House Prices: What Next?

by the Investors Offshore Editorial Team, June 2011, 24 June, 2011

Four years ago, as the house price boom continued in many countries across the world, we asked whether the laws of economics had been repealed. Now, we can see that they remain as true as ever. The air leaked rapidly from the global housing bubble. Beginning with the US, as has been demonstrated time and again with deflating asset bubbles, a wave of price falls spread around the world, attacking in turn each of the countries which had seen particularly aggressive house price rises.

But it was over surprisingly quickly in many countries. Figures for 2009 showed double digit price rises in Hong Kong, Taiwan, Israel and Australia, with increases between 5% and 10% in China, Norway, Sweden and Finland, and smaller gains in the UK, France, Switzerland, Singapore and Japan.

However, prices continued to fall in 2009 overall in the beknighted US, in South Africa, South Korea, Germany, Spain and Denmark, while Ireland reeled under a further 10% loss, and the damage continued to pile up in Dubai and the UAE in general.

2010 didn't show any clearer overall pattern. According to Global Property Guide, only 15 countries experienced house price increases, while 21 countries had house price reductions. 18 housing markets performed better in 2010 than the previous year, while 16 countries performed worse.

The data did, however, reveal certain geographical trends. In the United States, prices fell further in 2010 than in the previous year, by 5.3%, according to the seasonally-adjusted Case-Shiller index. Housing markets in Eastern Europe also fell, although at a slower rate than in 2009. The Baltic states bucked the Eastern European trend by recovering strongly in 2010, but much of the steam seems to have come out of this rebound in 2011. Prices continued to rise in some Asian territories and housing markets in Singapore ( 13.60%), Taiwan ( 9.70%), Japan ( 5.71%), Thailand ( 2.92%) and Philippines ( 0.19%) recorded price increases during 2010, supported by strong economic expansion and all-time low interest rates. Shanghai, China, on the other hand, experienced a slight fall of 1.95%.

Latvia was the best performer in Europe during 2010, which saw standard-type apartments in Riga rising by 19.09%. The Latvian property market began recovering in Q4 2009, and by Q3 2010 apartment prices had risen a surprising 24.73% year-on-year. Ireland on the other hand suffered the worst price decline of all countries surveyed. In 2010, average house prices in Ireland fell by 11.60% to EUR191,776, compared to 2009’s price-decline of 13.51%. Germany surprised many analysts by posting a 1.55% house price increase in 2010, buoyed by its strong economic recovery, but France and Switzerland saw meagre house price increases of 0.8% and 0.33%, respectively.

The picture for 2011 looks rather similar, although Global Property Guide's first quarter global real estate report suggests that house prices are falling in more countries than they are rising. This research shows that out of 35 countries with reliable house price data, prices fell in 21 and rose in 14. Asia and Latin America continue to be the regions were housing markets are relatively strong. Europe, however, remains very much a mixed picture, while the downtrend in the United States continues - US Federal Housing Finance Agency (FHFA) data released on May 25 showed that US house prices were 2.5% lower in Q1 2011 than in the same period in 2010, the largest decline since 2008. US house prices were standing at just under 20% below their April 2007 peak, the FHFA said.

With such a disparate picture, there are no overall guidelines to follow at present; each market has probably got to be looked at on its own merits.

Absent global trends (which we have had for the last ten years at least) there is no demonstrable direct relationship between house prices in the USA, UK, Spain, Dubai or Australia for example and prices in some of the countries that we look at later in this report. It was the impact of global wealth and global 'feel good' sentiment which drove the upward spiral of real estate prices during the 15-year long boom that ended in 2008, and it was then their absence that drove the downward spiral. Look more closely, though, which is what any aspiring real estate investor must do, and local circumstances can be seen to have had a major impact on the extent of the boom, and then the extent of the bust.

It cannot be denied that the latest boom in house prices has been unprecedented in both its extent and international synchronicity, enduring even through a brief period of economic recession in the United States. From 1997 to 2005, house prices escalated by 154% in the United Kingdom, 192% in Ireland, 145% in Spain, 114% in Australia and a stunning 244% in South Africa. Even in the United States, which for years consistently denied the existence of a national housing market or the growing danger of a real estate bubble, prices rose by 73% in the same period – a boom unparalleled at any time since the end of the Second World War. Only in Hong Kong among major jurisdictions did prices fall in that period, by 43%, a testament to the importance of local market factors, although they more or less went sideways in Germany.

Despite constant warnings that the enduring boom was unsustainable, and that allowing it to continue was increasing the chances of catastrophic collapse, politicians paid no attention (they never pay attention to anything except opinion polls and the next election) and allowed the toxic mess that was the sub-prime mortgage market to reach unsustainable proportions. People will be talking about whose fault it was for decades to come, but that is not the purpose of this report, which is simply to try to gauge the prospects for the market in the years ahead of us.

It is history now, of course, that the boom did come to an end in fairly sensational fashion during 2007 and 2008, with horrid consequences for the global economy and the banking sector. Signs of impending disaster were there to see in the US market as early as 2005. The 12-month rate of house-price inflation slowed to 12% in the third quarter of 2005, from 14% in the second. Prices of new homes, however, rose by only 1% in the year to October 2005, down from 16% in early 2004. A glut of new building was forcing developers to cut prices. The best signal of a further slowdown to come was the increase in the stock of unsold homes. The number of existing homes on the market was equivalent to 4.9 months' sales in October of that year, up from 3.8 months' sales in January. The British and Australian markets also showed considerable signs of strain in 2005, although prices didn't actually start to fall until 2006. In the third quarter of 2006, house prices fell in Melbourne, Brisbane, Hobart and Canberra. Nationally, Australian average prices increased by only 1% in the year to the third quarter. In real terms, they fell. House-price inflation also eased in France, Spain, Italy and Ireland.

A 2006 report on the rich world's housing markets by the OECD concluded that Australia had the most over-valued housing market, with prices 52% above their “correct” level. Next in line was Britain, where prices were 33% overvalued. To judge the fair value of homes, the OECD used the ratio of prices to rents, which is a sort of price-earnings ratio for housing. If prices are too high relative to rents, potential buyers will rent not buy, eventually pushing down real prices. In Australia this ratio was 70% above its average level over the period since 1970.

US house prices fell by 14.2% in 2008, and by around 3% in 2009. Although there are regional variations, the trend is still downwards, and more than 20% of US homeowners are reported to have negative equity.

