Tajick’s Take With Stephane Tajick
A seasoned researcher on RCBI, Stephane Tajick analyzes global shifts in the investment migration industry.
Every time the world economy faces some kind of crisis, governments scramble to search for beneficial economic policies. Since the onset of the pandemic, I’ve has been approached to consult on investment migration policies for more than half-a-dozen countries. This level of activity is not surprising and is reminiscent of the years following the Eurozone sovereign debt crisis less than a decade ago.
Whether it involves evaluating program performance, improving program competitiveness, or pitching completely new programs, there are six common problems that keep coming up.
#1 – Restrictive laws
Changing regulations is easy, changing laws feasible. Changing constitutions; a tall order. It takes significant political clout to alter a country’s nationality laws, especially when they are embedded in the constitution. Some programs just die at conception because creating a workable program is simply not possible under the current framework. The problem is compounded when the country’s constitution doesn’t allow dual citizenship.
#2 – Unrealistic value assessments
“Our neighboring country offers a CIP at $150K, ours should be worth $200K.” This is not how pricing works. Price is subject to supply and demand. You can price your product at $10 and sell 1000 units, or price it at $50 and sell 10 units. The optimal price is the price at which a seller can make the most profit.
For CIPs, I usually start by asking governments: how much funding are you hoping to raise, and how many new citizens are you willing to accept? During the pandemic, these two questions were asked relative to time (e.g., in the next three years) because the answers might help to shape a country’s post-pandemic economic relief package. Then an analysis is conducted to determine if this is attainable and under what circumstances. We then use a benchmark exercise to determine the product’s position in the market. And that’s only the beginning. Before final pricing is determined, many more variables come into play, such as how to price dependents, the cost to the state of new citizens, the impact on market prices of a new entrant in the market, the current economic climate, and more.
#3 – A lack of understanding of the global investor
Following on the previous point, many countries concentrate on what they want and design programs to fit those needs: “We established that we need investment in these sectors.” Certain programs offer numerous investment options but end up seeing one or two options monopolizing the vast majority of the investment.
Global investors tend to favor real estate investment, not only because it’s deemed safer and simpler, but also because they can actually use it. And when we go down a layer, we see those investments usually end up in the country’s strongest property markets (such as touristic areas or rich areas in the capital city), where investments were hardly needed. These problems are not due to global investors, as these behaviors are the norm. They are due to design flaws in the investment migration program rooted in misunderstandings of the push-and-pull factors at play.
Another important aspect I often stress is offering flexible physical residence to the investor. Requiring an investor to spend most of the year in your country can be a big deterrent and will attract only those that are willing to fully relocate to your country from the start. This will ostracize most global investors and, in consequence, put downward pressure on your price.
#4 – Your banks don’t want your investor’s money
For some programs, the main issue has been the fact that local banks don’t want to receive large transfers from foreigners they don’t know. KYC/AML regulations have made it difficult to get programs going in certain places. Individuals without a residence permit tend to have restrictions placed on them when they want to open a bank account and transfer sizeable amounts of money into them. This recalls our previous point, as some program options might also experience a lack of interest because of the barrier imposed by KYC and AML measures. The money transfer process must be taken into consideration when designing a program and, in some cases, might require the existence of financial intermediaries that can facilitate that part of the process.
#5 – Performance isn’t thoroughly tracked
A country’s economic environment evolves over time, so investment migration programs need to be directly plugged into the economic heartbeat to be able to adapt rapidly.
The fall of interest rates after the 2008-09 finance crisis drastically affected investment migration programs based on government bonds. If it takes 2-3 years for a government to intervene and readjust its programs, it creates an important opportunity cost. The same can be said about real estate investment programs in Europe. Many countries were experiencing deflated property markets a decade ago, and attracting investment was in the national interest. When those markets became healthy, the programs had to be readjusted to target other parts of the country’s property market or other sectors altogether. If those property markets are overheating and you haven’t adjusted your program yet, then your policy is having a worsening effect.
Following the heartbeat of the economy is crucial to allowing you to make constant, small tweaks instead of abrupt changes that cause big waves in the market and the private sector. Private sector work on investment migration programs is particularly affected by big changes such as, for example, abrupt changes in investment requirements from $1M to $2M.
Data plays an integral role in tracking performance and efficiently managing investment migration programs. That’s the foundation of an adequate program. It remains to be seen how quickly those data can translate into policy changes.
#6 – Lack of engagement with the private sector
We’ve come to, perhaps, the most important part: How to engage with the private sector to ensure your program is distributed worldwide. Certain policy-makers believe that, after proudly designing their program, investors will just flock to it. Unfortunately, it doesn’t work that way. Maybe in a vacuum, but certainly not in a competitive environment.
Marketing to the top 1% in a foreign country is a complicated and costly affair. It’s something the program can either take charge of directly or let the private sector handle. If the program decides to do it itself, it will require funds up-front and take a few years to build the structure. Also, its managers will need to acquire expertise, which makes the whole thing rather tricky. That is why having the private sector doing the heavy lifting is pretty much the only realistic option. A good program will sell like hotcakes, whereas a poor one might require the promise of a sizeable commission.
Either way, the private sector will need to market your product, which won’t happen if it’s not profitable for them. It’s important to understand that for a program to achieve high volume, it needs not only to offer financial incentives to the private sector but also a scalable process. Financial incentives can take a direct form (e.g., commissions) or an indirect form by enabling the private sector to profit from sales-related products such as financing or gaining commissions for referrals to a third party (e.g., property purchasers). Scalability comes from having a simple process that can be reproduced again and again over time. An example would be for the government to collect the investment from the investors and distributing it exactly where it wants, rather than having the investors look for a qualifying investment in a qualifying sector.
Stephane Tajick is a researcher in the field of investment migration, the developer of the STC database on more than 200 residence and citizenship by investment programs worldwide. He is a regular columnist at Investment Migration Insider.