INTERNATIONAL REAL ESTATE INVESTMENT RISK

Abdul Jalil Omar

INTRODUCTION

Risk in international trade Trade off between risk and return What are the risks associated with

international real estate. Market (specific) risks is similar to

investing in domestic market. Additional risks (similar to international

trade).

WHY INVEST IN REAL ESTATE?

Yield Excellent current return generating asset

class Diversification

Historically strong returns with lower risk Tax benefits

Ability to shelter portfolio ordinary income with ordinary losses

Price appreciation Long term returns Inflation hedge

ELEMENTS OF REAL ESTATE INVESTMENT RISK

Business risk → macroeconomic trends Inflation risk → time value loss Liquidity risk → real estate is illiquid Financial risk → loss of principal

Influenced by capital structure and interest rates Execution risk → management Legislative risk → change in the rules Environmental risk → exposure to hazards

BUSINESS RISKS

Changes in occupancy rates, level of new construction

Anything that affect demand for space. This may also relate to economic risk –

whereby may affect consumer’s purchasing power.

Delay in initiating a development project due to permit requirement, different labour culture etc.

POLITICAL RISKS

Risk analysis involve country’s economic outlook and government stability.

Other factors – corruption level, crime rate. Specific for real estate – change in

regulation, tax law, rent control, zoning etc. Greater political stability – safe investment

environment. Another indicator – seriousness of capital

flight out of a country by its citizen.

FOREIGN EXCHANGE MARKET

Market of converting currency of one country into that of another country.

Exchange rate: conversion rate Function of foreign exchange market Currency conversion Insuring against foreign exchange risk TERM: currency speculation – short term

movement of fund from one currency to another

CURRENCY HEDGING

Spot exchange rates – money exchange counter

Forward exchange rates – a contract for deferred payment

Currency swap – involve two ways trade between two countries. Import and at the same time export to the same country.

INTERNATIONAL MONETARY SYSTEM

Institutional agreement that govern exchange rates.

Floating exchange rate Pegged exchange rate Dirty float Fixed exchange rate