The drop in average house prices since the peak is greater than 20% in the UK. Many commentators are prepared to say that in the really over-bought markets such as the UK, the eventual fall may be as great as 30% (indeed, in Ireland the drop has been about 40%)Rising prices in 2010 in the UK seemed to contradict this; but it is probably a case of the rich London market masking a weaker picture elsewhere. Exceptionally low interest rates are also helping to prop up the UK market, and the Rightmove House Price Index for May 2011 revealed that average asking prices for new properties coming to the market saw a 1.3% increase over the month. Overall, however, the trend seems to be downward, with Land Registry statistics suggesting a 2.3% fall in UK house prices in the year to March 2011. And interest rates won't stay so low for ever.

Of course there is a moment at which the cycle will reverse itself, and that is when you should buy. Unfortunately we can't tell you when that moment will be, but if you were to put together a compilation of the views of all the experts - and no field has so many! - you might find that the bottom-most point will be reached in 2011.

That's about what happened last time, between 1989 and 1993 in the UK housing market. From the first serious signs of real trouble in 1988, it was five years before the market started to recover. And then it didn't look back for 15 years. If you count the beginning of the current storm as being in 2006, then 2011 would be the start of the recovery. As we have seen however, at the time of writing, the signals are definitely mixed.

Many people may feel that this is no time to make house-buying decision. Are they right? No-one should try to offer definite answers to such questions; but in this special feature we will try to outline some of the facts, factors and trends which a purchaser (or a seller) ought to take into account before making a momentous decision which may affect financial well-being for decades to come.

There are some factors which may have been responsible for extending and deepening the asset price bubble, and may act to limit the duration of the bust - for instance the simply huge and constantly growing accumulations of capital which are making people richer (at least in developed countries). Richer people can pay higher prices, and housing is in limited supply, especially in desirable neighbourhoods. In addition, most countries limit supply with zoning or planning laws. This latter factor is unlikely to change: as ever more land is covered with buildings, the pressure from environmentalists to preserve what is left will even tend to lead to more restrictions on new building. On the other hand, the weight of money argument is largely circular: much of people's assets is in the form of houses and financial investments, and in a bust situation their value goes down along with the ability of their owners to pay for them, so that there is a vicious downward spiral to contrast with the virtuous circle which had been pushing up valuations for 10 years at least prior to 2005.

In an attempt to understand why the housing market proved so resilient in 2005 and 2006, we must examine the economic fundamentals that underpin the global market.

The long-term upward trend of the last 20 years was fuelled to some extent by a sustained period of low interest rates. Between 1990 and 2004, the average base interest rate in the United States and its twelve main trading partners fell from 13% to 4.4%. This was of particular significance in the housing markets of Ireland and Spain which had to accept a sharp drop in interest rates after entering the European Monetary Union. Coupled with the growing availability of credit and rising real incomes in most industrialised countries over the last decade, plenty of fuel was thus provided to power demand in the housing market across most of the developed world.

But just as low interest rates helped to sustain house price growth, you would have expected that the continued trend towards higher interest rates in 2005 and 2007 in most countries, certainly including the US and the EU should have quelled the demand for credit and take much of the steam out of the housing market. If this is what finally caused the bust, the effect was very delayed; and interest rates have now rapidly sunk again to levels not seen for half a century or more.

It may be that the impact of higher interest rates was mitigated in some markets due to country specific factors such as the type of mortgage loans buyers hold. These can vary widely from country to country. For instance, in the United States most mortgages are fixed over 30 years, meaning home buyers and the housing market should theoretically be less sensitive to rate hikes. In some other countries, such as the UK, mortgage rates are rarely fixed for such a long term, and tend to float up and down with the prevailing interest rate. In the UK, it is therefore all the more surprising that higher interest rates did not brake demand for lending, triggering a sharper decline in the housing market as witnessed in the late 1980s and early 1990s.

In fact, after several years in which reality stubbornly refused to come into line with the theory, not all agreed that a nasty shock was in store for home owners. Alan Greenspan's successor Ben Bernanke argued that from a US perspective the real estate market tends to be highly localised, and does not suffer from the same irrational exuberance as in the UK or Australia for example. To an extent, this is true. As of March 2004, ratios of incomes to house prices in Mid-Western states such as Illinois, Wisconsin and Kentucky ranged from 2.4 to 1 to 2.9 to 1, whereas in California the ratios were nearer 8.5 to 1 (meaning the average house price is 8.5 times higher than the average income of a Californian household). Nevertheless, research highlighted evidence of property market bubbles in 27 metropolitan areas, mainly in California and in the North East, covering 20% of the total population.

According to some economists, the boom had no basis at all in economic fundamentals, and was being driven purely by a similar “irrational exuberance” to that which characterised the stock market bubble in the late 1990s. In other words, houses were being viewed increasingly by people as a short-term money-making vehicle rather than a mere a dwelling or long-term asset to bequeath the next generation. Evidence of speculative activity was certainly displayed in the United States, where turnover in existing homes reached a record 9% in 2004 as buyers and sellers in particular hotspots cashed in on spiralling prices. This bull market mentality meant that the boom in house prices was almost self sustaining and occurred independently of other factors such as interest rates and rising incomes.

In fact, the accusation can be levelled at the guardians of US economic policy that the housing market boom was encouraged to help the American economy weather a period of relative weakness. In each of the five years between 2002 and 2007, roughly one-third of all US home owners refinanced against the rising value of their homes, helping to unlock some $2 trillion in cash, the lion’s share of which was spent on big ticket consumer goods, acting as a useful prop for the US economy.

Well, if the US authorities hoped for a soft landing, they had failed to take account of the hysterical behaviour of capital markets dining out on toxic mortgage debt, and they are now paying the price for their misplaced optimism, along with millions of dispossessed home-owners.

In view of all these conflicting factors, it would be a brave person who would call the housing market in any of the mainstream economies at this juncture, and that of course is why the markets are paralyzed. No-one wants to buy when prices are quite likely to go lower, and no-one wants to sell at the prices that are on offer.

But many people, particularly expatriates, are not looking to buy or sell in the mainstream markets; instead they are interested in one of a range of offshore or emerging jurisdictions which to a greater or lesser extent are decoupled from the market in the bigger economies, and reports suggest that property remains a core part of the high-net-worth investor's portfolio.

