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Foreign affairs

Created:
6 October 2006

More than quarter of a million Britons now own homes overseas. According to the Nationwide Building Society, the most popular locations are Spain, France, Portugal and Italy, but the US and Bulgaria have also been recent hotspots for investors.

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And although many of these overseas properties are primarily holiday homes, more and more international residential properties are being bought as pure investments. That's because many overseas markets offer better growth potential than the stagnant UK housing market - so holding offshore residential property provides diversification.

However, investing in international property can be a tricky business and requires thorough research and planning. So, while adding foreign property to your portfolio can be a good investment, you must consider the additional complications and risks.

For one thing, an attractive holiday home might not have great potential as an investment. If you only want a holiday home, you might do well to consider a fractional investment scheme. Unlike timeshares, these arrangements let you own part of a property fully, benefiting from capital uplift. Fractional ownership is also cheaper than buying whole properties, and management companies normally take care of maintenance issues.

If you're thinking in investment terms, you should pick properties likely to attract regular tenants in areas where property values are likely to rise - areas boasting economic development and government investment, as well as tourism and good transport links. To save time and money, you do your research online or use a specialist adviser, such as Savill or Knight Frank, rather than travelling abroad to begin your quest.

You will also need a good lawyer to deal with all the legal and tax issues. It might be best to use a UK-based specialist, who should understand the regimes both here and abroad, not to mention having professional indemnity insurance.

Justin Rix of accountant Grant Thornton warns that international information-sharing agreements make it impossible to shelter overseas property from UK tax. Local taxes must be paid but can be offset against UK liabilities. However, some countries have higher rates than the UK and British investors don't qualify for refunds. What's more, you need to consider rules on inheritance and might need to make a local will. Currency risk is another issue, so Stuart Law, of property adviser Assetz, suggests using a local mortgage to hedge your exposure.

For further information on investing in international residential property, visit www.assetz.co.uk/tracker.

As an alternative to direct investment in overseas property, you could use a fund - a lower initial investment is required and you avoid all the hassles of owning a property as an individual.

Overseas property funds are normally domiciled offshore and are not allowed to promote themselves, so ask an independent financial adviser for more information. Alternatively, you could take a look at the rapidly growing band of closed-ended overseas property investment companies listed on the Alternative Investment Market.

Click here to download a table of the major residential property markets for investors (as a PDF file)

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