How much is enough?
Richard Colburn
For those expats settled in Thailand, the attraction and affordability of owning your own home in such a desirable country is undeniable. But investing exclusively in real estate property may not be the most appropriate financial planning strategy.
Meeting your needs
Expats generally have more experience of real estate than any other asset class. For many, this experience will have been gained as owner occupiers, rather than investors, often in conjunction with a mortgage and in their home country. This strategy provides for our basic need for shelter and physical security so that in retirement your home is owned free and clear. But, providing financial planning and financial security is a very different strategy. Long term financial planning and financial security means providing for your future financial needs as an expat, when you need them.
Long term financial planning
Personalised financial planing involves the provision of income and or capital growth. Any financial planning should be built around the preferences, circumstances and needs of the investor. Key to any financial plan is liquidity and flexibility. Liquidity can be a major drawback for the direct investor in real estate, as property often takes far longer to sell than financial markets investments, many of which can be liquidated on the spot.
Diversifying
Despite being relatively illiquid, real estate is an important asset class for investment and financial planning but it is not the only option available to the expat investor. Like commodities, real estate is a hard asset. But personalised investment and financial planning usually involves diversifying across several different asset classes. Not putting all of your eggs in one basket applies as much to real estate as to any other asset class.
A good investment
After the dot.com bubble burst in early 2000 many expat investors, both winners and losers, ran to real estate as their safe haven asset class. For the next few years the systematic reduction of interest rates, to historically low levels, along with the deliberate expansion of the global money supply, led by the United States, resulted in world wide domestic real estate price appreciation. This appreciation was far in excess of GDP’s and the main contributor to GDP in many Western countries over the past 6 years. At the beginning of 2006, the Economist magazine reported that the global residential real estate market was then in the biggest financial bubble of all time. Bigger than the equity bubble that precipitated the Wall Street crash and even the dot.com bubble. With domestic house price appreciation continuing in some countries such as the UK, this bubble is now looking very stretched. Prices seem to have already peaked in the US and Australia.
Bubble vision
Opinions on how the global real estate bubble will correct vary enormously. It is a fact that rental yields in the developed world are at historically low levels. Currently, rental yields are less than half their long term trend rate. For the past 500 years ALL markets that have deviated from their normal behaviour have returned to trend. Analysts looking at these rental yields suggest that these historically low (currently half the long term trend rate in the UK in June 2006) rental yields are not sustainable and that some form of correction is unavoidable, particularly with the now rising levels of interest rates. Even assuming that real estate prices don’t ‘correct’, it would take more than 10 years of domestic house price stagnation in counties like Australia and the UK, for ‘inflation’ to raise the rental incomes enough to return yields back to trend. This is not the best investing prognosis for expat investors.
A good return
If we accept the proposal that domestic real estate prices DON’T fall, direct investors in real estate in many countries, including expats, can look forward to returns of just 4% or less. This return is further reduced with maintenance costs, which can eat up 10% of rental income, managing agent costs and of course taxes. This can easily result in a return of less than 3%. A cautious expat investor could exceed these returns just by investing in UK, US, Australian or New Zealand Government bonds. Such a strategy would provide the capital security that real estate investors value so highly but would also mean that, unlike real estate property, the investment is readily realisable. It would also provide the flexibility to move into other asset classes when expedient to do so. Remember too that for expats, offshore investments grow free of tax.
Interesting times
At the end of May 2006, it was reported in the Bangkok Post that Land Registry Offices here in the Kingdom are to look more carefully at the ownership structure of Thai companies that are 49% foreign or expat owned. This is one of the ownership arrangements that is used to enable expats to buy real estate other than condominiums in Thailand. Even if this practice is not made retroactive, it could have a highly negative impact on the luxury real estate market in Thailand, by reducing the number of willing and eligible buyers.
Betting the ranch
A recent development has been to encourage expats to mortgage, or increase their existing mortgage, on real estate they own back in their home country. The suggestion being that the money so released can be invested elsewhere. Money for old rope, indeed! Professionally qualified financial advisers are required to act in the best interests of their clients. With the very real prospect of falling residential house prices and rising interest rates in the home countries of expats, the benefit of such schemes is not entirely clear. Given the capital returns that real estate markets have experienced over the past 6 years, a more sensible way of setting up a financial plan might be to dispose of the real estate, before a full scale correction and invest the clear and clean proceeds. This would lock in profits for expats without adding the risk associated with mortgages.
Separating your strategies
There are compelling reasons for expats owning their own home in a country like Thailand. Economic necessity also means that adult children in Thailand are often dependant on their parents for the purchase of their home. Beyond this, it is sensible for expats to maintain a good portion of their net worth in easily accessible offshore bank accounts and offshore investments as part of their financial planning. Even the most die-hard direct real estate investor would be well advised to keep some of their money in a form other than real estate…just in case.
Striking a balance
Professionally qualified financial advisers are in the business of making you money. They design financial planning to meet the long term objectives of expats. This is achieved by selecting asset classes that can deliver real returns whilst giving expats the freedom to access to their money.
A professionally qualified financial adviser can help you to design a structure that best meets your overall objectives.
It’s your money and your peace of mind.
Richard Colburn is a UK qualified financial adviser with Sterling Assets.
Questions to the author can be directed to 053 839 463 or email us