The 2011 edition of The Wealth Report by Knight Frank and Citi Private Bank shows that, on average, property accounts for 35% of UHNWI investment portfolios, second in importance only to investing in their own businesses.

Almost 40% of the 85 prime city and second-home locations in 40 countries that were analysed by the report’s Prime International Index (Piri) rose in value during 2010, 17 of them by 10% or more. A number of locations, however, saw values fall significantly. These include Dublin (-25%) and Dubai (-10%).

Six of the 10 biggest risers were in Asia, highlighting the region’s continuing economic surge, but established centres such as London and New York also performed strongly.

According to the report’s unique Attitudes Survey, lifestyle and investment are the key drivers for luxury second-home purchases, but education is of growing importance, especially among Asian UHNWIs. For those UHNWIs who change their main country of residence, tax is the biggest motivator.

New York and London remain at the head of The Wealth Report’s Global Cities Index, but respondents to the Attitudes Survey predict that Asian cities such as Shanghai and Mumbai will start to close the gap over the next 10 years. Luxury property price growth was highest in Shanghai with a 21% rise. London and New York saw increases of 10% and 13% respectively.

"The collective worth of the global HNWI community increased by 22% last year, according to data in the 2011 Wealth Report, so it is not surprising that many of the world’s luxury property markets benefitted. The biggest increase in wealth was in Asia Pacific ( 35%) and that is where we also recorded the biggest increases in property prices," said Andrew Shirley, editor of The Wealth Report.

"However, it is not just wealth creation that is ensuring that the international prime property market contains players from more countries than ever before. As we have seen recently in North Africa and the Middle East, a number of major geopolitical shifts are now playing out around the world. These all serve to enhance the desirability of true global centres, like London and New York," Shirley added.

Nevertheless, when it comes to the impact of politics on the global investment environment, 2011 has so far proved to be the "year of living dangerously" says Tina Fordham, Senior Political Analyst, Citi Private Bank.

"51% of the individuals surveyed for this report said they were 'more concerned' about global political instability than in the past five years while 55% are more worried about the state of the global economy than five years ago," Fordham observed.

“Events since then have strengthened our view, and perhaps signal the dawn of a new era, with political risk returning to the fore in both developed and emerging markets. In order to make sense of these developments, investors will need to be aware of this year's signposts and key risks, raising their political IQ," she added.

A Round-Up Of Some Other Real Estate Markets

While high property values in larger economies such as the US and the UK are inevitably linked to some extent to the business cycle, prices in small, rich offshore islands such as Bermuda and Jersey seem to thrive regardless of external conditions, no doubt driven by strong demand for a very limited supply.

The UK's Channel Islands offer a good example. In March, 2007, housing specialist Skipton reported that average house prices had moved forward in both Jersey and Guernsey, with prices in Guernsey 11% higher than at the end of 2005, whilst in Jersey, the rise was a healthy but more modest 6.5% against the previous year.

By the end of 2007, average prices in Guernsey stood at GBP330,000 in the local market. In the spring of 2009 there was no doubt that the market had weakened, with average sale prices down by 11% over the previous year. Still, the fall was entirely due to apartment values - house prices had not budged at all. The average cost of a home at the end of March, 2009, stood at GBP289,250, a 15.4% decline since the start of 2009. For the year as a whole, prices slipped by a mere 3.6% year-on-year.

In the 12 months since the end of March 2010 prices stood some GBP6,500, or approximately 3% higher at GBP370,500, according to data released in May 2011 by the Guernsey States.

Going forward, the States have announced a change in the method of calculating average prices which will in future will be known as “mix adjusted” and include fixtures and fittings sold with a property. At the same time, the basic method of calculating the average property price has been amended to reflect more accurately the mix of housing sold. The net effect of these two changes has been to increase the new mix adjusted price description by a little over 10%. Using this new measure, average prices at the end of Q1 stood at GBP424,714, up around GBP13,500 or 5.7% on their position at the end of 2010, using the new methodology.

Local market transaction volumes had declined slightly from their position at the end of December 2010 but stood marginally higher than at the same time last year at 165 for the quarter.

Within this, demand for the critically important two and three bed house moved ahead to represent 15% and 14% of transactions respectively, up from 6% and 13% of the total at the end of December 2010.

Commenting on the latest Guernsey housing data, Nigel Pascoe, Director of Lending for Skipton International, the Guernsey and Jersey mortgage specialists said: “This quarter, the change in methodology introduced by The States of Guernsey for the calculation of prices has muddied the picture slightly, but overall, the market remains solid and on any measure, is ahead in both value and volume terms compared to the position at the end of March 2010.”


Property prices in Malta have risen sharply in recent years, partly spurred on by Malta joining the EU in 2004, with one estimate showing a 40% rise in between 2004 and 2006. But in 2007 sentiment reversed, and the year actually saw a 5% fall in average sale prices; although a reported 3% fall in 2008 seems almost neither here nor there.

The market was effectively flat in 2009, with prices making back ground they had lost in the second half of the year. No clear trend emerged in 2010; Malta’s overall house price index actually dropped by 1.02% over the year to Q3 2010, when adjusted for inflation, but the nominal index rose 1.53%. There were also wide variations in different sectors of the market. Terraced houses for example fell in value by more than 6.5% in the year to the end of Q3, 2010, but apartments saw a 3.4% rise over the same period.

The Malta government is expected to allow developers to utilise more land for building, but some property companies see this as a negative rather than a positive move.

"Malta is an island with a finite amount of land, and while the Malta government view releasing more land for building, and more properties as the answer to increasing property prices, we believe this is the wrong approach", says a spokesman for Tribune Property, "and in the end more developments could have an adverse impact on Malta's economy."

"Tourism is an important industry for Malta, and tourists aren't impressed by cranes and construction work while they're trying to relax or go to see Malta's historical sights, and if it's a first visit to the island there's an increased chance that it will be their last, losing the Malta holidays industry repeat business," the company added.

While Malta's economy expanded in 2010, and tourist numbers are once again increasing, the outlook for the property market remains uncertain for investors in 2011, with supply outstripping demand and rental yields low.


In Ireland, prices more than doubled between 2000 and 2006, but 2007 finally saw signs of some softening in the market. A monthly house price index said in May that the average home cost EUR306,619 in April, down slightly on the previous September, although still up 5% year on year.

Early 2008 saw minor falls in average prices in most Irish districts, and in the 12 months to March, 2009, falls averaged 10%, continuing at that rate for the rest of the year. The first quarter of 2010 saw a further fall of about 3.5%, taking the overall collapse in price levels to around 30%.

