Ron Szekely // January 2015
Are you focusing most of your investment decisions on the UK? Are most of your assets concentrated in UK shares, bonds and property? If so, could you be suffering from “home country bias” and, as a consequence, missing out on some fantastic opportunities for income generation abroad?
The best explanation to what the home country investment bias is, can be demonstrated believe it or not by football. You are a fan of your country and would support it for better and for worse. However if we would let you gather the world’s dream team, you would probably get players from all around the world according to their skill level.
The same applies to investments. Maybe you “know” the UK market well, however if you can get more elsewhere in the world why not doing so? Of course you need to still make sure that all the safety precautions are being kept like not forwarding any money to the seller directly, doing proper due diligence, stick to safe investments like bricks and mortar and don’t do development projects but rather existing properties.
If you are in this position, you are not unusual. It’s normal to begin your investment journey by putting your money into UK-based companies, shares and property. After all, you know the market well and you are in touch with the political situation and how the economy is faring.
While this is a good initial basis for your portfolio, focusing entirely on your home market can mean that over the long term your holdings are not diversified. As a result, there is the potential for the majority of your assets to stagnate or fall in value if your home country is affected by economic or stock-market decline.
As Gur Huberman, Professor of Behaviour Finance at Columbia Business School explained in a 2001 academic paper (Familiarity Breeds Investment): “Investors’ aversion to risk implies that their portfolios should be diversified. In particular, they will greatly benefit from international diversification. Nonetheless, people tend to ignore this advice: by and large, investors’ money stays in their home countries.”
With UK interest rates at an historic low, and the stock market suffering a degree of uncertainty due to the General Election this May, it may well be wise to look abroad to growing markets, such as the US.
The US presents an opportunity for diversification without the political risk inherent in developing countries. This is particularly true of the property market, where Freddie Mac, the government-sponsored mortgage finance company in the US, said in its January report that “the U.S. economy and housing markets are prepared for a robust start” to 2015.
The January 2015 report from its chief economist continued: “We enter 2015 with a number of positive tailwinds buoying the economy. Economic growth is running at about a 3% annual rate. Mortgage rates remain low and have even fallen over the past few months. The labor market continues to heal, posting solid job gains and driving falling unemployment, and falling oil prices have helped push down retail gas prices, effectively giving U.S. consumers upwards of $200 billion extra in aggregate to spend.”
Compare this to the new forecast from the Centre for Economic Research for the UK which this month (January) said although UK house prices grew by 8.8% in 2014 they will fall by 0.6% in 2015. “Due to a marked slowdown at the prime end of the market, London house prices will witness the greatest decline of 3.3%,” it said. “Leading indicators such as fewer new buyer enquiries and properties taking longer to sell already point to falling prices.”
One company which has already seen the potential of the US, and which now offers UK investors an opportunity to invest in US property, is CityR, a real estate investment company with 15 years’ experience of investing in the US.
CityR identifies and purchases multi-family residential American properties on behalf of UK based investors. Yields are then returned to investors on a quarterly basis, with CityR looking at a five year time horizon for sale, creating an opportunity for capital value growth. CityR employs a unique model, operating neither as a brokerage or an investment house, instead investing 5-10% of its own equity into each property alongside investors while providing its partners a preferred return meaning the company would not get any profit of its investment in the property until the investment partners will make at least 10% year on year. No money is being transferred to CityR, but rather to a legally insured escrow account that purchase and register the property on behalf of the investment partners. A major US bank is backing the purchase and provides 75% LTV allowing extremely high returns on investments
Sophie Carter UK Managing Director at CityR, says that the threat of a mansion tax is likely to push prices down, particularly in London. “There is likely to be an impact on the buy to let market and the UK property for many people will be seen as less safe.”
Compare this to the US, where real estate prices as still sitting at a substantive discount, in some cases between 30 and 50% depending on the area.
“Areas we are looking at here are areas which are not fully recovered from the recession but where there is steady employment, major employers, and therefore potential for those markets to recover in a steady and less volatile style,” Mr Reid says.
“Places like Detroit are showing high yields, primarily because prices have stayed at a reasonable level going forward.”
With up to 3% growth being predicted for the US economy, and three million jobs likely to be created in 2015, the future is looking bright for investors, he explains.
“In the UK the low rates on bank deposits have made people look further afield, looking for a better return on their capital but at the same time with a degree of safety that they don’t want to sacrifice just in pursuit of the yield.”
He says since CityR has already made substantial investments in US property, potential gains have been locked in. “If you have bought at a discount, as this company has, you have the ability to take the benefit of that discount that has already been secured,” he says. Investors who have a lump sum of £26,000 or more to invest and are looking for income and capital growth over the medium term can find out more information from CityR.