Read This Before You EVER Buy International Real Estate
“The local McDonald’s didn’t open until 8:30 a.m. That was the first bad sign. Why wasn’t anyone stopping for coffee?”
Visiting the local burger-and-fries purveyor can tell you a lot about whether a neighborhood is thriving – or just surviving… and whether you’d want to buy an apartment there.
“And the second bad sign?” I asked my friend Ronan McMahon, who makes a living finding investment opportunities in residential real estate all around the world.
“There wasn’t a single immigrant in the kitchen or behind the counter. Every worker was born-and-bred Newcastle,” he told me, referring to the city in northeastern England where he bought an apartment years ago. “That told me that new blood wasn’t coming to the area.” Which is a bad sign if you’re counting on growth and rising income to boost real estate demand.
Today, Ronan’s in lockdown at his beach condo in Cabo San Lucas, at the tip of Baja California Sur in Mexico. But usually, he’s out visiting condos, apartments, houses, and beach bungalows from Thailand to Brazil to Portugal for subscribers to his newsletter. He’s personally bought more than 30 properties in nine countries over the past 20 years.
If stock markets are a Formula 1 McLaren-Mercedes… for example, the seven-week journey of the S&P 500 Index – down 34% and then up 31%… then real estate markets are a snail race. In real estate, the pace of price movements is measured in months, and algorithmic traders have no edge.
Of course, that doesn’t mean “buying at the bottom” is any easier. But at least with real estate, prices take longer to hit bottom and to recover. That slower pace gives regular investors more of an opportunity… as long as they understand both the risks and rewards…
A Slow-Motion Bust
Ronan points to Ireland, where the real estate market was supernaturally overheated in the mid-2000s, as an example. Back then, developers in Ireland were building houses at 4 times the rate, per unit of population, as they were being built in the U.S. Prices were the real estate valuation equivalent of the 1999 dot-com bubble (when the Nasdaq traded at a price-to-earnings ratio of around 90, compared with around 25 over the past 12 months).
I was living in Ireland at the time, and I tried to buy a house in a cookie-cutter development half an hour north of Dublin. When my wife and I went in to sign the paperwork, though, the contract detailed the wrong name and the wrong property.
“Oh, no worries, we’re busy these days, just sign and we’ll change it later,” the paralegal reassured us.
We laughed, left, and rented instead. Given the subsequent 80% drop in real estate prices in Ireland, the lawyers did us a big favor.
Ireland’s real estate bust was a Band-Aid ripped off in slow motion. “The property market stalled in 2007, and it started to crack in 2008,” says Ronan, who is Irish and follows the market closely. Banks held a lot of the busted mortgages, and it took years of regulatory fiddling before they started to unload inventory. “It wasn’t until 2011 before the deals got interesting,” Ronan said.
Only a few years after that, that the real estate market in Spain – which followed a similar path – finally hit bottom. By then, most residential markets in the U.S., where foreclosure works much more quickly, was already well into recovery mode after the 2008-2009 real estate bust. (By comparison, it took the Nasdaq around 2.5 years to hit bottom after the dot-com bust.)
So if you’re suffering from the fear of missing out (or “FOMO,” as the kids say) on the whiplash recovery in many of the world’s stock markets, don’t worry.
If history is any guide, most real estate markets will have a more delayed Wile E. Coyote runs-off-a-cliff kind of reaction.
Six Opportunities to Watch
Once the bottom does finally fall out, Ronan says he’ll be looking at Spain and Italy.
Each suffer from a toxic cocktail of concentrated coronavirus and a heavy reliance on tourism. In the past, Ronan has found small, old-lady flats a mile or so away – “not the George Clooney neighborhoods but close enough,” he says – from the big attractions in Rome, Venice and Florence. After a face-lift, they’d be good to go on Airbnb for when tourists eventually return.
With the economic crisis – the International Monetary Fund expects that Spain’s economic output will fall by 8% in 2020, and Italy’s by 9% – Ronan thinks those kinds of apartments will fall in price by 30% or 40% in euro terms. If you’re a U.S. dollar investor and the value of the euro falls, you’d get an even bigger discount since your dollar will buy more euros.
Ronan says he would target a gross yield (that is, the yield earned on renting out the property, before expenses) of 14% to 18%. That’s more than double the regular gross yield that you’d expect to earn in normal markets of 6% to 8%.
“The main thing is that they’re not making any more land in Florence,” Ronan says. “And people will always want to see David,” he says, referring to Michelangelo’s timeless masterpiece at the Galleria dell’Accademia.
Another option? Buy a “Plan B” farmhouse in the middle of nowhere for almost nothing. According to Bloomberg, as of late 2018, around 2,500 villages in Italy and nearly 3,000 in Spain were practically abandoned as old inhabitants died off, and young people moved to the city. Sometimes entire villages go up for sale. Ronan wants to find one, renovate some of the old homes, and bring it back to life. “As soon as Italy is open for travel, I’m going there,” he says.
Recently, popular markets where desperate sellers knock prices down are another good place to find great deals…
Ronan particularly likes Medellín, Colombia which – its cocaine-corridor past notwithstanding – is a vibrant, exciting city. “When liquidity disappears,” Ronan says, “you can find some great deals in some of these kinds of markets.”
