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Strategic Considerations about Real Estate Risks
Real estate, by definition, is what does not move; it is what you cannot carry with you. This definition suffers no exception - to the extent that, a tree, when planted in the ground is part of the real property; only an act of severance (cutting it down or uprooting it) would turn it into personal property.
The French call real estate "immobilier"; to the Germans, it is "Immobilien"; and in Spanish, it is "inmuebles". The three words stem from the same Latin root meaning does not move, immobile. Real estate remains immobile: it is its weakness and its strength.
Drawback: this is obvious; you cannot take it with you - unlike gold or stocks. If you need to leave tomorrow to never return, you will leave without your real estate. Many learned it at their expense while fleeing the Nazi regime.
Benefit: because you cannot walk out with it, real estate cannot be stolen...Unless it is with the complicity of the State. We know the powers of Eminent Domain, enabling a State to expropriate a property owner for the common good, such as building a major highway. Yet, this is an extremely rare occurrence in the United States. But this happens more often than you think in other countries, and for reasons that are far from the "common good". We mentioned the Nazis in the paragraph above.
I learnt a similar lesson the hard way at a very young age in the country where I was born, Algeria.
My experience: In 1957, the year I was born, Algeria was a French province, and it had been a French territory since 1830, before many States became part of the "United States of America". Several of my great-great-grand parents had been born there. Yet, an uprising turned revolution took away our property rights (we were lucky, because, for others, it took their lives as well). I cannot help thinking of these early childhood memories, when I see people invest in countries where they have no roots and in areas known for their lack of political stability: Costa Rica, Panama, etc. Most of these buyers are leisure investors: they purchase a home or an estate because the prices are cheap and costs of living affordable.
What may affect Wall Street: In the corporate world, the new fashion seems to have become the Orient, with all of its charms and dangers: India and China. The "Opium War" is now history and the days of the "One Hundred Flowers" of Mao-Tse-Toung seem well wilted, buried and forgotten. Yet, pioneer-investors in the new China, as early as the 1980's, could vouch for the fickle spirit which can reign there: many learned it at their own expense. They realized on the late, that before you invest somewhere, you need to learn more than a foreign language: you need to know the foreign culture. Or more precisely, from foreign, the culture must become familiar.
Of course, now with Wal-Mart and many American corporate giants in the process of quasi-relocation to the Middle Empire, why should we be scared? Well, actually, if we remember that the Chinese culture - a culture older than ours - is not a culture of "law" but a social establishment connected to one man, the Emperor, we can begin to understand that any corporate progress in China is subject to the Emperor's will...or whims. If the Emperor, now called the neo-communist oligarchy, changes his mind - which is a very human trait of character, amply confirmed in Chinese history -, then the rules and priorities change. It is not the rule of the Law, but the law of the Ruler. The nuance is of importance. Even the invincible Wal-Mart may one day regret its Chinese ventures: they may quickly turn into adventures where Goliath becomes David, without the Godly blessings delivered in the Bible...
Culture: In our Western culture impregnated by the Ten Commandments and the Roman sense of Law, we tend to make the fatal mistake of believing that every other country and culture are like ours. Our western habits are those of a minority on this planet. Another example is Japan. In the Empire of the Rising Sun, the social link revolves around the Samourai. This is a mutually elective relationship, carrying numbers of social conventions. The Law (or the Emperor for that matter) are not as important as the freely chosen relationship between two individuals, and the loyalty and commitment that ensue. Investing actively in Japan without a thorough understanding of this culture, would be like investing in the United States while ignoring the laws of our country - it would not take someone too far.
Constraints for a sound real estate investment: Going back to our topic of real estate, a safe investment can only occur in a context of a law known, understood, and enforced equally. This limits our field of action to the United States, Canada, and Western Europe. There might be a few exceptions, but not many. Take away the language barriers and the burden of learning new laws and customs - the conclusion is very simple: stay in the United States or exit at your own risk. Some may think that a potentially higher return abroad may justify the risk. I believe this argument to be fallacious, because real estate cannot be liquidated quickly. When the political climate begins to deteriorate (let's say, in Costa Rica), then, all potential buyers will wait and see. As things get worse, buyers will run away, leaving the Americans owning real estate there helpless and "stuck" in place. Add to the mix a revolution not fond of foreigners, and you have lost your investment, and in some cases, your life...
Conclusion: if you are American, buy your real property within the fifty states. The market may experience ups and downs, but you will not lose your capital. In today's environment, real estate is most likely to have reached a cyclic low: it's a great time to buy. Don't forget to hire a professional Realtor who will tell you facts and sensible opinions, as opposed to what you want to hear. Then and only then, yours will be success and profits...
Posted by:
Olivier
Monod
Posted:
7/19/2008
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