Between 2000 and 2007, prices had risen by about 10% per year on average, prompting a warning from the International Monetary Fund that the Irish housing markets risked becoming "overvalued".

In August, 2006, Irish Minister for Housing and Urban Renewal, Noel Ahern, had called upon the government to introduce measures to curb speculation in the country's property market.

Commenting on the release by his government department of new house completion figures for the first seven months of the year, Ahern urged Finance Minister Brian Cowen to consider the issue of Ireland's runaway property market when he presented his 2007 Budget.

However, Minister Ahern made it clear that tough measures should be directed towards investors who snap up property prior to completion with the sole intent of keeping it off the market until its value increases.

“The person that I wish I could get rid of is the individual, company or whatever who is just buying off-the-plans and off-loading it in 18 months’ time,” Mr Ahern said in a report by the Irish Examiner.

In fact the budget focused mainly on easing entry to the overpriced housing market, doubling the level of mortgage interest relief. Buyers suckered in by this piece of government legerdemain must now have harsh words for their rulers.

The painful economic austerity measures inflicted on Ireland as a condition of its EUR85bn EU/IMF bailout in 2010 means that the country is now locked into a vicious circle of rising unemployment and falling wages and as a consequence foreclosures are on the increase. The Irish property market is now in freefall, with prices having fallen by almost 40% below their EUR310,831 peak at the end of 2006, according to the Permanent TSB/ ESRI house price index. This does present the opportunity for international investors to snap up some bargains, but Ireland's economy is far from out of the woods yet, and it would be a brave investor who called the bottom of this market!


As might perhaps be expected, in property terms Monaco has more in common with small markets such as Jersey and Guernsey rather than larger markets. That's to say, it is wealth-driven rather than income-driven. At present, property prices remain high all across the Principality, and apartments in the district of Fontvielle, much of which is also reclaimed land, equal those in the city of Monte Carlo.

Expect to pay upwards of EUR1.5m for a small one bedroom or studio apartment, rising to about EUR15m or more for a three bedroom apartment or house. But don't expect to get a parking space with that! Naturally, the best properties are out of reach to all but the wealthiest of oligarchs and property moguls, at anywhere in the region of EUR50m or more. You might even get a parking space with that!

Monaco is also a deeply unattractive market for investors intending to let their properties, with yields running about 1.5%. But then there is not much of a rental market to speak of, the super rich choosing to buy in order to establish a permanent presence in this tax haven rather than rent on a temporary basis.

However, and perhaps helpfully for values, the new island development which was announced recently has been put on hold due to the economic situation. Tribune Properties, which specialises in Monaco property, had anyway expressed doubt that prices would ease as a result of the new development.

"By the time the development is finished prices would probably have gone up in Monaco anyway, and this new development on the housing side is likely to be aiming for quality rather than quantity," the company stated. "It's almost certain that the properties will be snapped up by investors off-plan, and then come back to the market with a premium once the buildings are complete. The development in itself will attract more attention to the Monaco property market."

"In the short and medium term prices are likely to rise in Monaco rather than fall," Tribune has predicted.

In February, 2007, Monaco overtook London as the most expensive location to buy flats and apartments in Europe, according to the Global Property Guide.

Monaco's prices are being driven higher as growing demand from a flock of foreign millionaires, particularly from the United Kingdom, seek out its unique benefits as one of lowest of the low-tax jurisdictions in the world, while being only a couple of hours flying time from London. Add in the constraints of Monaco's size at not much more than 1km square, or 485 acres, and it is hardly surprising that property prices have gone through the roof in recent years.


As elsewhere, China's largest cities saw dramatic increases in property prices in 2006 and 2007. In Beijing, prices rose 14.8% in the first three months of 2006 - compared to a year earlier - to RMB6,885, or USD860, per square meter, according to the city government. Prices in the southern city of Shenzhen rose by 25%, and prices in the north-eastern city of Dalian jumped by more than 10%, government data showed. Average property prices rose more than 10% in 2007, and continued on upwards in 2008.

Chinese Premier Wen Jiabao has stated that the government will continue to adjust tax, credit and land policies to curb speculation and ensure an adequate supply of affordable housing for low and middle income citizens, despite his assertion that China's property market is "under control".

New regulations require that foreigners seeking to buy homes in China are not permitted to do so until they have resided in the country for at least twelve months. This restriction will not apply to Chinese nationals living in Hong Kong, Macao and Taiwan who buy houses for their own use. Furthermore, individuals and institutions are required under the new regulations to set up a company to purchase property that is not intended for their own use. The regulations also impose capital restrictions on foreign real-estate developers.

The Chinese government tried a variety of tax, regulatory and monetary measures in order to avert a real estate market bubble, including the imposition of a 20% capital gains tax on the sale of properties in most parts of Shanghai, but the measures seemed at first to have had little effect.

By early 2009, however, the market was looking weaker. China's house prices dropped 0.4% in January from a year earlier, the first decline on record since 2005, as slowing economic growth amid the global recession deterred home buyers. The fall in prices across 70 major cities followed a 0.5% gain in November, the National Development and Reform Commission said.

China's State Council said it would avert drastic declines in property prices by building more homes for low-income families and controlling excessive gains in land prices. There are also plans to introduce real estate investment trusts, or REITs, to revitalize construction projects delayed by financing woes, said Qi Ji, vice minister of housing.

It need not have worried: in early 2010, the Chinese Ministry of Finance published statistics on land transfer payments in 2009 which show that revenues, at RMB1.424 trillion (USD208.5bn), were up 43.2% in the year; this fee income is the mainstay of revenues for local government in China. Land transfer fees and administrative charges make up almost half the cost of a house, making local government a major beneficiary of China's real estate market boom. About two thirds of the income originated in the booming coastal provinces. Land acquisition and compensation for demolition accounted for 40.4% of the total, while urban construction and land development was 27.1% and 10.7% respectively.

The fees fell by 19.7% in the first half of 2009, the low point of the economic crisis, only to rise by 110.9% in the second half, a sign that fiscal stimulus measures were feeding the property boom. House prices in Beijing almost doubled in 2009.

