The constitution of Peru emphasizes fair treatment of foreign investors and foreign investment is welcomed in almost all the sectors of Peruvian economy that includes the real estate business. The constitution implemented in 1993 also provides foreign investors with same rights as local investors. As such, foreign investors in Peru have an opportunity to benefit from investment incentives that include for instance, tax exemptions. However, while the constitution provides economic freed as stipulated in Article 63 of the country’s constitution, the government sometimes tend to implement measures that interferes with free market principles. Conversely, Foreign Investment Portfolio in Peru would be advantageous because, the law permits foreigners to invest in any economic activity that is legal. The legal economic activities in this sense include FDI, portfolio investment and investment in immovable property (Oladipo, 2013). In terms of considering a portfolio, real estate is seen as an alternative asset class. In essence, it is a supplementary investment that can be used to diversify key portfolios that includes stocks, bonds, assets and other securities (Curcio, Anderson, & Guirguis, 2014). For instance, during periods of low interest rates, but also expansionary monetary policy, risks may exist in terms of increase in interest rates and inflation. Consequently, portfolio investment in real estate is ideal because of its diversification value when compared to other asset classes such as Equities or Fixed Income. The focus on foreign portfolio investment in real estate emanates from the need to reduce risks through geographic diversification. However, the viability and effectiveness of geographical diversification is contestable. On another note, international diversification appears to provide low return correlations and thus significant diversification opportunities (Curcio, Anderson, & Guirguis, 2014).
As a result of embracing global investment, prospective investors are in a position to realize the diversification benefit associated with reduced volatility in terms of overall performance that cannot be achieved locally. In most countries, the real estate market often appear organized and efficient compared to traditional markets that deal in stock and bonds (Holsapple, Osawa, & Olienyk, 2006). Conversely, investors need to take note of institutional barriers that include market transparency, agency commissions, accessing mortgage loans and taxes on capital gains. There are also challenges in terms of evaluating prices and investment opportunities. This is because properties tend to be unique and are not directly interchangeable. In addition, investors also need to note that risk-adjustment returns vary from country to country. In essence, the benefits of foreign portfolio investment in real estate include diversification (using commercial real estate to diversify a portfolio of stocks and bonds), reducing risk, yield enhancement and development of capabilities for inflation-hedging (Lizieri, 2013).
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