Why you must still think of '8' when buying overseas homes

By Tan Kok Keong

You have probably seen an increase in the number of advertisements promoting the launch or the sale of foreign properties in this newspaper. With tighter loan restrictions imposed on Singapore property, such overseas investment has become an increasingly attractive option. Foreign developers know this and are now actively marketing their projects here. As this is a big investment, you must take note of the intricacies and risks involved, given a lack of familiarity of overseas markets, laws, taxes and financing options. Here are eight pointers to note before you embark on the journey to find prosperity.

1) Plan to sell before you buy

Buying is the easy part; difficulties often surface when selling the property. You should be mindful of the barriers to sell before purchases, which can affect your cash flow. For example, completed projects in Australia can only be sold to Australian citizens and permanent residents (PRs). In Malaysia, properties sold to foreigners have to be priced above RM 1 million. These restrictions limit the buyers' pool and as a result, would cause the seller to spend more time selling.

2) Don't compare with Singapore but check the local conditions

When shopping overseas, Singaporeans often use one word - cheap. But do note that while the same item may appear cheap to us due to the strong Singapore dollar, it may be deemed as expensive in that country. So when buying a property overseas, you need to check how the locals will view the price as this could affect your ability to sell later. Just take a look at the situation in London. The Londoners are being priced out of prime downtown areas and demand for property in those areas are predominantly fuelled by foreign buyers from the Middle East, Russia, Hong Kong and Malaysia.

3) Buy and rent

The ease of leasing out your property will depend on property type (condominium or house), property use (family or student accommodation) and the number of competing units that will come to market at that time. If you intend to rent out your foreign home, you would need to consider whether your expected rental yield is realistic and the economic situation there when you take over the keys. So before you sign on the dotted line, it is pertinent to determine the targeted tenant profile and the amount the expected rent. Location is a key influence on these two criteria; the tenant mix of property in the central business district is likely to be foreigner-centric and these tenants can be afford to pay more. But don't expect to buy high and rent high. For example, many owners of large, high end properties in Kuala Lumpur City Centre now realise that despite the good quality of their apartments, they find it tough to look for tenants who pay the high rental.

4) Know the laws relating to the housing and maintenance of the development

While regulations surrounding common property are more or less similar in developed markets where most buildings are strata-titled, you may face challenges in developing markets such as Myanmar, where strata-title laws are not established. Without an established system of law or local practice with regard to allocating and enforcing contributions to the maintenance fees for common property, poor maintenance of the common areas could happen. This could result in rapid deterioration of your asset value.

5) Buy only from credible developer and seller

This is the simplest advice and yet the hardest to follow because time and again, we hear heart-ache stories of folks who have bought into overseas projects that are later abandoned. When purchasing uncompleted properties, you need to be aware of the developer's track record of projects, financial ability to complete the project and commitment to deliver the promised project.

6) Check whether your funds are placed into escrow accounts

Ideally, there should be a process to allow buyers' funds to be placed into an escrow account dedicated to the project. Such dedicated escrow accounts are necessary to ensure that the withdrawal of funds are only authorised by credible third parties and also to ensure that the funds will only be used to finance the development of the project. In several countries, there is no formal law on the creation and management of the escrow account. Without this, the developer can use your money to fund other projects or other commitments which might result in delay of the completion of your property.

7) Check the borrowing cost and limit

It is important to determine the total cost of financing your property before buying. The initial down payment may be small, but should consider wider, more comprehensive factors such as exchange rate movements, interest rates offered in the respective currencies (which would affect an investor's monthly cash flow), ease of funding instalments and Loan to Valuation. In the event that a lower loan amount is granted, you must be ready to foot the shortfall.

In addition, if the loan is from a Singaporean bank, you will be subjected to requirement such as the Total Debt Servicing Ratio (TDSR) when processing the loan application, which could limit the capacity to purchase your ideal overseas property.

8) Consider the foreign taxes on property

Similar to additional taxes imposed on foreign ownership in Singapore, other countries may also impose taxes on foreigners. These taxes may come in the form of buyer and seller's stamp duties, property tax, estate duty, capital gains tax and/or withholding tax.

For example, in United Kingdom, a capital gains tax of 18 per cent or 28 per cent, which is dependent on your earnings, will be levied on foreign-owned property sold from April 2015. A set of new rules have also been introduced in Hong Kong, which mandate the doubling of stamp duty on residential and commercial properties over HK$2 Million and a 15 per cent property tax on non-residents. These taxes on foreign-owned properties ultimately result in smaller profit for foreign buyers.

So Singaporeans looking to invest in overseas properties should remember these eight points. Indeed, you should seek written assurance from the developer on these points before signing off on the purchase. As always, it is better to be safe as you embark on the journey to prosperity.

The writer is the CEO of REMS Advisors Pte Ltd. REMS Advisors Pte Ltd is a Singapore-based advisory firm that provides research-driven investment advice, collaborative investment strategies and mortgage advisory. He can be reached at [email protected].

Foreign Properties, The Straits Times, Saturday, April 5 2014, Pg C50