For those investing for inter-generational wealth transfer, the abundance of overseas properties with freehold tenure is a big draw. The spread of overseas property investment options is staggering.
Locations range from Sydney to London to New York and many cities in between. The array of property types include the familiar segments such as residential, office and retail shops, and the somewhat exotic segments such as farms, hotel rooms, carpark lots, hostels, aged care facilities and real estate debt.
Spoilt by the multitude of choices across the world, how does an investor tell what are genuinely good investments?
A recent article on Bloomberg titled The End of the Global Housing Boom stated that house prices in major capital cities are heading south, caused by increasing taxes to reduce demand, tighter borrowing rules and home values being out of whack with affordability.
The article highlighted the weakening demand and declining prices in London, Sydney, Beijing and New York and forewarned of the risks of contagion effects: rich investors have enjoyed low interest rates buying homes across multiple cities; once these investors are forced to realise their losses in one city, they might have to sell out in other cities too.
The article is correct, particularly in the segment of luxury homes where the wealthy are buying homes to rent to the wealthy, rental demand simply falls short of supply! For most of the markets that we keep track of, luxury residences are over-supplied while mass affordable housing is sorely insufficient.
This is particularly true for most of the countries in South-east Asia, perhaps, with the exception of Singapore. Investors who are purely focused on the residential segment could do well to search for opportunities in mass affordable housing in countries such as Malaysia, Indonesia, Cambodia, Thailand and Vietnam.
By mass affordable housing, we are referring to homes that are priced at about three to five years of a factory production worker’s household income.
Beyond South-east Asia, we observe the following trends with regard to the popular markets of Australia and the UK, and more recently, Japan. Here is a summary of a few key markets which we track and our recommendations.
What is interesting?
Large populations ascending from the lower to the middle class, coupled with steady increases in household incomes and relatively youthful demographics will drive demand for affordable housing. A new government in Malaysia, and potentially new governments in Indonesia and Thailand, may bring better economic prospects and improved real estate values.
Recommendation: Invest in mass affordable housing where the shortage is unlikely to be filled within the next decade. Stay clear of the luxury segment unless employment laws are favourable for large numbers of expatriate families to move in. Take note that currency controls and fluctuations, together with withholding taxes could dampen investment returns significantly.
What is interesting?
Terms of Brexit are still cloudy and the exodus of EU and foreign nationals from the UK will exceed the number of British nationals returning to the UK. The reduction of EU education grants is expected to draw a majority of EU students back home to enjoy free university education instead of having to pay foreign students’ fees in UK universities.
Recommendation: Avoid investing in England’s real estate until the dust has settled a year or two after Brexit is completed. This also goes for student hostels especially those outside London.
What is interesting?
Tight loan rules and increased taxes have weakened foreign demand. Installing the sixth prime minister in eight years at the end of August 2018 also added downward pressure on the real estate market. However, Australia powers the world with its energy and mineral resources and feeds the world with its agricultural products so the long-term outlook remains positive.
Recommendation: Stay on the sidelines and watch for a resurgence in global demand for commodities before investing. For those who are long Australian dollars and need to invest immediately, and given that developers are hard-pressed for financing, do consider financing developers’ debt – an avenue open to retail investors.
Take note that the resale market for Australian homes is small, as second-hand homes can be resold only to Australian nationals and permanent residents.
What is interesting?
After two lost decades, the property market woke up over the past six years when Prime Minister Shinzo Abe deregulated industries and opened doors by relaxing visa restrictions to welcome foreign students, foreign workers and tourists.
Thirty universities conduct degree and post-graduate programmes in English with fees from around S$7,000 per year. There are close to a million jobs waiting to be filled. No surprises that the number of foreign students and foreigners residing in Japan is breaking record highs every year for the past six years.
A residential apartment in the popular Tokyo districts of Shinjuku and Shibuya will rent for 4-6 per cent gross yield. It is rare to find property titles that are not freehold.
Recommendation: Demand for real estate, particularly residences in the major cities, should be sustained for the next decade or so. The expected decline in population is not happening as much as predicted due to the influx of foreign skilled workers. Take note that Japan’s property transactions and both sellers and buyers need to pay up to 3 per cent fees to the agents representing them.
Do your homework
I sound like a broken record when I remind investors and fellow property agents to consider the risks and potential stumbling blocks around investing in properties overseas. The first pitfall that plagues most investors is not having done sufficient homework to research the foreign markets.
On the other hand, I have also seen investors who have done too much homework and missed the 30 per cent total returns (capital appreciation and rental income) they would have gained from Japan’s property market in the past four years.
Furthermore, many investors rely purely on new foreign properties launched in Singapore without considering that completed properties with tenants might give better returns.
Investors should also consider the post-investment activities such as: how would you secure your first tenant, who will collect the monthly rentals on your behalf, is there a trustworthy agent who will manage the property, how do you report and pay taxes in the foreign country, who will help you sell the property when you need to divest, what is the estimated total returns after divestment and remitting the money back to Singapore?
Higher returns for higher risks
Regardless of asset classes, investors are exposed to significantly more risks when investing overseas as compared with investing in Singapore. Given the higher risks, investors must demand higher returns that will offset the risks, and cover the additional efforts required.
No matter how beautiful the scenery at that ski lodge or how enjoyable that beach resort experience was, properties that do not provide higher returns over and above the increased risks and efforts should be avoided. Invest with your heads, not with your hearts.
By Ku Swee Yong – a licensed real estate agent with International Property Advisor Pte Ltd and the co-founder of HugProperty.com. And Desmond Tay – an undergraduate from the Department of Real Estate, National University of Singapore.