IMPORTANT WARNING: The contents of this report have been compiled in good faith by Investorsoffshore.com to provide assistance to investors, but do not constitute investment advice or recommendations. Investors should not rely upon the information given in order to choose types or routes of investment but should make their own independent enquiries before making choices. Investorsoffshore.com has taken reasonable care in researching and presenting the information herein but makes no representations as to its accuracy and accepts no liability for actions taken or not taken as a result.

Real estate has become one of the most popular forms of alternative investment in recent years. Putting money into bricks and mortar or the land it stands on has undoubtedly been one of the best performing investments when compared to more conventional assets such as stocks or bonds over the last four or five years. Although many experts warn that the housing market boom in certain onshore countries has gone about as far as it can realistically go, the more adventurous home-buyers and investors have begun to look to offshore and emerging markets such as Eastern Europe for the next real estate boom.

There are, in fact, two main ways that one can attempt to profit from the buying of real estate. The most obvious of these is the physical purchase of a property or land by an investor who is looking to gain from either capital appreciation or rental income, or both. However, this is not always straightforward. Depending on the investor's country of residence and the jurisdiction where he or she chooses to buy real estate, a whole host of tax and legal obstacles may come into play. More on this later.

There is another, more indirect route, and that is to buy shares in a property fund or trust. Along with the growth in the alternative investment and hedge fund sector in the post-dotcom financial landscape, property funds have become an increasingly popular vehicle for both individual and institutional investors.

Research has shown that US$47 billion (Euros 38.9 billion) was placed into property funds worldwide in 2003, representing annual growth of 13% since 2002. Pension funds have been particularly keen to get in on the act, especially in Europe, where they accounted for 65% of this new investment, whilst in North America and Asia pension funds accounted for 58% and 20% of growth respectively. In fact Europe has become something of a hot-spot for property fund investing. During the first half of 2004, research shows that total investment volume reached Euros 41.3 billion, a 30% increase on the same period in 2003, fuelled by improving economic conditions, low interest rates and higher investor confidence. Studies show that this trend is set to continue as the development of more indirect property investments vehicles opens real estate to a wider investment audience.

The Asia Pacific region is to an extent playing catch up. Real estat assets totalling US$2.4 billion were bought by foreign investors across the region last year with South Korea leading the way, accounting for 26.4% of this, followed by Australia (23.9%), Tokyo (14.1%) Hong Kong (10%) and Singapore (8.2%).

Another commonly used indirect investment mechanism is a real estate investment trust, or Reits as they are know in the United States and elsewhere. These are companies that own, and in most cases, operate income-producing real estate such as apartments, shopping centres, offices, hotels and warehouses. They may also engage in the financing of real estate. Most Reits are publicly traded firms that are often listed on major stock exchanges.

Reits are to be found in many jurisdictions and are broadly structured along the lines of the US model where a company must distribute at least 90% (this level varies depending on the country) of its taxable income to its shareholders annually to qualify as a trust. Qualifying companies are permitted to deduct dividends paid to their shareholders from taxable corporate income. As a result, most Reits remit the bulk of their taxable income to their shareholders and therefore owe no corporate tax. Shareholders then pay taxes on the dividends received and any capital gains. A Reit cannot pass any tax losses through to its investors.

Reits offer investors the advantage of greater diversification through investing in a portfolio of properties rather than a single building. Another plus point (or minus point depending on one's own experiences!) is that management of the trust is undertaken by experienced real estate professionals.

On the other hand an investor may have different needs entirely that require the direct purchase of a property abroad. One may be moving with the job, looking for a second or retirement home or purely looking for profit in another marketplace. However, by investing directly across international boundaries, depending on the chosen jurisdiction purchasers will find themselves entering a potential minefield. Besides having to face the possibility of raising finance in a foreign country, the investor must take into account a myriad of taxes (capital gains tax, inheritance tax, gift tax, property transfer tax, VAT, stamp duty, tax on rental income, share transfer tax, land tax), fees and other legal obligations which could easily sour the most promising investment if not researched thoroughly.

Fortunately, there are a growing number of international financial advisors, mortgage brokers and relocation specialists offering international products tailored to meet the needs of both expatriate and onshore-based property investors. Whilst it is tempting to 'go it alone' in an attempt to maximise potential profits, paying for the services of a professional company experienced in dealing with international markets and well versed in the processes and legislation applicable to non-resident purchasers could prove invaluable in the long run.

As mentioned, some of the Eastern European states that in May acceded to the European Union are now being noticed by international property investors. Comparable property prices even in quite sophisticated East European locations such as Prague can be up to four times lower than say in Paris or major German cities. However, as regards other less-well-known areas of the region, opinion among experts on market growth prospects is divided, and buyers are advised in the short term to stick to the areas where there is a large western presence, such as the Czech Republic or Hungary.

Naturally, the purchase process in each East European country tends to differ. In the Czech Republic, foreign individuals have to spend about US$ 2,500, (Euros 2,000) setting up a limited company before they can buy a home. Relatively speaking, it is not so difficult for non-Czech nationals to get mortgages, although most lenders insist on repayment loans as opposed to interest-only schemes. Another hurdle is that it can take six months for the property to be registered which in the meantime cannot be occupied. Also, there is a transfer fee and at least a 22% tax on profits when investors sell.

In Croatia, a popular European holiday destination but not yet a member of the EU, home purchase is open to individuals and 'corporate' buyers. Nevertheless, the process is lengthy and bureaucratic. Permission must be sought from the Croatian foreign and justice ministries, which can take from six months to a year. An additional 10% can be expected on top of the purchase price in taxes and fees, although this can be reduced if buying through a company established in Croatia. Upon sale, a company may likely avoid the 35% capital gains tax that individuals pay on their profits, although it may be liable for 20% corporation tax.

Another region that is seeing an increase in foreign interest is China, particularly Shanghai where 18 million inhabitants are crammed into a city stretched over 200 square miles (roughly the half the area of London, which has around half the population). Here, a modest two-bedroom apartment can be purchased from around US$108,000, (Euros 89,000) rising to US$300,000. Although Chinese home-ownership rules are more relaxed than before, the authorities nonetheless scrapped a tax incentive for buyers in 2003 and have now raised purchase tax in a bid to curb property speculation. This is on top of a 20% tax on rental income and a 25% capital gains tax on the profit made on the sale price of a property that has been rented out. A deposit of US$50,000 is required and buyers are advised to add 10% of the purchase cost to fund the setting up of a mandatory Chinese bank account and mortgage, and to cover consultancy fees. Buyers will also need to appoint a managing agent.

Alternatively, there are plenty of low-tax jurisdictions scattered around the world (many with very nice climates and sandy beaches!) where one can dip one's toe into offshore property investment. Many of these jurisdictions, particularly in the Caribbean, are offshore dependent territories of the UK, so have similar legal systems to the UK or the US. However, some jurisdictions limit the number of foreign nationals permitted residence or work permits in order to protect the local way of life and the employment chances of existing residents. Others with limited geographical size and resources have limited property investment opportunities for wealthy investors only, or have in place tough planning conditions that put investment out of reach of the ordinary investor.

So, in summary, the opening up of markets in places like Europe and Asia has given international real estate investors some excellent new opportunities. It is also becoming increasingly easy and popular to acquire a second or new home in sunnier climes for those unwilling to put up with the inclement weather (and tax regimes) of their native countries. Although it may appear that the process of acquiring property abroad a somewhat daunting and costly exercise, and as with any other form of investment there are risks that need to be taken into account. Nonetheless, overseas property investment is achievable so long as the process is thoroughly researched and the appropriate professional and legal advice is taken.