taking time to make a logical and considered decision about what to buy. This, however, will not protect you from market level events which could strike at any time. To manage risks at this level there are two main options; diversifying by buying in more than one area or country; or, if you don’t have the resources for this approach, investing through collective investment schemes.

Diversifying and building a portfolio

Diversifying is simply a matter of hedging your bets. You may find a development that seems guaranteed to double in price, but to buy up as much as possible of a single development or area is risky. Any unexpected change in the market will endanger the whole, rather than a small proportion, of your investment.

The ideal approach is to split your investment and buy as large a range of property as possible. At some stage this may mean commercial and industrial property as well as residential. These markets are more complicated however, and price entry thresholds are higher. Most new property investors will prefer a first venture into commercial property to be in their home country.

For those people taking their first step into property investment, look instead for different kinds of residential property, and in different countries or different continents even. Because property markets are often localised (usually at a national level), buying in a range of countries helps to reduce your risk. Buying on different continents will reduce your risk exposure even more by limiting the impacts that may be felt from regional events. In the late 1990’s property prices plummeted across the whole of South East Asia. Property investors who had all of their investments in the region suffered significant losses. For those who owned South East Asian properties as part of a broader portfolio, the events of 1997 were less of a concern. .

Even if you are absolutely devoted to a single market and determined to pick up as much as possible in the country of your choice, there are ways to diversify risk by buying different kinds of property. Dubai was one of the favourite investment destinations of the last year. In Dubai apartments have traditionally been more desirable than villas. This has caused many investors to concentrate exclusively on building a portfolio of apartments.

In 2005 the market shifted slightly and villas became more desirable. One study suggests that over the last year villas have appreciated up to 15% faster than apartments. Those investors who had the foresight to diversify have therefore benefited.

If your first property is in a sunny holiday resort, try to balance this with something in a city. If you have been busy buying up houses with five or six bedrooms, then balance your portfolio with a couple of one-bedroom apartments or studio flats. After all, the size of the family is shrinking and more people are living alone than ever before.

Part of this diversification is trying to put together a portfolio where the properties carry different levels of risk and will react differently as an investment in different circumstances. Put simply, it is the old adage of not putting all of your eggs in one basket.

Whilst diversifying your investment helps to reduce your risk, over stretching yourself can be equally damaging. If you only have enough money to buy one property, the best option is to buy something generating significant yields and then save that income towards your next property in a different market. Over time you will end up building a healthy, sustainable, low risk and diversified portfolio.

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in “Where to buy a property abroad – an investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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