Christopher Nye is from Property Guides who are experts in providing property resources to overseas buyers. Here, he shares his top five reasons for why you should invest in property abroad.
With Brexit on the horizon — but its final form still unknown — worries of a global economic slowdown and deepening concerns over trade wars, many people are looking further afield for assets that hold up against these risks. And property overseas is top of the list for a lot of investors, with advantages ranging from tax breaks through to short return cycles. Here are my top five reasons to invest in a property abroad.
Diversify your investment portfolio
We’re in volatile times, politically and economically, and so anyone with their entire portfolio concentrated in one area risks taking a significant hit on its value. By spreading your investments across different markets, you help to counterbalance that exposure to risk.
Imagine, for example, that you owned a property in the UK, and then bought a second property in Portugal. At the moment, the British property market is coming close to flatlining, with annual growth of 1.5%. On the other hand, the Portuguese market has seen growth of 10.3% in the last year. With a foothold in Portugal, you would see your overall investment still performing strongly, and vice versa if, in the future, the reserve becomes true.
Benefit from short return cycles
You can take advantage of some extremely buoyant markets, such as Spain’s Costa Blanca or Costa del Sol, to find some very fast returns. By investing in an off-plan property that is still in the early stages of development, you will often find it rapidly increase in value as it comes closer to completion (and beyond). We have seen real examples over the years of an increase in value of 8–22% between building phases.
This is known as flipping a property and, done correctly, can be a sound way to make the most of sudden upswings in popular overseas markets.
Take advantage of the currency markets
Buying abroad in a weaker currency offers the chance to enter that market at a much lower cost than would otherwise be the case. For example, pound sterling is extremely strong against the Turkish lira, up 24% since 2016. Other hotspots include Argentina, New Zealand and even the beautiful Bahamas.
We would never advise anyone to play the markets, or to try and second-guess where exchange rates will go — this will only heighten the risk of seeing them swing the other way and losing thousands. Instead, as an investor, you can find a favourable market for your home currency, and use a strategy such as a forward contract to fix your exchange rate for the coming year or more. That way, you’ve benefitted from the strength of your budget’s currency of origin, but you haven’t hedged or left it open to sudden swings.
Earn higher rental yields than traditional buy-to-let
It’s no secret that you can make an excellent ROI on letting out a holiday home in the sun, especially when you’ve benefitted from buying low value property. We’re travelling more than ever, and disruptors like Airbnb have made it ever easier for you to reach a wide market of potential guests from around the world. Traditional buy-to-let properties, renting to young professionals on a yearly basis, can seem attractive investments, but actually pale in comparison in many cases. Most of these have high entrance costs, including property prices. This means that, while rental prices are also high, the actual yield — calculated as a percentage of annual rental income to the property value — can be low. In London, it’s around 3.7%.
By contrast, medium-to-high rental prices and low property prices in much of Southern Europe make rental yields much more attractive, as Idealista data shows. Take Spain, for instance. The island of Gran Canaria has an average rental yield of around 6.8%, with areas like Las Palmas reaching 7.1%. Over in Italy, medium-sized, affordable but popular cities like Vicenza see returns of around 7.9%. The beautiful Limoges region of France offers returns of 8.1%, and Saint-Étienne reaches 9.1%.
Benefit from more tax breaks and lower tax rates
Depending on how you use your property, and whether you’re tax resident abroad or not, you will often find that you benefit from lower taxes on any income. There are many low-tax countries that you could choose in Europe, including peaceful Andorra, which is nestled between Spain and France and is a popular spot for skiing property, as well as Gibraltar, Monaco and Switzerland.
Do your research on tax breaks and deals, too. For instance, in France, you can choose to have investment income taxed either at the usual progressive rates, or at a flat rate of 30%, known as a prélèvement forfaitaire unique.
Foreign countries will have different laws and taxes when it comes to buying property, so it’s important that you carefully follow any rules and regulations and pay attention to your obligations. The best way of knowing this for certain is to consult a specialist expat tax advisor. They will be able to advise on tax treatment of income, dealing with future investments and inheritance tax planning.
Buying a property overseas is a strong investment, particularly as we are in such a time of political and economic volatility. Whether it’s diversifying your portfolio, taking advantage of a weaker currency or a strong rental market, there are plenty of reasons to look abroad for your next investment.