| By Jonathan Neale – property and business journalist The UK tends to ‘punch above its weight’ when it comes to attracting foreign money. This is primarily because so many contracts insist on ‘upward-only rent reviews’, meaning that the income from the tenant can only go up, not down. Long lease lengths are another factor. An additional factor in the UK is the lack of land supply; we are a small island and development is very strictly controlled by the planning system. Given the Government’s opposition to out-of-town development, new office parks or retail centres are an unlikely prospect and, therefore, future competition is limited. Meanwhile, in countries such as the United States and Australia, land is far more available, and development is less regulated. Consequently, it is far easier for your investment to be, quite literally, devalued because of a new development several miles away. This adds some degree of risk. However, if you have serious money to invest, spreading your risk is certainly a good idea – if one country is suffering, another might be thriving. Here, we will take a look at a handful of the major foreign markets and look at how they differ from home. United States America, with the world’s richest, largest and most dynamic economy is an obvious target for an overseas purchase. Its vast array of private businesses would seem to almost guarantee some sort of return on any investment. The US – like other ‘Anglo-Saxon’ markets, such as Australia and Canada – has a very similar market to the UK. It’s very ‘transparent’ – i.e. it is easy to get information on the market and properties for sale, and transactions are conducted on a very ‘open’ basis. It is also very easy for foreign investors to purchase property, although there are, of course, tax implications. As might be expected, there are fewer anachronisms such as upward-only rent reviews and, in general, very little Government legislation covering contracts. In particular, indexation of rent used to be the rule in the office market, with the figure payable per year increasing in line with, or in proportion to, the Government-produced Consumer Price Index (CPI). It is now more usual for the tenant to agree a fixed annual increase of a few percent. In the UK, major shopping centres now tend to charge tenants via a ‘turnover rent’ – i.e. a proportion of the shop’s income, subject to a minimum ‘floor’ rent. This has been general practice in the US for some time, and it is now common for all types of retail unit. Like the upward-only rent review clause in this country, this will ensure that your income will not drop below a certain level but will also give you a share in any bonanza if the retail location suddenly booms. Unlike many other markets, commercial tenants do not have automatic right of renewal when the lease ends, so many will try to ensure some sort of option is contained within the lease, subject to negotiations over a new market rent. The major issue with investing in US property is the rate of currency exchange. The dollar is currently weakening, so the worth of any investment there is declining. Of course, this situation could reverse at any point. Whatever the situation, the unpredictability of exchange rates adds another level of risk to your investment. Remember, you will also have to pay careful attention to your legal rights and tax obligations as a foreign investor, which will be very different to those applied to American citizens. Australia Australia has become a popular place to invest in, mainly because of its familiarity. A lot of British people have relatives ‘down under’, or have at least been there on holiday. While the culture might have recognisably British roots, business has become increasingly Americanised over the past few decades and the rules and risks are very similar to the USA. The economy has been among the world’s strongest and steadiest for several years, aided enormously by its proximity to Asia, the world’s great growth zone. Despite the country’s stability and prosperity, the Australian dollar – sometimes jokingly referred to as the ‘pacific peso’ – has historically been prone to large fluctuations. It is also worth noting that Australia has higher tax rates than either the US or the UK and these will be even higher for foreign nationals investing in the country. Once again, good advice is indispensable in minimising your burdens. Although Australia is almost 24 hours away by air, having business interests there is one of several ways of convincing its Government that it wants you as a citizen. Continental Europe The proximity of countries such as Spain and France, together with the emergence of the likes of EasyJet and RyanAir, has made property investment there increasingly tempting. As property is a tangible asset, people are often more comfortable if they can see it on a regular basis. The EU’s demolition of financial barriers has meant that it is now cheaper and easier than ever to invest in these countries. In law, you should be treated no differently to a citizen of that country, so the tax implications are minimal. Despite increasing centralisation, Europe is still a minefield of different legislations and customs. Scandinavia and the Low Countries have a tradition of transparency and high levels of information that are instantly recognisable to the English-speaking investor. However, Germany, France, and, most of all, the southern European states are notorious for secrecy and a lack of transparency. In some cases the market is closed to anyone outside a certain clique, let alone the foreign investor. Add in a language barrier and it becomes obvious that there is a need for highly qualified, locally based advice. Indeed, many British companies have set up in places such as Spain offering exactly this advice to both UK residents and expatriates. As a result of this increasing internationalisation, countries such as Spain – where property was once a byword for corruption – are rapidly conforming to a North European model. Nevertheless, what has not changed is the amount of regulation covering the commercial property industry. Legally, the stakes are often pitched towards the tenant. In France, for example, rents legally have to be indexed, and any attempt to alter this can lead to court action. It is also practically impossible to evict a tenant, as he or she has automatic right of renewal. While this has meant that a lot of properties are decrepit – there is no gain in the landlord refurbishing them – it has also meant that France has retained many more small businesses than the UK. However, as these economies begin to liberalise in the face of sluggish growth, this could change, and become an opportunity for investors. The ‘wild east’ of Europe – the countries which have recently joined the EU, such as Poland and Hungary – has long attracted the less risk-averse investors. Putting your money there is still seen as being more dangerous than in the established economies, but given the dynamite-like growth in the east over the past few years, that view is rapidly changing. Yields are high as a result of that perceived risk and the difficulty of negotiating local regulations. If you have the stomach for both, the returns could be substantial.
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