Investing in properties overseas

Many people have described the current global financial crisis as a once-in-a-lifetime opportunity to invest in not only the equity markets overseas but in the property markets as well, where prices have taken a beating.

David Lye, an agent with Chester Properties, cites Trump SoHo, a five-star, 45-storey hotel condominium in New York, as an example. Trump SoHo has seen its price fall by some 30% in these trying times.

Lye expects values to rebound by the end of the year, when the economy is expected to recover.

Elsewhere, citing a report by London-based Knight Frank LLP dated May 26, Bloomberg reported that Dubai, home to the man-made Palm Jumeirah and The World island developments, saw its house prices fall 32% in the 12 months ended March 31 following the collapse of the investment bubble.

Homes in Dubai, the second-largest of the seven sheikhdoms in the UAE, had appreciated at an annual rate of 48% just a year earlier. The Middle Eastern country is also the second-biggest decliner, after Latvia, in the Knight Frank global house price index. In 1Q2009, house prices in Latvia fell 36% while Singapore was the third-worst performing market, with a drop of almost 24%.

Where to invest?
The managing director of Knight Frank Ooi & Zaharin Sdn Bhd, Eric Ooi, advises investors to put their money in countries they are familiar with and that have clear regulated guidelines on foreign ownership and security of property rights.

“The recent economic crisis has seen many countries offer good values for their properties. Traditionally, Malaysian buyers have a preference for properties in Singapore and Australia. Singapore is still a good place to invest in due to its infrastructure and tourism projects that aim to transform the city-state into a global city.

“More recently, they have gone to markets like the UK and even the US,” he tells City & Country.

Henry Butcher Malaysia Sdn Bhd’s chief operating officer Tang Chee Meng says London and Singapore, two international financial centres, were hard hit by the financial crisis and saw property prices dropping significantly. Investors could thus pick up properties at lower prices. These countries also have clear and transparent regulations on property investments by foreigners, he says.

Tang adds that the London and Singapore property markets appear to have stabilised in the past two months, after witnessing some steep price corrections since the start of the financial crisis. Investor sentiment may have been boosted by the improvement in the stock markets as well as the stimulus packages introduced by the various governments.

PPC International Sdn Bhd’s executive director Thiruselvam Arumugam says countries with better economic, political and social stability are generally the best choice for overseas investments, although some investors may opt for newly developed countries or emerging economies, which pose higher risks.

“European countries such as the UK, Italy and Switzerland, as well as Asia and Australia, have generated more stable yields with continuous capital appreciation and are therefore better bets than developing countries like China, India and even the Middle East,” he says.

He adds that investors should be cautious as developments in some countries have been shelved or abandoned due to the slowdown in the economy.

Knight Frank’s Ooi says investors need to pay a commission to the agents they engage when they want to sell their properties overseas. Commissions vary, depending on the standard rate of the respective country.

Meanwhile, buyers may have to pay property managers to maintain or manage their rental properties. Agency commissions in other countries are known to be higher, he adds.

Potential pitfalls
One should beware of the potential pitfalls of investing in property overseas. The developer’s background is important, especially when investors are going for off-the-plan projects. In Malaysia, foreigners need Foreign Investment Committee (FIC) approval for properties above RM250,000.

“Developers who are getting financing from financial institutions are generally required to show sales of at least 50% before they will approve a loan. Hence, if they are unable to show that, the project may not proceed,” explains Henry Butcher’s Tang.

On guaranteed return schemes by developers, Tang says such schemes should be viewed with caution. “Banks today have a conservative view. They may consider guaranteed return schemes to be marketing gimmicks and assume that the returns have already been factored into the price,” he says. This means that if a purchaser requires financing, he may find that the bank’s valuation of the property is lower than expected.

Some countries have also imposed property investment rules or restrictions, so investors should do due diligence or consult agents familiar with such requirements before they make any investments overseas. In Australia, for instance, secondary properties are restricted to citizens or permanent residents. Foreigners can only buy properties off the plan.

Henry Butcher’s Tang says it is also good to know the location of the property to ensure that it is in high demand by the locals.
He adds that Australia also imposes a capital gains tax on profit made from the sale of the properties, and that there are more factors to consider with regard to taxation.

In Singapore, foreigners are not allowed to purchase land or landed properties except in “special zones” such as Sentosa Island.
Unlike Australia, Tang says those who invest in properties in London and Singapore are not subject to capital gains tax. The exit catchment market of the two countries is also wider than that of Australia as they do not have restrictions on buyers of secondary properties, he adds.

Knight Frank’s Ooi says one should also find out the rules regarding ownership of properties as not all countries allow foreigners’ freehold ownership.

“Most countries in Southeast Asia, such as Vietnam and Thailand, have strict policies on foreign ownership. For example, foreigners are only allowed to buy leases of the properties. It is important to ascertain how the ownership issue works as buyers may face difficulties in disposing of the properties later,” he says.




This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 761, June 29 - July 5, 2009.