June 13, 2018

Interested in Global Property Investment? Make use of the Catch-up Theory

If you are an international investor, the golden rule of thumb is to buy the right property in the right location at an opportune time. Catch-up theory recommends another rule to help investors in identifying and buying property with attractive rates of return. According to this theory, you should buy properties in cities and countries where properties have to do a lot of catch to come up at par with major property markets. Interestingly, it says that the bigger the difference in these prices, the higher is the profit for the investor.

It was during the time when Dubai property market was gaining prominence for the first time among the investors that I learnt about this new theory of investment. I thought that the difference in prices of property in Dubai and other comparable markets of the world was too big for this theory to be accurate.

It was a time when foreigners were just given permission to acquire properties in Dubai and there was no way to judge the accuracy of the theory. There was no data available and even the mortgage market was just beginning to develop. Everyone was very critical of my catch-up theory at that time as most people believed it was not correct. However, time has proved me right and even my fiercest critics have now turned into my friends and thank me for my advice. Even though Dubai was not a wealthy city at that time, prices were still higher than what many believed they should have been. Those who paid high rents back then now rue their decision to not avail mortgages.

History repeated itself when Abu Dhabi emerged as a global city few decades ago. Although it offered leasehold and not freehold properties, it gave a chance to reap rich rewards for foreign investors. Property prices doubled in no time at all and then trebled to come at par with prices in major international cities.

I believe that my catch-up theory can still be applied to many other cities of UAE. For instance, Pal Jumeirah properties are being singled out by experts as the next big thing. The reason lies in the fact that prices here are still a fraction of similar properties in cities like London or New York. Also, the authorities are pumping in huge amounts of money to develop infrastructure in Palm Jumeirah. For instance, they are developing Nakheel Mall at the center, retail markets, and the Pointe boardwalk restaurant to make these properties even more alluring. They are also developing many 5 star hotels, skyscrapers, and shoreline apartments to convert Palm Jumeirah into a world class city.

In all probability, prices of properties in Palm Jumeirah should increase and become equal to average properties in Dubai. The most likeable aspect of catch-up theory is that it ignores the markets where properties are already overpriced. These markets have already peaked like Tokyo in 1990 and prices may soon start to decline. It is not prudent to invest in these markets as they are likely to stagnate or fall sharply in near future.

All this is not to deter wealthy investors form investing in high quality markets. There will always be upper end of the housing markets and investors ready to take a plunge in those markets.

Dubai property prices still need to move up a little bit to catch up with the average property prices in niche markets like NYC and Los Angeles, but it is better to look at markets where property prices are quite low.

One good way to identify potential market where property prices will increase at a brisk pace is to find out nations where average salaries are increasing in a fast manner. There is a strong correlation between salaries and property prices and they increase at double the rate of increase of salaries.

HSBC published a study in 2012 that talks about countries with highest increases in average salaries in the year 2060. Even though this list cannot be summed up as definitive, it nevertheless gives investors an idea as to where to park their money. The list contains countries in Eastern Europe and parts of Asia where average salaries are showing a tendency to increase year after year.

For example, average salaries in Hungary are expected to increase to $32000 from the current $6200 by 2050. Czech Republic should also see a similar increase from the current $7200. Your investment in Hungary at current prices should increase 10-fold by 2050.

Many may disagree with this proposition. But the way in which prices of apartments in Russia have increased 10 times in the last decade corroborate this theory. It is true that one cannot generalize and think of every market to be investible. But this is the way new markets keep on emerging like Eastern Europe in the 1990’s and UAE in the 2000’s.

In a similar way, there are many housing markets in Asia where the same rule of price increase applies. Phuket in Thailand has already proved to be a hidden treasure for the investors. The rate at which volume of tourists is increasing in countries like China and India, investors would be well advised to look out for properties in the tourism sector there.

I have a gut feeling that prices of properties in America and other European countries have increased this much only because of mortgage rates being kept very low. These prices are likely to take a beating as soon as this interest rate starts to go up. If you show a little bit of patience, you could soon be able to buy properties at lower prices. However, if you are interested in bigger returns on investment, you must look at housing markets with a lot of potential in terms of increasing property prices.