One way to take advantage of buyers heading for the hills is to make a “stink bid” that’s 25% or so below the asking price of a property. That’s a way to make the lack of liquidity (that is, when there aren’t many buyers or sellers in the market) work to your advantage. What’s more, the Colombian peso has fallen by 20% compared with the U.S. dollar, so “now you can buy at 2011 prices,” Ronan says.
But Ronan is most excited about parts of the world that are in the early stages of big transformations. He thinks that Tulum, Mexico – on the Yucatán Peninsula, about 70 miles south of Cancun – is “like 1980s Miami,” with a rapidly developing infrastructure and beautiful beaches… and without the Don Johnson pastel threads made famous in Miami Vice.
Ronan also likes Panama, which aspires to be a crossroads of global trade… like a western hemisphere equivalent of Singapore or Dubai. Here in Singapore, price-insensitive buyers from Indonesia, China, Thailand, and elsewhere in Asia buy outlandishly high-priced real estate just so that they have a place to go if things go haywire. Panama, for which Manuel Noriega is a distant bad memory, is a similar beacon of stability for rich people in Venezuela, Colombia, and Brazil. “Except real estate in Panama is one-tenth the price of Singapore,” Ronan says.
Of course, returns in many of the markets that Ronan traffics in – from Thailand to Mexico to Uruguay – are higher than, say, Cleveland or Omaha or other developed markets. The higher returns of emerging markets are often conditional on higher risk.
Nicaragua, one of Ronan’s favorite places to visit, is perpetually on the doorstep of revolution in part because Daniel Ortega (the name might give you Oliver North, 1980s flashbacks) is president again. The rule of law in Nicaragua and other emerging markets is a lot weaker than it is in more developed countries. And a lot of things that you can count on – power, for example – aren’t a sure thing in Buenos Aires.
That’s what makes it interesting, though. “In the U.S., there’s lots of money chasing any remotely attractive deals,” Ronan says. The crowds of investors are thin at construction sites in the places where Ronan goes.
What he requires, though, is good infrastructure. The most opulent beachfront villa won’t see much rental traffic if it doesn’t have running water or a road to bring you to it. And Ronan aims to reduce construction and development risk for new properties by only working with developers that he knows well and that have a solid track record.
Make Sure You Have an Exit
One of the trickiest things with real estate is knowing when to sell. One way, Ronan says, is to look at whether there’s a “natural buyer” at the price level.
For example, real estate prices in Lisbon, Portugal got “out of whack” – flirting with London levels. They were too high for a normal Portuguese person with a regular job to even live there. Artificial demand from foreigners buying apartments to qualify for a “golden visa” that would pave the way to European Union citizenship pushed prices into the stratosphere.
“The golden-visa people weren’t buying real estate,” Ronan explains. “They were buying the right to live and travel in the EU.” There’s nothing wrong with that – except if you’re looking to make a reasonable return on your real estate investment (or if you’re a normal guy in Portugal looking for a place to live). If Mr. Normal Local Guy can’t afford to live there, reality will eventually set in for the real estate market.
Low gross yields are another warning sign. Around 2013, Ronan told me, apartments in Phnom Penh, the capital of Cambodia, were priced at a gross yield of around 3%. “That’s less than some of best properties in the best neighborhoods in the world,” Ronan said. “Why would you go to Phnom Penh for that kind of return?” The market there hasn’t done well.
And that apartment in Newcastle that Ronan bought? “It was one of my first international investments, and I made a rookie mistake by not checking it out before buying,” he says. If he’d noted the accents of the locals behind the counter of the McDonald’s, he wouldn’t have bought. That’s why he spends most of his time traveling to talk with developers, check out infrastructure, and see construction sites.
His other mistake was caving into the dreaded FOMO. “At the time, Dublin was taking off, and I’d missed it,” he says. It was easy – peering through wishful-thinking glasses – to conflate booming Dublin with Newcastle. “Since then, I’ve learned that there’s always another market to look at, and that nothing is worth chasing,” he says.
Now here are some of the stories we’re reading…
Weekly jobless claims total 2.981 million, bringing coronavirus tally to 36.5 million
According to the latest figures, those displaced are still not being brought back to work under a freeze that was supposed to last weeks but now has extended for nearly two months. Continuing claims rose by 456,000 to a record 22.83 million, after the previous week’s total was revised down to 22.38 million.
The safest vacation? Your own private island
Brokers and travel industry experts say that since March, prospective buyers and renters around the world are showing an increased interest in escaping to an island exclusively for them.
Large chunks of a Chinese rocket missed New York City by about 15 minutes
The large core stage, with a mass slightly in excess of 20 tons, was slowly drawn back toward the planet as it interacted with the planet’s upper atmosphere… Had it reentered the atmosphere only a little bit earlier, perhaps 15 to 20 minutes, the rocket’s debris could have rained down on the largest metro area in the United States.
Soaring Prices, Rotting Crops: Coronavirus Triggers Global Food Crisis
Up to three dozen nations could face famines by the end of the year, potentially pushing an additional 130 million people to the brink of starvation.
And let us know what you’re reading at [email protected].
May you find your way through the chaos,
Chaos Chronicles Editor, American Consequences
With P.J. O’Rourke and the Editorial Staff
May 15, 2020