Currency dynamics impact property decisions

One of the big benefits of having a portfolio of international investment properties is the benefit of being able to buy properties based on local fundamentals, but also with an eye on international currency movements. For this reason I am currently in NZ, and I've just purchased a property for $NZ78,000 (or $US 41,000) based on currency conversions at this point. Its a buyers market at the moment so I was able to buy this property from some panicky old people, but also managed to get 3 months deferred settlement and I only have to pay nominal rent of $70/week before we reach final settlement. In case you are wondering what I got, I purchased a 2br home with a study on 756m2 of land in a rural town with a population of 44,000 very friendly people, 2 hours from a majority city, and just 2km from a lovely beach. The broadband signal on the beach was not so good so we opted for 2km away. The property was listed for sale at $NZ99K. There were bigger bargains but this suited us.
Why this property makes a lot of sense lies in the market dynamics and the global currency movements. Here are the reasons why the NZD has taken a major tumble:
1. The carry trade: The carry trade has broken but it will rebuild. The implication is that NZD again looks like good buying. Confidence will rebuild in NZD as the country is now more competitive than ever, and its a major food producer. We might not pay as much for premium food, but we will continue to eat, and the food market fundamentals don't look bad either, which is why we like the rural market
2. Rural areas - some parts of NZ have been undergoing depopulation so property prices have not fallen. Some areas which were depopulating are now growing, so in certain markets the dynamics are changing. Rural areas like this which were yield propositions are now growth propositions.
3. Tax benefits - NZ has some very attractive elements which favour investment. These include no capital gains tax on property, no transfer taxes, no GST. The 4% agent commission is levied on the seller.

NZ is also getting punished because it has a lot of debt, but one needs to appreciate that its terms of trade just improved a heap because its currency is weak and commodities (which it exports) are denominated in USD. The other attraction is that one-third of its external debt is denominated in AUD, and many will realise that the AUD roughly tracks the NZD, and that at a time of weak metal prices, the NZD might actually do better. But importantly the NZD is essentially not exposed to AUD.

I have attached here some charts showing just how attractive NZ property is in your local currency. Oh...and did I mention that NZ has some of the most open foreign investment and migration regimes in the world...because too many technical people keep moving to Australia for higher pay. The benefits of investing in NZ are particularly good for the Japanese, Europeans and anyone from a US-denominated currency. Its also one of the most beautiful countries in the world and contrary to my initial view people can be really friendly in this country. My earlier holiday perceptions were wrong.

www.sheldonthinks.com

Property sales in NZ

At the moment I am in New Zealand. I arrived about 2 weeks ago in Auckland. The appeal was a swag of cheap property for just $NZ80,000-100,000. Some are in really bad locations like the cold part around Southland, but others are close to major cities. I am in the process of preparing a report on the property market here because the country makes a lot of sense for Americans, Britons and Japanese based expats, assuming you dont mind the distances. It suits writers like myself or the semi-retired.

The attraction of NZ is the prices, the spectacular scenery, and contrary to my previously uninformed view after 3 fly & drives here, NZ'ers are actually very friendly people. There are drive-by shootings here related to gangs, but nothing that would make an American flinch. I've even seen Japanese tourists here. Usually the gangs shoot themselves.

Anyway I bought a Holden 2001 Combo and have travelled south of Auckland stopping off at all the real estates. Some really beautiful spots to be seen. Actually I prefer the South Island, but actually I am looking at a place close to the beach. More details in coming weeks. The real attraction is the weak NZD. The first thing I did was buy a car to send money, then I bought the car for $NZ5,000. Actually I organised to view the car after looking on the internet. The dealer even picked me up from the airport. Great little car/van. Its a 1.4L engine so great fuel economy for touring, and I'd happily sleep in the back if I was camping out, as I intend to do alot of mountaineering and kayaking here. As soon as I buy a house I will be buying an inflatable kayak. I want one this summer. Can't wait until I go back to Australia or Japan.

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Andrew Sheldon www.sheldonthinks.com

When to buy Japanese foreclosed property

In recent times I have been suggesting that for a lot of buyers it does not make sense to buy foreclosed property in Japan. People investing funds from countries like Australia and NZ should not invest in Japan at this time unless they want to see their asset value erode over the next 5 years. Even if you are flipping these properties you will pay higher capital gains tax in Japan for short term trading in property.
The people who should be buying property in Japan are those who are living in Japan, earning money in Japan, who retain their savings in Yen. In addition there are those countries whose currencies remain strong against the Yen, who also have the opportunity to invest in Japan. Japan therefore has appeal to the Japanese-based English teachers, financiers (who still have a job) and programmers. Even if you don't plan living there more than 2 years it probably makes sense to buy your own place and renting it out. There are several factors to consider:
1. Japanese interest rates remain at record lows - this has not translated into economic stimulation for other reasons, but recognise that it likely will at some time. Higher interest rates will strengthen the yen at some point.
2. OECD countries which have lowered their rates of late will eventually have to raise them, partly due to inflation, partly because of the normal credit cycle.
3. An eventual recovery in economic activity will strength the currencies of commodity producing currencies, so it might be prudent for people to remit their funds back to Aust, NZ, etc by that time (say 3-4 years). You can pay off an investment property in 3-4 years based on current yields....if you buy the right property.
2.
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Andrew Sheldon www.sheldonthinks.com

