International property development – developing real estate in a country that is not your own – appeals to many people.
Some feel – completely wrongly – that it is ‘easy money’: that the challenges of carrying out a property development project are relatively small and the rewards high.
Others feel that they have the necessary experience – or can contract in the necessary experience – and that the financial rewards of developing in another country are higher than the rewards they could obtain by developing in their own country. These people, too, are often wrong.
A third group of potential international property developers decide to embark upon a property development project in another country on the basis of some previous experience and a thorough commercial analysis of the opportunities, risks and rewards. These are the people who are often successful.
What is international property development?
For the purposes of this guide, we will look at property development (real estate projects) in its broadest sense: doing work on land or buildings to improve them or change their use and so increase their value.
International property development is simply the process of doing this in a country that is not your own.
Property development can therefore run from the smallest of projects – for example, taking a small, run-down house and refurbishing it to sell at a profit – to a large-scale green field development of 1,000 units or more.
For some people, it can also include buying land and then working to change the use of that land to a more profitable use: for example, changing agricultural land to building land. However, this type of property development is specialised and usually requires local connections and knowledge and so it is generally not a realistic option for international property development.
Some people engage in international property development with a view to building up a portfolio of properties that they can let (rent out) to other people rather than immediately sell at a profit. By doing this they would expect the property to grow further in value over time and the combined profit from the rental and ultimate sale to be more attractive than the profit from the simple development and immediate sale. If this is a topic of interest to you, you should see our Global Guide to Property Investment and the country-specific variants of it.
Which countries are the ‘best bets’ for international property development?
What you’re looking for are countries that have the following characteristics:
There can be opportunities to make money in countries that are not politically stable but where you believe political stability or positive political change is just around the corner. For example, there has been lots of interest in Cuba and a few years ago there was considerable – if short-lived – excitement about the potential rebirth of Lebanon as a tourist destination.
People have been successful in developing property in Albania as it emerged from communism. Others saw opportunities in Bulgaria, South Africa and elsewhere.
Property development in a country that lacks political stability is a high-risk venture. It is not for the inexperienced or faint-hearted. Nor is it something in which you would want to sink your life savings; because ‘sink’ could be the operative word.
As people’s living standards improve, in most countries their first desire is to buy a nice car and their second is to own a nice home. Beyond that, there comes a point where they look at additional property as an investment and become interested in property in another country or in a beautiful region of their own country as a lifestyle enhancer.
Prosperity and economic growth are, therefore, the engines of the property development market.
In recent years, vast numbers of people around the world have reached a level of prosperity where they can improve their housing. Tens of millions in China and India. Millions in Brazil. Millions in Eastern Europe. Tens of thousands in very small places like Singapore.
In each of these places there has been a huge boom in property development and in each of them developers have made fortunes. Unfortunately, in each of them developers have also lost fortunes if they have entered the market at the wrong moment.
Many international property developers therefore feel safer looking at opportunities in countries with less explosive growth but a solid long-term trend of increasing prosperity. At the moment (February 2016), an obvious place to investigate would be Germany: an economic powerhouse which has suddenly acquired over 1million extra residents. This is putting pressure on property availability which has an impact at all levels of the property market as the poorest are displaced by refugees into slightly better housing, the people who were living in that housing are displaced upwards and so on.
A working legal system
Property development is all about two things: knowing that you can safely own land and that your rights will be respected and knowing that the dozens of contracts that you will enter with architects, builders etc will be enforceable.
Both of these things depend upon the country having a working and reliable legal system.
Many countries around the world do not. Some of them are surprising. See our Global Guide to Crime, Justice and Corruption.
Deciding to develop property in a country that lacks a working legal system is an extremely high-risk strategy: many would say foolhardy, especially for a new developer.
A growing demand for property
When you embark upon property development you will do so with a target market segment in mind. For example, this could be housing for growing numbers of students or housing for professionals such as teachers, doctors and nurses. Equally, it could be tourist accommodation – either aimed at local ‘domestic’ tourists or increasing numbers of international tourists.
Whichever your target market there is a wealth of information available to allow you to study its projected size over the next five or ten years. For example, for international tourism there are statistics from the World Travel & Tourism Council (WTTC) or the UN World Tourism Organisation (UNWTC). For projected growth in student numbers you will usually be able to find information in the country’s Department of Education or Department of Statistics’ websites. However, such is the importance of these numbers that it is probably worth – in all but the smallest development projects – getting an expert to prepare a short report for you as the expert will have access to a larger range of sources than you will be able to find online.
A shortage of property
A shortage of property not only creates demand but generally also pushes up prices.
The shortage will often not be a national shortage but a shortage you’ve identified in a particular place: for example, a particular university town lacking accommodation for students or a newly developing tourist area where tour operators are desperate for quality accommodation.
In many countries around the world there is a shortage of accommodation of almost all types in their big cities.
Low labour, land and materials costs
Property development costs generally have three components: the cost of the land, the cost of the labour required to develop it and the cost of the materials used. In the traditional basic financial model for property development, you would expect to see the land price accounting for about one third of the sale price of the property being built, labour and materials used in construction accounting for another third and the final third being profit. Many developers would that say that, in today’s post-crisis world, that model is damaged if not broken and that you will be lucky indeed to see a third of the sale price as profit.
In the place where you’re thinking of developing, the mix of expenses will – in any case – probably look very different. There are places where labour is cheap but land surprisingly costly. There are others where the materials used in construction are either scarce or heavily taxed. For example, in Cape Verde labour costs are quite low, land prices are low to moderate depending on the location on the land and the facilities that come with it and construction materials very expensive as Cape Verde has no natural resources and so everything has to be imported. Even the water you use to make your concrete has to be produced by desalination.
The ability to sell at a significant profit
One of the things that attracts many people to international property development is that there is, certainly at the beginning of the development cycle, a disconnect between the price of construction – land labour and materials – and the price people are prepared to pay for a property.
This is particularly so if you are selling holiday homes to foreign tourists. Most of those tourists will come from first world countries and be expecting to pay not much less than first world prices for their piece of paradise. If you can build their dream home at second or third world cost, the profit margins can look very substantial.
Even if you’re not aiming at the tourist market and its soft prices there is often opportunity for good profit in international property development, particularly in its early stages in any particular country.
The people in that country will have been building houses, schools and commercial property for themselves for decades or hundreds of years but in poorer countries the process of development tends to be ill-defined and inefficient. They will often not have applied the disciplines and ‘science’ used by property developers in more mature markets. Thus, when a particular market becomes a candidate for significant property development, international developers often have an advantage over local developers and that advantage can turn into extra profit. Of course, it isn’t a one-way street. The local property developers will have the advantage of their many years of experience in dealing with local conditions, their local contacts and a natural preference for the local administration to deal with local companies. Despite this, larger international companies can often work more profitably during the period until the local developers acquire and absorb the more sophisticate skills needed.
Many international developers will try to get the best of both world by teaming up with a local partner: matching their technical skills to the local partner’s local knowledge for their mutual benefit. However, this tends only to be on larger projects (though there is no reason in principle why the same technique could not be used in smaller ventures).