Theory of Relativity

Learn more about leasebacks in International Living Postcards--your daily escape.

Saturday, Oct. 13, 2007

A recurring theme developed this week at my conference in Monte Carlo: relativity. It’s an important idea to keep in mind as you shop the globe for real estate investment opportunities. For what is too small, inadequate, risky, or unacceptable by one culture’s standard…is standard in another.

Many Americans have walk-in closets in their houses bigger than the leaseback studio apartments viewed on our tour to Cannes. Twenty-three square meters is about 250 square feet. That’s an area of 15 feet by 16 feet. And it’s a standard size for a leaseback studio. The two-bedroom units we viewed were about twice that size. By American standards, that’s not small…that’s a closet. Remember, though, that these apartments aren’t intended for full-time living. They are meant to serve as resort hotel rooms with small kitchens. They’re built for short-term rental. Investors buy them for the rental yield (low, but guaranteed by a long-term lease with a management company) and the potential appreciation (based on the fact the rent payments increase each year and you can renegotiate with the management company after the initial lease term). [ Ed. note: New to leasebacks? This tells you everything you need to know about the choice of Europe’s best-informed investors.]

Leaseback units are smaller than typical European apartments, but even typical European apartments are small by U.S. standards. On the Continent, 80 square meters is a reasonable size for a two-bedroom apartment. A three-bedroom of 120 square meters is considered comfortable.

Price, too, is relative, of course, and it’s important to draw out price comparisons. Consider, for example, the price (per square meter…always think per square meter, for it’s the only reliable point of comparison) of a two-bedroom at a prime address in one city versus the price of a two-bedroom at a prime address in another city, in the same country or not. Then try to understand the local conditions that could be responsible for one of those apartments being worth more than the other. Look at the economy, the government, the existing infrastructure, and the plan for infrastructure improvements. And look at pricing and pricing practices. Understanding these dynamics will allow you to pinpoint undervalued markets potentially poised for rapid appreciation once the out-of-kilter conditions revert to the norm.

I knew a developer once with a seafront project in the Caribbean. His product wasn’t selling even though his prices were an excellent value. Even two years into the project, by which point prices elsewhere on the island had moved well beyond his, this developer’s lots still weren’t moving. Then the developer did something unexpected. He raised his prices dramatically across the board. He made his lots more expensive than comparable lots on the island…and they sold out in a few months.

What?

In fact, this made sense. The marketplace was skeptical of his product, because he’d priced it too low from the start. Potential buyers worried subconsciously that something must be wrong with these lots. Why else would they be so cheap? When the developer increased the prices, new would-be buyers valued the product more. These must be good lots, right? Just look at the cost.

A German friend learned a similar lesson a few years ago when he returned to his homeland for vacation and began speaking with friends about his mortgage business. He offered them a very good interest rate if they were interested in investing with him. His German friends, though, declined. They thought the investment opportunity must be too risky, because they were used to lower returns. My friend changed his structure to accommodate his friends’ relative expectations. He came back to them offering a lower rate of return for the same deal, and many of them changed their minds and bought in.

It’s all relative.

Regards from Monte Carlo,

Lief Simon

For International Living

P.S. In 11 days, I’ll be at IL’s Ultimate Event in Panama, where attendees will learn the pros and pitfalls of international real estate…how to hunt for global profits…how to double your money quickly and safely with Australian and New Zealand property…what you need to know about foreign currencies and fluctuating exchange rates…how to purchase international real estate through your IRA…and much, much more. Full details here.

Related articles:

- Hassle-free Returns in the World’s #1 Tourist Destination

- It’s Not Too Late to Diversify Your Property Portfolio

- High Prices, Bad Neighborhoods, and Good Investing

Lief Simon will speak at:

- The Ultimate Event, Oct. 24, Panama

- Global Wealth and Wisdom Summit, Dec. 1, Ireland

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