Philippines - attacks on successful people

There was a story in the SMH Online “Aussies 'held captive' in Philippines” on 6th Nov 2008 highlighting the experiences of an Australian property/resort developer in Boracay. In this instance his family were held hostage by ‘armed thugs’. Greg Hutchinson, the owner of SandCastles resort, believes the intent of the bandits was to intimidate him.
Hutchinson was one of the original developers on the island, arriving in 1989 when there were just 10 resorts. This is not a new phenomenon. There are vested groups in the Philippines who resort to intimidation if you achieve too much success. You establish a successful business model and they want to force you out. A time of financial crisis is the best time. The intimidation is not just of foreigners, but Filipinos as well, whether local or foreign. The Philippines is a nation of victims and perpetrators. The trick is to have modest goals or to spread one’s interests broadly, so that you remain under the radar. Avoiding the drug, prostitution and arrogance settings is another sensible strategy. I would therefore recommend avoiding these places.
Hutchinson said he had been experiencing such intimidation for three years. He said "There are certain elements in the country who wait until you develop something, make a success of it and then they move in and force you out so they can reap the rewards". One could speculate on what rewards the bandits are after? Were they there to rob the guests, were they trying to discredit the owner’s establishment, did they want to burden him with higher security costs than them, did they hope to encourage him to move out before his 30-year lease expires in 11 years. Maybe some combination of those. Interesting this article follows a similar story of a Australian businessman in Angeles City, who was killed because his business was too successful. I haved posted on this previously. Its apparent that the Philippines gets a bad reputation from these crimes. They always seem to be centered on those centres of ‘prestige’ like Boracay, Manila and Angeles.

Buying foreclosed property in Australia

Here is a good article on foreclosed property in Australia.
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Andrew Sheldon www.sheldonthinks.com

Property market risks moving forward

The property market risks looking forward is an important issue to consider. My focus is Japan and the Philippines, so I will restrict myself to those two countries because I consider them the most promising in the Asia Pacific region. There are 3 main considerations:
1. Foreign exchange exposure for foreign investors or foreigners residing locally looking to repatriate earnings from Japan.
2. Debt leverage
3. Interest rates

Interest rates in Japan are already very low so there is only one way they can go and that is up. The most pressing reason to raise rates would be inflation in the current climate. This is not a factor however that you strike Japan in isolation, so this is not an issue, and there is no reason to rein in private spending because its not strong. The private sector in Japan is not overly leveraged, though the government is. At some point the government will be looking at increased taxation to fund the public sector deficit. I think this is likely to fall upon the property market because consumption is weak and the government will be reluctant to tax income given the economic weakness. I don't see this as a significant increase. Certainly not enough to discourage investors given the high yield opportunities.
For the Philippines, debt leverage is very low, which augers well for future credit growth. Interest rates in the Philippines have always been at a premium because of the poor propensity for Filipinos to save. They pay a premium for borrowing abroad, which also increases the risk to local banks. Well the Philippines is not the only plausible source of capital. I think we can expect an increase in foreign savings flowing to the Philippines as the Arroyo reform agenda continues...albeit slowly. Metal commodity prices are lower, soft commodities are likely to fair better. The country will continue to attract remittances from abroad. Its a good story, though I do see it taking some time for the Philippines to benefit. Attractive features include Chinese, Korean and Japanese investment. The Philippines will be a future tourist and retirement destination. The scale will however be low-key for the time being as developer projects are restricted by foreign investment limitations. Its not the time to commit a lot of capital, but high net worth individuals with local relationships are investing with confidence. Some are not protecting themselves. Some don't know how to protect themselves. I recommend using protection!
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Andrew Sheldon www.sheldonthinks.com

End of the global property cycle?

Are you wondering whether this is the end of the property bull market? You will hear conflicting information. There are those saying that:
1. The OECD countries are so indebted that they will take years to bail themselves out
2. You have central banks cutting interest rates around the world

What gets me is how people just don't understand global finance...including the so called experts. Everyone is an expert. I must concede that it does take a lot of time to learn global finance. It covers a lot of topics. Fortunately property is one of those areas which is a lot simpler to understand. Simple, but its not always readily evident. For instance, relationships are often over-simplified. eg. Cuts in interest rates mean rising housing prices. That is a dangerous assumption. Falling property prices mean recession or depression. So which way is the market going?

My answer to this is simple. Its going sideways. That is true for property and equities, though equities clearly offer the superior opportunity to trade positions. You should therefore look for rallies and sell into weakness. The implications for property: Look for yields in Western markets. Really Japan is the only OECD market offering good yields, and best of all is that anyone can buy property there. I bought property there on a tourist visa.
The other opportunity are those Asian markets which have not yet moved. The best two economic laggards are Indonesia and Philippines. These two countries still offer capital growth propositions. Among those two countries the Philippines is by far the best prospect for a number of reasons including visa rules, reform measures, language, etc. The Philippines like Japan also has a sizeable foreclosed property market, though the price discounts are not nearly as compelling as Japan. But thats ok its a interesting story for different people. If you want a tropical life you go to the Philippines, if you want a cosmopolitan life you go to Japan. If you are a high roller, then you have a place in each country, and spend a few nights transferring in Macau besides. :)
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Andrew Sheldon www.sheldonthinks.com