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| Globalization
By Harriet Murray
October 5, 2003 |
Globalization, in an economic sense,
is the movement by countries companies, organizations
and people toward a single market environment. Historically,
people have understood an economy as a system functioning
within a single country. Today, world economies have
evolved into regional and supranational networks.
The Eurodollar is giving strong competition
to the US dollar, and the Mexican pesos.
The net effect of the shrinking economic
world is that all the “sub economies” of
individual countries are tied into a single network
of supply and demand for products services, capital
and resources. Included in this global system of supply
and demand is the demand for real estate.
The impacts of globalization on real
estate are that global investors now enter and leave
various local markets to create business opportunities
and seek investments.
The National Foreign Trade Bank (Banco
Nacional de Comercio Exterior) reports that eight new
projects were finalized in June, involving 25 million
dollar investments by companies in Korea, the United
States of America, Canada, Italy and Taiwan, which will
generate 915 new jobs in Mexico. Jalisco is one of the
states receiving this benefit. Others are Coahuila,
Nuevo León, Puebla and Yucatán. The Investments
include making of jams, men’s suits, fresh produce,
railroad cars and engine valves.
The liberalization of investment
and ownership laws: A presidential decree in l990 emended
the Land Reform Act of 1917, making it easier for foreigners
t own and use Mexican real estate. In addition, an update
of the Foreign Investment Law in 1993 allows foreign
nationals to own agricultural land in Mexico. There
is a recent further change in the Foreign Investment
Law, which is still to be interpreted.
The North American Free Trade Agreement
(NAFTA) continues to harmonize trade regulations and
encourage foreign investment, especially from the USA
and Canada, in order to establish businesses in Mexico.
The increase of foreign enterprises in Mexico may be
accompanied by a rise in the demand for residential
property for foreign owners and investors.
REAL ESTATE AND CAPITAL
FLOW
Most expanding markets in the world
today require foreign capital. México is no exception.
“Good merchandise
finds a ready buyer.”
Plautos, c.200B.C.
The underlying forces that direct
capital flow are:
1. Supply and demand
2. Investment return.
On a global scale, investors examine
and invest in markets that best match the risk and return
objectives for their portfolios.
Capital flow is a complex interplay
of foreign exchange instruments that move currency assets,
credits and debt around the world almost instantaneously.
“All currency
is neurotic currency.”
Norman O. Brown, l966
CURRENCY
urrency exchange rates provide a
general insight into a country’s economic and
financial performance as compared to another. With all
other factors being equal, if a country outpaces another
in growth of gross domestic product (GDP) and positive
trade, that country’s unit of currency will be
worth more than the other’s.
Mexico’s inflation rate has
been at manageable levels for several years. Tough extraordinarily
low after the devaluation in 1994, the value of the
peso has remained relatively constant since then. In
addition, the economy has experienced GDP growth, a
rise in the stock market, and privatization.
When a currency improves or gains
against another, its change rate falls. The stronger
currency is worth more so it takes fewer units to purchase
the weaker ones.
For example, if the Canadian dollar
strengthens against the Mexican peso, it will take fewer
Canadian dollars to buy pesos. In other words, someone
holding Canadian dollars can now buy more Mexican goods
with the same amount of money.
If the currency unit weakens, the
exchange rate increases and it takes more Canadian dollars
to buy the sane amount of Mexican goods.
If the currency unit strengthens,
the exchange rate decreases and it takes fewer Canadian
dollars to buy the same amount of Mexican goods.
In many cases, investors buy real
estate, not because of the features of the property
itself, but because the trend of the investor’s
local currency against a foreign currency is favorable.
MARKET ASSESSMENT
To understand the economic, capital
and currency conditions in an international market,
it important to consider any cultural or policitcal
infulences as well as local real estate practices.
From an investment perspective, it
is important to be able to distinguish between favorable
and unfavorable financial climates. A favorable aspect
of a climate could include the stability of a population’s
equilibrium, free market philosophy, social harmony,
democratic institutions, adequate infrastructure or
underlying economic strength.
According to the National Association
of Realtors, 2003 Mexico is 1,972,550 square miles with
a population of 103.4 million and Gross National Product
of 920 billion dollars.
This article is based upon legal
opinions, current practices and my personal experiences
in the PuertoVallarta-Bahia de Banderas areas. I recommend
that each potential buyer conduct his own due diligence
and review. Operadora de Fondos Lloyd, S.A. and the
National Association of Realtors have furnished information
for this article.
HARRIET MURRAY
Harriet
Murray, Broker
For additional information on properties for sale or
lease within the bay, please call or e-mail me at: harriet@casasandvillas.com
Thanks and until next week.
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