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