In response to increasing unrest at the overheating of the property market, a statement was issued after the conclusion of an executive meeting of the State Council chaired by premier Wen Jiabao, in which it was stated that the Chinese government had raised the down payment required from second-home buyers to a minimum 50% of the value, up from 40%. The statement added that first-home buyers' downpayments would have to be at least 30% of the property price if the property is above 90 square meters in size. It also indicated that tax policies would be adjusted to "influence purchases and adjust property investment returns."

Analysts believed that the government's action was a strong signal that it could levy a property tax in the near future, and in April, 2010, the Chinese Ministry of Housing and Urban-Rural Development (MOHURD) was reported to have approved a property tax trial in the four cities of Beijing, Shanghai, Shenzhen and Chongqing.

Some commentators suggested that the lack of official confirmation of the proposals might have meant that it was only a rumour generated to dampen down the overheated market. However, in January 2011, the Chinese government approved the immediate application, as a pilot, of the property tax in Shanghai and Chongqing. While the basis of the tax will be residential property values, the municipal authorities will be able to set its details. For example, the applicable tax rate for each property is expected to depend on the relationship its value bears to average local real-estate sale prices. Depending on the results of this pilot exercise, the central government may in future decide to roll out the tax on a national basis.

House prices rose by 26% in Shanghai and 29% in Chongqing in 2010, and prices across the country continued to rise into 2011, although there are signs that the market is slowing. Prices of newly-built homes increased in 49 out of 70 cities in March 2011, down from 56 out of 70 cities a month earlier. House prices in Beijing increased by 4.9% in March, down from 6.8% in February, and a similar pattern was repeated in Shanghai.

It remains to be seen whether the government's measures to dampen China's property market will have their intended effect, but recent figures suggest that prices are continuing to climb, albeit at a slightly slower pace. This raises the possibility of additional tax and other measures being imposed by the government to curb speculation.

Hong Kong

As to Hong Kong, until 2008 people looking to buy property there found that real estate prices had begun to recover after a long slump which began amid the Asian financial crisis of 1997/1998. Prices were up approximately 30% in 2006 and 2007, and were around 40% above their historic low reached in 2003. However, prices remained depressed and were, on average, about 50% below 1997 levels. We are talking relatively here, because property in this densely populated territory remains comparatively expensive by international standards. Hong Kong’s residential prices were 90% up in the five years to January 2008. The market went into reverse again in 2008, of course, with falls of up to 25% in most categories of property. Transaction levels fell, and banks tightened lending to expatriates without HK-sourced income. As of early 2009, a 70 sq m, 2-bedroom, refurbished apartment in a not specially wonderful area would have set you back about USD200,000.

But prices took off again later in 2009, perhaps driven partly by speculative demand from the mainland, and in April, 2010, in a speech at the Legislative Council, the Financial Secretary, John C Tsang, said that the government would keep a close watch on the state of Hong Kong’s property market and would extend property taxes if necessary to reduce property speculation.

In the budget in February 2010, so as to increase the cost of property transactions and curb possible speculation in the luxury flat market, John C Tsang had already increased the rate of stamp duty from April 1 on transactions of properties valued more than HKD20m (USD2.6m) from 3.75% to 4.25%, with buyers no longer being allowed to defer payment of stamp duty on such transactions.

He reported that, while he appreciated public concern over the rise in property prices, the “upward momentum in residential property prices in Hong Kong has tapered slightly in recent months.” The rise in overall apartment prices slowed from 2.5% in January 2010 to 1.1% in both February and March.

However, he said that “the increasing risk of a property bubble cannot be ignored.” He confirmed that the government would continue to “closely monitor the property market and the overall economy, and introduce timely and appropriate measures to ensure a stable and healthy development of the property market.”

In that regard, if the monitoring of the trading of lower-valued properties showed there was excessive speculation in the trading of those properties, he said that he would consider extending the budget’s measures to transactions of properties valued at or below HKD20m.

He also reminded his audience that the Inland Revenue Department (IRD) will closely follow up all cases involving speculators profiting from property speculation, and will levy profits tax on the persons or companies earning profits arising from such transactions.

“The IRD,” he added, “maintains a huge database where details of all property transactions are recorded. To identify cases of possible property speculation, a computer selection is run periodically to analyze the sale and purchase transactions in the database.”

“In 2008-09, for example, there were over 13,000 suspected speculation cases identified by the computer program,” he confirmed. “More than 4,000 cases required follow-up action after being reviewed by IRD officers. If it is proved that the cases involve speculation, the IRD will recover profits tax from the persons or companies involved.”

Following a significant inflow of hot money, leading to substantial increases in asset prices in Hong Kong, Tsang announced new anti-property speculation measures in November 2010. Among them was the SSD on residential properties, charged on top of the current ad valorem property transaction stamp duty.

Any residential property acquired on or after November 20, 2010, either by an individual or a company, listed or unlisted, and regardless of where it is incorporated, and resold within 24 months is subject to the SSD.

The SSD is payable jointly and severally by both the buyer and the seller in the resale transaction, and is calculated based on the consideration for the resale transaction at regressive rates for different holding periods.

It is charged at 15% if the property is held for six months or less; 10% if the property is held for more than six months but for 12 months or less; and 5% if the property is held for more than 12 months but for 24 months or less.

It was also proposed to disallow deferred payment of stamp duty, including SSD, for residential property transactions of all values, while, to deter non-compliance, the existing statutory sanctions were extended to cover the SSD. Any person who fails to pay the SSD by the deadline for payment is liable to penalties up to 10 times the amount of the SSD payable.

But the SSD ran into trouble in Legco, and its future is obscure. At all events, the measures do not seem to have had much of a dampening effect on Hong Kong's property market, with figures released by the University of Hong Kong in May 2011 showing that price of residential property increased by 4.5% between February and March, meaning that prices were more than 25% higher than they were in March 2010.

The government has not ruled out further measures to deter speculation in the Hong Kong property market.


The outlook for Dubai's property market remains decidedly mixed. While property developers and the government continue to talk the market up, most analysts are of the view that the market will remain depressed for the foreseeable future due to the large inventory of newly-completed developments which are sitting empty, and which will continue to depress prices and rents.

Property prices in the once-booming emirate have shed about 50% since the market hit a peak in late 2008. According to a recent report from real estate advisory Firm Jones Lang LaSalle, Dubai's commercial property market has been forced to cut back rental prices significantly as vacancies increase.

A further decline in average rents is likely, however, due to increasing levels of new supply. By the end of 2011, 25 million square feet of additional office space is forecast to enter the market which will increase the vacancy rate and place further downward pressure on average rental rates.

