Monday, April 9, 2012

5 things to think - foreign properties

I plan to start a new series on property, aiming to give key pointers of the property landscape, local and overseas.

There are many benefits on property investment such as:

(a) Hedge against inflation
(b) Let money work harder for you
(c) Preovides a pssive income (hopefully for our retirement years!)
(d) Earn profit from capital gains when we sell our properties
(e) Leaves a legacy for our loved ones

Information is based on my personal research. Please do consult your agent for further details as each individual profile is vastly different.

Before I get started, I will like to update my portfolio status first. I sold the following and locked in marginal capital gains weeks ago:

- Sold ARA
- Sold SIA Engineering
- Sold Ho Bee

I will be on the look out for market opportunities.

Today, I will touch on
"5 key points to think when buying foreign properties"

If we read our local papers, to name a few, we will notice overseas real project launches from Australia, United Kingdom, New Zealand, Malaysia, Thailand, India and the United States. In my opinion, we can't find a property that matches our expectations 100% but we hope to be aware of the factors that will shape our decisions. In other words, to be well informed before taking the plunge.


1) Stability

We need to assess the political climate and economic stability of the country. Constant infighting within government bodies, civil unrest, riots and strikes will affect rental and capital value of real estate as foreign companies will shun away and not be attracted to invest and set up their bases and offices.

Worse, your properties will be affected when the buildings are bombed and damaged - probably insurance covers to a certain extent only.

2) Government and economy

- Rules governing foreign ownership
- Government "friendly" support for foreigners (we hope for rebates!)
- Taxes (income tax / property tax / capital gains tax (some countries exempted)
- Stamp duties
- Currency fluctuation (it's better to buy overseas properties in the country currency as you will not be exposed to the currency rate changes)

Examples (as of current):

A. Malaysia
State government imposes restriction on the minimum price - ranging from RM250,000 ($103,000) to RM500,000 at which foreigners can make a purchase.

B. Australia
Foreign investors are only allowed to purchase new residential properties and resell them to Australia citizens or permanent residents (PRs)

C. India
Only non-resident Indians (NRIs) are allowed to invest in properties

On a broader perspective, consider the economic indicators:

- 5 years GDP growth (for benchmarking purposes only)
- Inflation (runaway inflation such as Vietnam - check the past records)
- Total trade import and export vs. focus on domestic consumption such as China

3) Other Costs

Think about:

- Mortgage interest cost / interest rate
- Legal fees
- Maintenance fee (usually in strata-titled units development where there are facilities)
- Conservancy charges by the local council
- Ground rent (applicable for most leasehold properties)
- Management fee
- Insurance
- Repair and replacement costs

Excluding mortgage interest cost and income tax, the annual outgoing expenses can be between 2 per cent and 3 per cent of the property's value.

4) Property cycle

The cycle goes through booms and bust. One needs to gather data from government sources or property research companies, attend seminars and exhibition (to gauge buying interest in foreign properties and collect information), on-the-ground observation (of people's spending power or if not, refer back to figures on consumer expenditure on luxury products - the more money people spend on luxuries, the more disposable income they have which translate to positive economic sentiment) and regular transacted prices. Timing of the cycle is essential to enter at the right time and anticipate the trough before it really happens.

A scenario in our local backyard - HDB is meant for public housing and thus should be affordable to all household; the type of flats depends on the income level and profile of the flat owners and co-applicants. Recently, Toa Payoh HDB resale flat was sold for record SGD$894,000. This means buyers are feeling bullish which makes sense because interest rate is low. Sentiment is high and therefore the property cycle for the mass market is near to peak when demand and prices shoot up. If you own a HDB and plan to sell, this can be the right timing in the next 6 months.

5) Niche, high-end or others

Know the different splits for various types of overseas properties before zooming down into your choice. It could be niche-based such as ski resorts in Japan to high-end residential homes or others such as commercial and industrial properties. It boils down to your objective - are you going for yield or capital gains?

Usually, it is rare to find a property that provides strong rent and yields solid capital gains. For instance, apartments generally provide higher rental yield when compared with landed homes. Landed homes generally appreciate in value faster than apartments. Thus, it's important to know our target.

We have to do our due diligence. Research is important, providing you the relevant property intelligence. After all, there is no "get-rich-quick schemes in properties". If you are busy, seek out a reputable and licensed agent or get a Mentor to guide you. And don't forget to talk to seasoned investors who may have great experiences to share regarding their foreign properties exposure.

6 comments:

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