Expert on investment attractiveness and country risk

Before investing in a country, a competent investor always takes into account country risks. Our expert, Dr. Nikolai Trifonov, FRICS tells what it means and why the country risk premium could be useful not only for investors but also for ordinary property buyers.

Dr. Nikolai Trifonov is the Fellow of Royal Institution of Chartered Surveyors, the Full Member of the International Academy of Engineering, the Foreign Member of the Russian Academy of Engineering, the Honorary Appraiser of the Republic of Kazakhstan, teaches real estate appraisal at the Belarusian State Economic University, the author of manuals "The Valuation Theory" and "Comprehensive Real Estate Valuation". In 1994, he founded the Belarusian Real Estate Guild, which united the largest private and state participants in the real estate market and privatization. In 1996, Nikolai created and headed the public association "Belarusian Society of Valuers", which is a member of International Valuation Standards Council (IVSC). In the period 1998-2005 Nikolai was elected and reelected as Board Member of European Real Estate Society (ERES), Director at Large – Responsible for Central & Eastern Europe.

What is a country risk premium and how to calculate it?

The Country Risk Premium (CRP) is a premium for the risk of investing foreign funds in a project in a given country associated with the loss (in whole or in part) of the project’s value due to the overall economic, financial and sociopolitical factors in this country.

The country risk premium can be interpreted as a country-to-country difference in the investment yield of the valuation currency, that is, the difference in the investment yield of the currency in the country in question and its issuer.

When calculating a country risk premium for a country, the basis of the calculation is information about the yields of securities (long-term government bonds, usually with a nominal value of 100 US dollars), which are traded in international markets — this indicator Rpr. In this case, the country risk is calculated against the US dollar, because the securities are denominated in this currency. It is precisely to use in the calculation the profitability of treasury constant maturities of the US government that gives the magnitude of risk-free rate R0.

As a result, the country risk premium formula is as follows:

CRP = (1 + Rpr) / (1 + R0) — 1.

— Why is the calculation of country risk premiums interesting for a typical real estate buyer?

— Knowledge of the level of country risk of a country helps the investor to assess the prospects of investments in the given direction, — said Nikolai Trifonov. — The country risk premium indicators are part of the formulas for assessing the performance of investment projects, as well as the valuation of assets in that country, primarily enterprises and real estate.

It is important for an ordinary property buyer to know the level of the country risk premium to understand the real value of an apartment or house in a country in the international real estate market. And if he plans to sell this property in the future, this indicator will help him to assess how likely he will be able to go «plus» with such a sale.

The summary table of country risks premiums (against the United States dollar) for the various countries is given below.