According to Landmark Advisory, a division of Landmark Properties LLC, capital values declined by 5.8% and 1.4% for apartments and villas respectively over the last quarter of 2010, with rents declining by 7.5% and 3.4%.

Saeed Hashmi, Head of Valuation and Advisory at Landmark Advisory said that downward pressure will continue to be exerted on prices and rents "due to the fact that 2010 saw significant postponements in delivery with roughly half of the 50,000 or so units we had expected to be handed over, delayed."

Nevertheless, Mr. Hashmi affirms that while capital values did decline, there was actually a significant spike in apartment leasing volumes across the quarter due to a combination of relocation demand from other Emirates in the UAE, coupled with people within Dubai looking to take advantage of declining rents.

In Dubai's office market transactional activity remained slow, away from a select few high-profile Grade A assets in prime locations. Furthermore, according to Mr. Hashmi: "Capital value declines due to oversupply are stymieing the amount of potential purchasers into the market and while it now makes sense for companies to consider owner-occupation, liquidity constraints are preventing this being witnessed on a large scale".

Confidence among international investors was shaken again after Dubai World, the city-state's real estate vehicle, announced a debt moratorium for at least six months in November 2009. At the time, the total debt of Dubai World amounted to USD59bn, and it is was unable to finance one small short-term component of that, falling due in December. The news however, sent shockwaves across the world's stock markets, which tumbled as a result. But despite Giebel's bullish words, and subsequent action by the UAE to prop up the market, it is likely to be some time before confidence is fully restored in Dubai's debt-laden economy.

To Buy Or Not To Buy? A Basic Guide To International Property Investment

If you are in the right place at the right time, investing in real estate can be one of the most profitable and enjoyable forms of medium to long term investment there is. Depending on your circumstances, international real estate investment may prove preferable, for a number of reasons, despite the additional challenges it can sometimes pose. Diversifying your investment portfolio by buying property in several different countries, for example, can help to cushion you against downturns in any one particular market. Even if you cannot afford to do this, you may find that you will be able to snap up an incomparable bargain in an up-and-coming country which would never have been available in your country of residence. (Unless you happen to have the good fortune to be resident in a newly popular emerging market country, of course!)

Now, if you decide that international property investment is for you, there are several different ways of going about it. Those with neither the time nor the inclination to become landlords, or who simply want to diversify a top-heavy portfolio, might choose to invest indirectly, using one of the many real estate related funds available. Ground rent funds, for example, are proving increasingly popular with investors, and offer a relatively low risk and secure investment with the possibility of high returns. As with all mutual fund investments, there are specific advantages and disadvantages, but if you are interested in the growth possibilities in this market and would prefer a less 'hands on' approach, then this may be for you.

On the other hand, you may not even have an investment portfolio - you may just be looking for somewhere nice and sunny to retire to. Or you may be an expat looking to supplement your income. Or you might have been relocated by your employer, and need somewhere to live. Or… well, the list goes on. There could be any number of circumstances, both personal and financial, driving you to consider investing in property overseas. In this article we will deal with the issues raised by international property investment, and the possible taxation implications raised by such purchases.

International mortgages - Do I need one?

One of the primary considerations, when purchasing property either domestically, or on an international level, is raising the necessary amount of money. Unless you happen to have enough ready cash just lying around (down the back of the sofa, for instance…), chances are you will need to take out a mortgage. There are several options:

1) Taking out a mortgage with a local bank. You may, however, find yourself constrained by exchange control rules (where they still exist). Even in jurisdictions where exchange controls have been lifted, such as Spain, you may find that domestic banks and building societies will charge non-resident foreign nationals higher rates of interest.

2) Taking out a mortgage or loan from a bank or building society in your country of origin.

3) Taking out the mortgage offered by the developer. Sometimes, with new complexes, developers will offer their own mortgages in order to increase sales

4) Taking out a mortgage with an international institution. Even if you are confident in your understanding of the processes involved in purchasing property in your country of choice, this is probably the most sensible option, for the simple reason there are likely to be issues involved in dealing with an expatriate client which a local provider may not have the expertise to cope with.

There are a growing number of international mortgage brokers and relocation specialists offering international products tailored to meet the needs of expatriate property investors, and although it is possible to go it alone, you may find that enlisting the services of a professional company experienced in dealing with international markets eases a purchase considerably, as they are likely to be well versed in the processes and legislation applicable to non-resident purchasers, and can often mediate between yourself and the local entities involved.

What sort of mortgage?

There are several different sorts of mortgages available, so you should really shop around to make sure that the international mortgage broker or IFA you choose to handle your affairs offers a wide range of products, from a varied group of international providers. Below is a basic rundown of the different types of mortgage available, although not necessarily all for your country of choice, so you need to check:

1) Repayment mortgages. With this type of mortgage, you pay a little of the interest and a little of the capital off each month, so that at the end of the term, the debt has been repaid completely, and the property is yours. Although in the early years, very little of the capital is repaid, as the amount of capital owed decreases, so does the amount of interest which accrues, so towards the end of the term there is a kind of 'snowballing effect' in terms of the amount of capital which can be paid off at a time. This is generally considered the safest bet in terms of mortgage loans, although it is usually more expensive than an interest only mortgage.

2) Interest only mortgages. With one of these, your payments to the lender simply pay off the interest on the loan, and the capital is paid off at the end of the term. Monthly payments are (obviously) lower than they would be for a repayment mortgage, and the idea is that you put the money you save on repayments each month into an investment fund, so that by the time the term ends, you will have accumulated enough to pay off the mortgage. Or that's the theory. If your investments do well, you could be in a position to repay the mortgage early, or have some money left over at the end of the term. However, in order for that to happen, your investment fund needs to bring you returns which are higher than the interest you are paying on your mortgage, otherwise there will be a shortfall at the end of the term.

3) Endowment mortgages. These used to be used quite a lot in conjunction with interest only mortgages. They are designed to guarantee that if you die before the end of the term, the mortgage will be repaid, and to provide a means of paying off the capital owed at the end of the term. However, there is no guarantee that an endowment will repay the loan in full at the end of the term, and as with many pensions and life assurance products, there are high 'front-end' costs. Where there is preferential tax treatment for life assurance premiums they may still be of some use, but as the majority of expatriates are excluded from the benefits of domestic pensions investment, they are rarely suitable.

