Due Diligence Print E-mail

Before you part with any money, or sign any legal contract requiring future monies, then it is key that you, or your representative, have carried out due diligence on your potential investment.

What is due diligence?

Due diligence means taking the appropriate level of care and attention over any given transaction. In the context of a property investment or purchase, it means researching the country or market that you are considering investing in. There are several levels of research, ranging from the essentials of checking your property venture or purchase is legal and compliant with local regulations, as well as the next level of research, which is about ensuring that the specific property you are purchasing meets your requirements and investment objectives.

So whilst we conduct our own due diligence at Property Venture to ensure we are comfortable with our partners and the investments we offer, only you can make the final decision on whether it meets your needs and aspirations.

There are several areas of research, which must be undertaken before final decisions can be made. The level of detailed research conducted, will to an extent depend on the level of investment and the risk profile of the investor. However, there is always a base level of understanding of the fundamentals that will be required.

It may be useful to consider using a mnemonic similar to the STEP-LED one below, to help guide your effort in considering the different macro (high level) market factors that will start to inform the decision on whether an investment is the "right" one. Each of the factors are grouped under the headings below, which make up the STEP-LED aide-memoir. Each of the headings are designed to act as a checklist for the type of questions you ought to be asking about your chosen investment and help apply common-sense to your investment. :

S ocial - factors will often take into account the cultural aspects of a market, including health consciousness, workplace ambition, mobility of workforce. These can give clues as to attitudes to and propensity to renting property for example, or the type of accommodation needs of the resident population, should your property purchase be a buy-to-let investment.

T echnological  - may have an effect on ease and speed of communication in the chosen country, which in turn may impact on  the purchasing process and potentially the speed at which this is done. For example, if relevant websites are in your chosen language, this eases the process considerably

E conomic - factors such as economic growth of the country, the prevailing interest rates, exchange rate stability and levels of inflation - all have some influence on the level of risk and potential profitability of the chosen property venture. The greater the levels of disposable income, the more a population can afford to spend on areas such as renting property, for example and this could shape how you decide on rental income and the sale price.

Tourism is a key economic driver, enabling many emerging property investment markets to flourish. Some people are prepared to take risks on fairly unknown countries, whilst others will still prefer to invest in a tried and tested, stable market place for instance Montenegro versus Spain.

P olitical - factors include political stability of the chosen country, (which in turn has an influence on how long a term the investment may be), and other areas such as tax policy, which will directly affect the profits from a property investment. With much of the world in a politically unpredictable state and with varying degrees of religious unrest, it is essential you look at the stability of your chosen investment market.  Clearly, the higher the risk, the more likely there is to be a greater return, but you must weigh that against the sustainability and stability level of that market.

L egal - factors may cover environmental laws, regulations relating to foreign ownership of land and property which directly affect the purchasing process. So countries encouraging direct foreign investment are more likely to encourage foreign ownership of land and property and make this process easier e.g. Montenegro. Some markets that have a well developed, self-regulating financial services industry, (like the UK) means there are a wealth of mortgages and other financial products readily available to support the investor. Other markets, which are less well developed e.g. Poland, do not for example have such a concept as a buy-to-let mortgage.

You will need to take into consideration the legal structure of the purchase and be mindful of local law involving the sale of property, land ownership, property ownership.  If buying new or off plan, check out the builder's local reputation e.g. does he own the land on which he is building, if not then who does, are there any debts on the land or buildings?  Are the relevant licences granted, have the banks guaranteed the project, do they allow re-assignable contracts? Do they offer long-term building guarantees?

Ensure where possible that, all building licences, permits and bank guarantees are in place prior to signing any legal paperwork

E nvironment - strong environmental controls could limit the number of developments or property opportunities available for investment, thus protecting the investment by creating a 'limited number = desirability" scenario.  In some countires and areas, local environments have often been marred by the build them high sell them cheap logic.  Many national and local governments have learned by these earlier mistakes and may now strive to make new build products compatible with the local topography. 

At Property Venture we are mindful that each investor has their own agenda and where appropriate we will endeavour to source environmentally friendly product for them to see.  Investors do need to realise however, that in some emerging markets, whilst local councils and developers will comply with legal stipulations, their main objective is to sell product and they may pay less attention to the environment and simply ensure the basic levels of compliance.

D emographics - population make-up and dynamics such as age, gender, ethnicity, religion, language, help provide an understanding as to their individual needs, which should be taken into consideration, if you are considering buying and renting out a property to the locals, or indeed renovating and selling on.

Once you have worked through the market due diligence process using a STEP-LED approach or similar, decisions on geographic location need to be taken, along with the type of property in which you are interested. Here comparisons of local property prices, rental returns, how well the infrastructure works and whether the local government are investing in transport links, schools and health care, can help.  Also take note of natural features which may enhance your investment - e.g. city expansion and growth plans, sporting activities e.g. skiing, golf, attractive beaches.

Return on investment - taking all of these factors into consideration, you need to decide which country profile best suits your needs and risk profile. Bear in mind that in many of the emerging markets, where capital growth could be significant fairly quickly, the country's infrastructure may not be well established.  Clearly, the high return on emerging market investment is tempered with the higher risk often associated with it. Be clear that the investment itself is in line with your own expectations of capital growth and yield (rental income as a % of property value) and that there is a realistic chance of achieving these.

REMEMBER:  A property purchase is only an investment if it is legal and purchased at the "correct price", allowing for its value to appreciate and/or generate solid rental returns, in proportion to its cost.