Buying property in an overseas market presents diversification opportunities for your investment portfolio in terms of asset class and geography, as well as the glistening prospect of higher yields.
According to 2016 survey findings by property investment company, IP Global, Australia, the UK and Japan are the top three destinations among Singaporeans looking to invest in property overseas. Other popular investment destinations include Malaysia and Thailand.
However, venturing into an unfamiliar foreign market is no light decision and you could end up in a property investment trap.
Here are the top risks you should consider before embarking on a foreign property investment:
1) Foreign currency fluctuations
Investors take on foreign exchange risk when they purchase properties overseas. In 2015, the Malaysian Ringgit weakened about 40% against the US dollar, and sank to a record low of below 3 against the Singapore dollar amid falling oil prices and political instability.
Foreign exchange risk also affects rental yields and could result in further losses for property owners.
On the flip side, foreign currency fluctuations can also swing in your favour. For instance, if you’d bought property in London in 2013 when the pound was at $1.90 against the Singapore dollar, you would have made a pure currency gain of 15% in 2015.
The attractive exchange rates relative to the Singapore dollar also offer a pricing advantage for property investors here. However, for more stable returns, buyers looking to buy property abroad may consider seeking markets where the local currency has proven to be stable over time.
2) Developer risk
Developers in Singapore are subject to stringent requirements before they are allowed to build and sell a project. These requirements include safety records, architectural standards, and importantly, having sufficient funds to actually complete their projects.
Whereas in some countries, property developers may be allowed to start selling projects before they are finished, with the hopes that the sales will make up for capital shortfall and allow them to continue the project.
This is where it gets tricky, for should the developer fail to sell enough units to carry on construction, they will pull the plug and leave investors counting losses. For instance, investors suffered losses of between $140,000 and $500,000 after paying for units at The Heritage, a condominium-hotel project in Lagoi Bay, in northern Bintan. Developer PT Stareast Sejahtera had originally promised that the project will be completed by end-2015, but pulled the plug on construction a year ago.
Potential buyers would do well to perform adequate due diligence to avoid potential pitfalls. Investors who are keen to buy property overseas can mitigate this risk by first looking at established property developers with a good track record. One example is Thailand’s listed property developer Sansiri Public Co, which has launched eight condominium projects so far in 2017, and plans to launch four more by year-end.
3) Policy risk
Shifting monetary policies in foreign economies can affect the cost of debt obligations and also rental returns for foreign property investors.
For instance, the Singapore government raised property taxes by 15 per cent for foreigners, when it imposed the Additional Buyers Stamp Duty (ABSD) in 2011. Meanwhile in Malaysia, foreigners can only purchase properties priced at RM1 million ($320,000) or above starting March 2014 . Stamp duty for these properties will be raised from 3 per cent to 4 per cent starting January 1, 2018.
In Australia, foreign property buyers can only purchase new developments, which means they can only sell to locals down the line.
Another concern is rent. Some governments may pass rent-control measures, which restrict how much you can sublet your property for, resulting in a much lower return on investment. Certain policies also restrict who you can rent your property to – for instance, in Singapore, non-Malaysian work permit holders from the manufacturing sector can not rent a whole HDB flat, and are only eligible to rent rooms.
One way investors can protect their hard-earned money and ensure optimum gains is by first understanding the landscape of the market they wish to buy property in.
Adapted from: EdgeProp, 22 September 2017