Are you Home Biased in Your Investment Approach?
I recently read an article by Kim Iskyan on Truewealth Publishing that was titled “Investing solely in your home country is like juggling live dynamite”. The article is geared towards publicly traded investments but got me thinking about its applicability towards property investment.
In my experience there is strong tendency for private property investors to invest in their local market. Of course, it is in many ways a natural thing to do. You know all the corners, the good and the not so good areas and can instantly rate a location.
However, the article argues that staying at home means taking a lot more risk than you might realise and I think that also applies to property investment. Yes, investing locally has a number of advantages and is easier and in many ways more efficient than investing, say nationally or even internationally. At the same time, local investors can also develop blind spots or a skewed view of their home markets.
One example that springs to mind is about three social housing tower blocks with 800 residential units that we sold on behalf of a private equity fund just a few years ago. The towers had a bit of a reputation as an epicenter for crime, drugs and prostitution. They also had a history of coming from a neglected management situation resulting from an insolvency before our client picked up the asset and got a repositioning program on its way. Working with the asset intensively, the situation improved significantly over a period of 3-4 years. Vacancy and rent arrears were reduced, problem tenants moved out and were replaced with more regular people, deferred maintenance was caught up with and tenant satisfaction rose to new levels.
We then proceeded to put the asset up for sale. Initially we compiled a long list of target investors with an emphasis on local and regional investment players because we thought they could handle an asset like this and would be able to spot the potential.
What we did not expect was that the historically grown reputation obviously stuck with the assets a lot longer than seemed reasonable. We found that local and regional investors had a fixed opinion and picture in their heads and were not able to put that aside and take a fresh and objective look at the facts and figures. We almost got laughed at for even offering the assets to them. Eventually the assets sold to an outside investor for a good price. That outside investor was able to assess the situation without the burden of local historic perception and knowledge and consequently secured a good and sound investment for themselves that local players missed out on.
Now, that of course, is not the main or only argument for investing outside your home market. From a portfolio theory perspective, diversifying into different markets almost always reduces risk, even if you just pursue a “naive” diversification strategy without specific regard to market correlations.
Your investment performance is simply no longer dependent on the performance of one single location. Currently, following the Brexit vote in Britain, there is a lot of talk about Frankfurt benefiting at the expense of London. Whether that materialises or not, it does show that an external shock that hits one market can be balanced by being invested in another market.
Top 5 Reasons Why You Should Invest Outside Your Home Market
- To capture diversification benefits
- To have another benchmark and perspective
- To have more opportunities to choose from
- To develop a more balanced view
- To improve long term performance
Top 5 Problems and Pitfalls to Overcome When Investing Outside Your Home Market
- Sizing / spreading yourself too thinly
- Lack of market knowledge; no insider know how
- Lack of knowledge on political, legal, tax and currency framework
- To find reliable and professional advisors and partners on the ground
- Lack of reliable and representative data and information
If you are interested to find out more about how to overcome the problems and pitfalls and how to benefit from the diversification effects, arrange a free 30-minute initial consultation with us.
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