Large investors are continually faced with the issue of diversification of real estate into foreign investments.
Penetration of unfamiliar property markets leads to greater dependence (advisers, real estate brokers and often higher risks (a different culture, reduced government stability, a different legal system, different ownership guarantees and different tax systems etc.). The currency of the target country and the exchange rate movements are crucial performance factors. Performance after currency conversion is vital for disinvestments and exit. Property profits are frequently equalised through currency losses or vice versa. Timing market entry is just as essential, albeit difficult.
Additional factors that influence investment in foreign real estate are:
- Political stability
- Economic situation / economic cycle / future trends
- Employment situation
- Purchasing power
- Willingness to invest
- Property cycle / position of the property clock
- Necessity of a Double Taxation Treaty (DTT) between target country and homeland
- Tax benefits for foreign investors?
- Land taxes (tax rate, tax-free allowances, degressive tax)
- Subsequent exit option / demand for (such) real estate
A foreign direct investment should be made through a locally based legal entity (company) as a precautionary measure.