Usually, international mortgage providers will offer both repayment and interest only mortgages at fixed, variable, capped and sometimes discounted interest rates, all of which are fairly self explanatory, and have specific benefits and disadvantages.

International home-owning - The logistics…

Several of the problems you may encounter if you decide to purchase property in a country other than that in which you are resident are likely to be logistical. Okay, so you can afford to take time off to find a property in your country of choice, and maybe even visit a few times a year, but that is likely to be all. This is where designated international organisations come into their own.

For example, in Spain, the completion of a mortgage must take place in front of an appointed notary, and all parties to the purchase including the vendor, lawyers, the buyer, and a representative of the lender. However, if you are unable to be there due to previous commitments (or simply geography!) an international broker should be able to help you obtain a power of attorney, allowing someone else to sign on your behalf.

Renting your property out when you are constantly on the move can be a bit of a headache, but hiring a letting agent qualified in dealing with international clients could take the pressure off. They can help you find suitable tenants, prepare a letting agreement, take the security deposit, deal with utilities bills, collect the rent (the important bit!), visit the property on a regular basis, check empty properties, and undertake property maintenance during a tenancy.


Ignoring taxation (which we will deal with in more detail later), and quite apart from the cost of the mortgage itself, there are other expenses to bear in mind when arranging a mortgage for your investment property, and these vary considerably from country to country. For example, in France, the fee level can be affected by the age of the property (as newer properties attract lower charges), the number of people involved, and how many outside agencies (e.g. estate agents, lawyers, brokers, letting agencies) are involved.

If buying a property in France, (over and above the broker or IFA's fee) you should be prepared to pay:

Moves are also afoot as part of France's 2011 supplementary finance bill to impose an annual tax on the secondary residences of non-residents and expatriates at 20% on the rental or cadastral value of a property. However, it is thought this tax would breach EU law, and is therefore the subject of some uncertainty.

As previously stated, costs will vary depending on the location of your property, as you can see the issue of additional expenses needs to be taken into account when deciding whether international property investment is for you- although the returns can sometimes be spectacular, it ain't cheap!

The tax implications of international property investment

Capital acquisitions tax, capital gains tax, inheritance tax, gift tax, property transfer tax, VAT, stamp duty, tax on rental income, share transfer tax, land tax…no, wait a minute. Come back…sit down and take deep breaths - we didn't mean to frighten you.

Although the majority of countries impose some kind of taxation on international property investment by foreign nationals, it would be a rare (and unpopular!) country which levied all of the above. The tax implications of your foreign real estate investment will vary in complexity and impact according to where it is located, and to a certain extent, what you intend to do with the property when you have purchased it. As a general rule, in the majority of countries if the tax authorities believe that the purchase was made as a 'commercial' investment (i.e. if you habitually buy, renovate, and sell on, or if you have bought undeveloped land with a view to building a housing complex or leisure facility), they will view you as a property dealer, and tax your investment accordingly at a higher rate.

Where taxes are levied on international property investment, they will usually fall into the following categories:

1) Taxes on the purchase, acquisition or transfer of the property or land, such as capital acquisitions tax, inheritance tax, stamp duty and property transfer tax.

2) Taxes on the ownership of and/or residence in the property, such as local and national property taxes, and land tax.

3) Taxes on rental income. (If you choose not to live in the property, be aware that there may be additional taxes imposed on non-resident or foreign landlords. Not necessarily devastating, but still a factor to be considered if buying to let overseas.)

4) Taxes on disposal of the property, such as capital gains tax, gift taxes, and death duties

As previously stated, property taxation regimes vary widely from country to country, and you may feel that low, or no-tax jurisdictions are the ideal choice for you. However, in some (although not all), due to limited resources and space, property investment opportunities are limited only to the very wealthy, who must be willing to contribute substantially to the local economy, and purchase luxury real estate. Other jurisdictions limit the number of foreign nationals permitted residence or work permits in order to maintain the standards of living, and protect the employment chances of existing residents.

Governments in non-tax haven countries tend to impose fewer restrictions on property purchase for investment or residential purposes by foreign nationals. However, in such countries, the likelihood is that you will face more taxes on your investment. Some property investors choose to purchase international property via an offshore company or trust in order to bypass some of the taxes levied in high tax countries, and although this can be a valid option, it is not suitable in all circumstances. We will discuss this in more detail later.

Where you decide to purchase property is, in the final analysis, a personal choice, and will need to be based on your circumstances, resources, and eventual goals. If you have your heart set on retiring to a beachfront house in the Bahamas, you are unlikely to be satisfied with a one-bedroom apartment in Cyprus. If, however, you are looking to subsidise your income by providing affordable housing to expatriates and other professionals, the latter would be ideal. It all depends…

Although tax shouldn't necessarily be the most important consideration when choosing a property, there is no denying that it's certainly up there at the top of the list for most people. Probably the best way to illustrate the variety of taxes, and the way in which they are imposed, is to look at three countries with very different tax regimes:


Currently in Greece, purchase, inheritance, possession, use, and donation of property are taxable. Greece has a unified inheritance and gift tax on property acquired as the result of a gratuitous lifetime transfer or death, with the liability resting on the transferee, or beneficiary of the property. Property situated in Greece, and moveable property situated abroad owned by both resident and non-resident foreign citizens is liable for inheritance tax. Non-residents may wish to reduce their tax burden by purchasing Greek real estate through a non-resident company, as then the asset held by them is a shareholding in a foreign company, which is not subject to inheritance/gift tax under Greek law. However, this solution will provide no protection for Greek residents, as the shares themselves would be subject to the unified tax.

Greek real estate taxes include:

Rental income is subject to Greek income tax (calculated on a progressive scale up to 45%) and also stamp duty calculated at 3.6% of the actual rent, and payable on a monthly basis.

There are also capital gains tax implications following the sale of a property. For properties purchased after January 1, 2006, capital gains tax is charged on a sliding scale depending on how long the property is held. For properties held for less than five years the capital gains tax rate is 20% falling to 10% for a holding period of between five and 15 years; 5% if held for between 15 and 25 years; and 0% if held longer than 25 years. There is no capital gains tax on properties purchased prior to January 1, 2006.

Additional taxes are likely to be imposed on larger properties in Greece as a result of the austerity measures being pushed through Parliament. A further round of austerity measures adopted by the Greek government in May 2011 may result in higher taxes being imposed on high-value property in particular.


