Bus Lines And Narco-Traffickers? Compelling Reasons Not To Invest In Real Estate Overseas?
This week during an interview for a real estate podcast, the interviewer asked about the Spanish real estate market…leading to a discussion about how a would-be property investor should analyze a potential market for investment.
Specifically in this case, the interviewer wondered about the impact of the ongoing troubles in Greece, including the possibility that this country might be removed from the euro, on property prices in Spain.
I tried to explain that that kind of high-level economic analysis across a region doesn’t make sense to me when it comes to trying to decide whether or not to make a specific property investment. Certainly Greece leaving the euro would have some impact on Spain and other euro countries. However, I’ve learned over the years that analyzing markets at a macro level in this way can lead to a no-buy decision for the wrong reasons. Hundreds of factors, including these kinds of macro factors, could be considered, but, the truth is, only a handful of factors are likely to have any significant impact on the performance of an individual investor’s investment.
I refer to these factors that I do think matter as “compelling reasons” for why an investment is likely to perform strongly.
For example, two compelling reasons I identified for investment in Medellin, Colombia, when I first landed in that city were the relatively low capital requirement for getting into the market and the relatively high rental yields. Today, property prices in Medellin are still low compared with other markets of interest; however, rental yields have softened. Meantime, another compelling reason has come to the foreground—the improving local economy and the expanding local middle class.
If you were to consider the investment market in Colombia from a macro level, you’d have to address concerns to do with Venezuela, the FARC, and drug cartels. However, I’d say that those factors have less impact on the Medellin market than the “compelling factors” I identified. That’s why I invested in Medellin when I did.
Right now, I see compelling factors at work in Spain (to return to my podcast interview this week), specifically in Barcelona. Prices didn’t collapse here as they did along the Costas post-2008, and this city enjoys a growing tourism base that is expanding the short-term rental market. Additionally, Barcelona is increasingly recognized as one of the “classic” destinations in Europe alongside Paris, London, and Prague, and more and more people with money are seeking it out for second homes. These second-home buyers aren’t the retirees who pushed up the Costa markets but a more stable buying crowd.
Even in the Costa markets I see compelling factors today. Prices in this part of this country collapsed, meaning that, in spots, quality properties right on the beach are available for absolutely bargain prices on a cost-per-square-meter basis. Spain is still an economic basket-case, but it’s hard to go wrong with oceanfront property in a sunny climate that tens of millions of North Europeans can access cheaply thanks to Europe’s low-cost airline industry.
Every market has negative aspects. The question is whether those negative aspects outweigh the compelling factors that should allow property prices to appreciate and/or provide for great rental yields.
What else comes into play when analyzing a market for investment? I’d recommend, if you’re buying for investment, that you don’t let personal prejudice get in the way.
Years ago, a former colleague went to Buenos Aires looking for investment properties in the wake of Argentina’s 2001 currency collapse. I had bought three apartments in 2002 to take advantage of the window of opportunity, and this guy was interested in getting in on the market, too. He toured the city with a real estate agent who showed him several apartments, every one of which would have been a good investment as far as I could tell. However, my colleague found something wrong with each one that allowed him to beg off. In the end, he didn’t buy anything. One of the apartments, for example, was on a bus line…meaning buses drove by the apartment building. Buses are noisy he told me…so he didn’t buy that apartment.
Yes, buses can be noisy. On the other hand, a bus line in front of the apartment could make it more attractive to would-be renters. It’d make it easy for tourists (short-term renters) to get around the city and easy for locals (long-term renters) to get to work.
The point is that the presence of the bus line was an extraneous factor…not a compelling reason to buy…or not.
Had my colleague bought that apartment at that time, he would have enjoyed a decent rental yield from it and much better than decent capital appreciation. I eventually doubled my money on my investments.
The micro bus line argument was silly. Less silly, maybe, could have been a macro “the government of Argentina is crazy and its economy is a mess and both those things likely will always be true” argument.
Still, for me, the compelling reason to buy offered by the currency collapse trumped it all.
Lief Simon
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