Overseas Real Estate: Buyer Beware

An owner of a small company bought a condominium in Las Vegas for $1 million (930 million won) November last year. He expects to earn approximately 50 million each month in rent when the condominium is completed in May.

“I had about one billion won to invest, and invested it in the U.S. due to real estate regulations in Korea,” he said.

Last May, the Korean government permitted individuals to invest one million dollars in overseas real estate, and could increase the amount to three million dollars by the end of this month. Naturally, interest in overseas real estate investment is growing.

However, some warn that people should be cautious in investing overseas because the real estate market is cooling in the U.S. and Canada, and countries like China and Japan are suddenly announcing new regulations.

According to the Ministry of Finance and Economy, overseas real estate investment amounted to 64 cases worth 27 million dollars in last May, and increased threefold to 180 cases worth 72 million dollars last November. Last December, investment cases decreased to 150 cases worth 56 million dollars, but increased to 182 cases worth 64 million dollars this January.

Growing overseas real estate investment seems to be resulting from people investing overseas due to regulations in Korea, and to the government’s policies of wanting to slow the foreign exchange rate by inducing Koreans to invest overseas.

Among investment destinations, the U.S. (48%) and Canada (23%) were the highest, and most of the investment was actual demand.

“Among the 40 cases involving Koreans last year in Los Angeles, only 4 to 5 cases were pure investments,” said Sohn Wook of Kousa, an overseas real estate consulting firm.

Many investments in the U.S. are intended to gain an E-2 visa.

“The minimum investment requirement to earn a E-2 visa is 200,000 dollars. Therefore, many Koreans choose to purchase 200 to 300 thousand dollars worth of grocery stores in the outskirts of Los Angeles,” he said.

According to U.S. Department of Commerce, foreign investment in the U.S. amounted to 19.6 billion dollars, 0.6% less than 19.7 billion dollars in 2005.

Capital from Asian countries increased by 891%. Therefore, dollars from East Asian countries such as Korea, China, and Japan seem to have flowed into the U.S. market.

Experts warn that the real estate market in the U.S. and Canada has been cooling down since 2005.

“Blind investments are dangerous,” said Yang Mi-ra from overseas real estate consulting firm New Star Realty.

In fact, a house in North Vancouver rose from 800 million won in 2004 to 1.2 billion won earlier last year, but did not increase for 8 months.

Investors should also keep in mind regulations.

Mr. Lee recently got loans to purchase an apartment in Shanghai, but did not because the Chinese government announced a regulation that only residents who lived over one year in China are eligible for real estate purchases.

sukim@donga.com bae2150@donga.com