Tenerife is the largest of the Canary Islands, which although they are autonomously governed, for taxation purposes generally fall under Spanish jurisdiction (although a great deal of autonomy is afforded to the regional governments).

When the purchase, acquisition, or transfer of Spanish property takes place, one of two taxes will be payable. VAT is levied on the purchase of newly constructed property and land immediately available for construction. (In the Canaries there is an Indirect General Tax for the Canary Islands, but it is similar in many ways to the Spanish VAT). In situations where VAT is not levied, property transfer tax at a rate of 6% of the purchase price (Escritura value) is levied instead. When buying newly built property, stamp duty (IGIC) at a rate of 5% is also payable. However, there is an exemption for property investors who create employment, whereby transfer tax and IGIC are not payable. (Corporate income tax can also be very low in these cases).

Liability for inheritance tax is dependent on residence status, and for non-residents is payable only on Spanish sourced income or gains. The level of the tax varies according to the degree of kinship between the deceased and the beneficiary, and the previous level of wealth of the beneficiary.

There is an annual real estate tax of 3% of the Cadastral value of the property payable for both residents and non-residents, and as in France, a 3% tax levied on the purchase of Spanish property by non-resident companies (although there are certain situations in which this doesn't apply, and property purchased by a Spanish company, even if all of the shareholders are non-resident, is exempt from this). Non-resident property purchasers must also appoint a resident fiscal representative, and submit a wealth tax declaration.

Rental income from property obtained by a Spanish non-resident is subject to taxation at a rate of 24%, although maintenance costs and expenses incurred as a result of obtaining the income (for example interest paid on mortgages and loans) are deductible. Capital gains tax on the sale of a property is levied at a flat rate of 18% of the difference between purchase price and selling price. Progressive capital gains tax rates apply if the property is sold within less than one year after purchase.

The Cayman Islands

At the other end of the spectrum lie the Cayman Islands. Other than import duties (imposed at various rates), and a stamp duty rate of 7.5% on real estate transfer and 1% on legal documents pertaining to valuable assets and transactions, there are no direct taxes imposed on Caymanian residents or non-residents.

There are no restrictions on foreign ownership of real property in the Cayman Islands as such, and due to the lack of direct taxes, it is equally possible to buy a condo and rent it out for the majority of the year, or to buy an undeveloped piece of land, and leave it undeveloped until you have the time and resources to build your dream home. If you choose the former option, your rental income will be free from income tax (in Cayman at least), and the absence of property taxation, or of any rules stipulating the time frame within which land must be developed, means that the latter is in essence a 'maintenance free' investment until such times as you choose to develop the land.

However, achieving residence and/or a work permit can be problematic, as access to employment is fairly restricted for foreigners. An expat wishing to apply for permanent residence in the Cayman Islands on retirement should be prepared to invest at least $180,000 in local enterprise or real estate. Caymanian status is usually granted on a quota basis to citizens from the UK and British dependent territories, and certain other countries including the United States, Eire, Australia and New Zealand.

Offshore Companies and Trusts

As you can see from the examples above, the country in which you choose to locate your property (as well as your country of residence if different) will almost certainly have an impact on the amount of tax payable by your estate in the event of disposal of the property, or of your death.

In order to alleviate some of the tax consequences involved in the ownership of foreign real estate in high tax countries, some investors may choose to purchase property through a non-resident company or trust, often established in a low tax jurisdiction. Trusts in particular can sometimes be effective in protecting the investors and their beneficiaries from punitive estate and death duties. In countries such as Greece, where there are no provisions in the country's tax legislation to facilitate the taxation of the underlying assets of a foreign company, an offshore company can often be a tax efficient and effective vehicle in which to hold property investments.

However, although in some countries (for example Spain, Portugal, and Australia) non-residents are encouraged to make their real estate investments through an offshore company, this form of tax planning may not be effective (or even possible to implement legally) everywhere, so again it depends on your chosen location.

In France, for example, legislation was enacted in 1983 to prevent property investors from avoiding registration and wealth taxes. The tax authorities complained that when French real estate was purchased by legal entities in offshore jurisdictions, it was impossible to levy the aforementioned taxes on the sale and transfer of shares within these entities because they were unable to discover the identity of the shareholders, due to the stringent secrecy laws in place. They therefore demanded that a 3% tax be levied on the fair market value of real estate in France owned by these companies.

The tax was later ruled by the supreme court to have violated the non-discrimination clauses contained in some of France's bilateral tax treaties, however, and so was modified. As it stands now, foreign entities which own real estate in France (either directly or indirectly) are only subject to the 3% tax if the value of such real estate represents 50% or more of their French assets. French residents and foreign companies registered or resident in countries with which France has a double tax treaty are also exempted, provided they furnish the French tax authorities with the identities and addresses of the shareholders on an annual basis.

Although double tax treaties are of more interest to corporate and commercial international property investors, they can sometimes have an effect on the amount of taxation that an individual's real estate investment income is subject to, especially if they are resident in a country which taxes world-wide income, or are planning to purchase property in a country which does this. Certain double tax treaties may enable you to claim tax paid on rental income from overseas against your domestic income taxes, or to receive dividends at a lower rate of withholding tax. However, the number of different tax treaty models, and the sheer volume of treaties in force on a global level make it impossible to give a comprehensive picture of the likely consequences of a double tax treaty in any given circumstances. We would therefore strongly recommend that you take advice as to the potential implications from a qualified professional before making a decision as to the location of your investment property.

So - Is it worth it?

The answer to this question will depend on your personal circumstances, what you hope to achieve by investing, and how much you can afford to spend. There is a vast spectrum of opportunities available within the property investment field, ranging from the ridiculously expensive to the nicely affordable, and with the help of an international broker or IFA, you should be able to find something suited to your tastes and pocket.

Investing in a 'real' asset, as opposed to an intangible one can sometimes provide more stability, and in spite of recent falls, property tends to hold its value better than other commodities. You do need to be aware that the overall liquidity and health of the property markets, and possible fluctuations in interest rates and inflation can affect the value of your investment, but generally it is possible to achieve a very healthy return on your investment.

But - and it is a big but - this is a very special moment in the history of housing markets. We cannot offer advice, and don't do so, but right now you may want to exercise especial caution and patience. Of course, if you are buying a property to live in for the remainder of your days, you may feel that price is unimportant. Anyone who expects to see a profit on their investment, however, may take a different view.



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