Broadening your horizons: increasing numbers of investors are looking to diversify into overseas property holdings. Pauline McCallion guides you through the basic principles

What Investment, June, 2007 by Pauline McCallion

The impressive track record of the UK property sector for providing solid, dependable returns, in terms of both capital growth and income, has led investors to flock to the asset class in their droves in recent years. They are looking for portfolio diversification and the high levels of total return produced by what is currently a booming market.

Not only have the growing number of UK property funds attracted attention, but many investors have poured money into actual bricks and mortar. Using property to secure retirement funds is a popular option these days, with more people using both direct and indirect property investment to spread risk and secure an alternative source of income.

Diversification

For many UK investors the emphasis is firmly on UK property, which is understandable given that it is their home market. The commercial property sector here has been booming in areas such as office and retail space, while a quick glance at the TV listings for almost any day of the week will confirm that residential property investment and development seems to have become something of a national pastime.

But property prices in the UK can't go on rising forever. What happens when the market starts to slow down? Many property investors have already anticipated this scenario and are busy investing their UK gains in property markets around the world.

Whether you want to invest directly, are happy to use a property-focused fired, or even just want to buy some shares in a property company, opportunities abound globally--provided you use the right formula.

Mark Long, head of research and strategy at Invista Real Estate, says Continental Europe, for example, is at a similar stage to the UK market of three years ago. 'While less mature than the UK market, opportunities on the continent remain attractive, with relatively high levels of income return and the potential for capital appreciation through rental growth and further yield compression,' he explains. 'Savvy investors should hold a balanced portfolio, with exposure to both UK and European property in order to maximise the benefits of diversification.'

Locations further afield also contain opportunities. Michael Morris, fund manager of the ING UK Real Estate Income Trust, adds, 'The US has a similar cycle to the UK, while developing markets such as Asia offer higher-risk investment options.'

However, Morris warns, 'Clearly, when investing overseas one needs to consider exchange rate risks and understand fully local property market conditions as well as tax, legal and other issues.'

Do your homework

Experience of property investing in the UK will provide a basic knowledge of the ins and outs of this asset class, but obviously a few student lets in Manchester won't fully prepare you for renting out holiday homes in Florida or navigating the purchase process in the Czech Republic.

Alistair Powell, managing director of Seven Continent Investment, an overseas property specialist, outlines three main points to keep in mind when investing directly in property.

He advises investors to think about rental potential, the local legal system and an exit strategy. The latter is particularly important in order to maximise capital growth. Powell explains, 'The newer markets are becoming overdeveloped and are saturated with newly built properties. So when you come to sell, why would someone buy a resale when they could have a new-build?'

He adds, 'Overseas property investment seems like a minefield, but if you do it properly it can be very easy. If someone with a portfolio of London properties wants to diversify into Leeds, for example, they would do a lot of research about Leeds before buying there. It should be the same with overseas property investment as each country has a completely different economic, legal and Government system. You should know all about each of these if you want to invest in a particular country.'

Chris Howard, managing director of 4:Property, agrees, 'The main issues are lack of knowledge of the market and possible future changes, scant consideration of the issues relating to managing the property and, more importantly, the exit strategy. What will your position be when you come to sell in terms of the likely competition? What are the chances of selling at the same time as other local owners?'

Similarly for those investing indirectly, every property market has its own quirks and trends, meaning that research is still vital when investing in a fund or property company.

Bricks and mortar

So, the first thing to do is to decide what type of property investment you're after. Those who want the hands-on experience of finding the property, developing and maintaining it, attracting suitable tenants and so on should invest directly. That way you actually own the bricks and mortar--or at least a part of it, depending on the type of direct investment you go for.

In the UK, the purchase process is reasonably well policed, with transparent rules and relatively low costs. Purchasing abroad is often a very different story. For a start, many foreign property markets are loosely regulated, or at the very least they have a different regulatory system to the UK. Where would you turn when faced with a foreign legal system, a local estate agent that only speaks Bulgarian or a massive and wholly unanticipated bill from the local council for some purchase-related fee you've never even heard of?