Table of Contents
- Why Invest in Overseas Properties
- Should You be Thinking of Investing Overseas?
- Rules for Singapore/PRs Buying Overseas Properties
a. For HDB Owners
b. General Rules
- Areas to Consider
a. Familiarity with Market/Market Understanding
b. Security of Property Title, the Strength of the Regulatory Framework
c. Financing Options and Implications
d. Asset Management
e. Tax and Structuring
f. Legal Consideration
- Top Countries for Property Investments by Singaporeans
- Co-investment in Overseas Properties
Why Invest in Overseas Properties?
There are many reasons why people invest in overseas properties. For example, overseas properties may provide a source for holiday leisure or retirement home. More often than not, such purchases bring about unique investment benefits which some are elaborated below.
One of the most important benefits is international diversification which is the key to any modern investment strategy. Diversification helps to reduce the risk of concentrating all the investments in a single area and improves the risk-return profile of an investment portfolio. Investors would also be able to avoid the hefty Additional Buyer’s Stamp Duty (ABSD) in Singapore, which is currently at 12% for the second residential property owned and 15% for the third. In addition to protecting your investments, buying overseas properties also allows you to earn higher returns especially against the low 2-3% yield in Singapore.
Should You be Thinking of Investing Overseas?
The global property index indicates that global housing prices have increased at an average of 4.7% in the year, a positive trend for potential overseas investment. Meanwhile, Singapore’s housing prices have risen by just 0.4% in the past year, ranking 48th in the world for this growth. In comparison, the growth rate of overseas properties points to it being a better source of investment with potential for future returns.
For investors looking at a buying low and selling high strategy, overseas markets experiencing a plateau in property prices are a good investment opportunity. One such example is Australia, which has had a 6.1% price growth over the past 12 months, but a drop of 0.4% in the past 6 months and 2% in the past 3 months. An added benefit is that the Australian property investment process is relatively uncomplicated for Singaporeans, with the main restriction being that non-residents are limited to new developments.
However, Singaporeans should take note of the general rules in place for overseas property investment.
Rules for Singaporeans/PRs Buying Overseas Properties
1) For HDB owners
HDB owners can only invest in residential overseas properties after fulfilling the Minimum Occupation Period (MOP) for five years. After MOP, HDB flat owners can sell and rent the flat while being able to invest in a private property from local and overseas. The MOP applies for both resale and new flats, starting from the date you officially own the flat. Once the MOP period is over, there is no limit on the number of private properties you may purchase.
However, if you wish to invest in overseas non-residential properties, you may do so even before the MOP period. These properties usually belong to commercial real estate, such as industrial, retail, and other mixed-developments.
Once you have fulfilled the eligibility conditions that apply to your flat and invested in local or overseas properties, HDB owners who are Singapore PRs need to sell the HDB flat within six months.
2) General Rules
CPF savings cannot be used to invest in overseas properties as they can only be used to purchase properties in Singapore. This may be a financial burden to some as you will need to pay for both the more hefty initial cash outlay and also the actual purchase. However, properties in other countries are generally priced lower than Singapore properties. As such, it is important to summarise the different factors and make an informed decision with a thorough financial assessment before the purchase.
For people who intend to purchase an HDB flat, you will need to sell your overseas residential property within six months of purchasing an HDB flat. This rule applies to both local and overseas private residential property. After the purchase of an HDB flat, the rules for an HDB flat owner apply if you want to make investments in local or overseas properties.Sign Up at RealVantage
Areas to Consider
Before making an investment in overseas properties, investors absolutely need to get a firm handle on multiple areas. Oversight in any of these could potentially impact your returns adversely.
1) Familiarity with Market/Market Understanding
Investors should perform thorough research into the markets for which they are considering investing. As the real estate market differs from region to region, investors should equip themselves with an adequate understanding of the specific market before any transactions. Because real estate investment is very much a local business, investors need to have a firm grip at both the macro and micro level levels.
What does the upcoming supply picture look like? What are the price, rent, and transaction volume trends? How does the particular market segment perform relative to other segments? What drives the local economy and rental market segment? How is the labour market situation? Where are interest rates headed? How are regulators viewing the sector and what policy risks are involved? It is a long list. But investing without the requisite familiarity of the local market is a gamble and recipe for disaster.
Many investors attend overseas property launches where brokers would present how attractive an opportunity is and base their decisions heavily on what was presented. Needless to say, brokers are there to sell; not only do investors need to approach with a healthy dose of scepticism, but they also need to undertake their own due diligence.
After all, brokers make their money from the sale itself but the consequences of the investment fall squarely on the investors at the end of the day. As an example, you don’t ever hear a sales broker selling Australian apartments cautioning potential investors that during divestment, investors are selling into a smaller market. Based on current regulations, only Australians are allowed to acquire properties off the secondary market.
2) Security of Property Title, the Strength of the Regulatory Framework
Consumers should look into the laws regarding the ability to hold the title of a property and the requirements needed to secure the title. The policies for foreign real estate investments vary for different countries and It is important to take note of the change in legal rights.
For example, the current New Zealand legislative changes emphasised the banning of foreign ownership of a residential property with exceptions to foreigners with residency status, Australians, and Singaporeans. Australia's Foreign Investment Review Board (FIRB) has already banned foreign ownership for existing residential property. While Vietnam passed the law allowing foreigners to own properties as early as in 2015, there are buyers who have not been able to receive their property titles half a decade on.
3) Financing Options and Implications
If you need financial loans, you may loan from a local or a bank in the country of the invested foreign property. However, do take into consideration the interest rates, the loan currency, and loan limits. Not all local banks provide overseas property loans, and those who provide may only limit the property loan to a few cities in selected countries such as the United Kingdom or Australia. The Total Debt Servicing Ratio (TDSR) will also apply if you intend to obtain a loan from a local bank in Singapore, which limits the amount borrowers can spend on debt repayments to 60 percent of their gross monthly income.
In addition, loan-to-value limits vary between different banks and countries and ranges between 50% - 80%. As such, you should diligently compare different bank packages to find the most suitable one specific to your investment destination.
Investors may also choose to get recourse loans. A recourse loan helps a lender to recoup its investment if a borrower is unable to pay the liability and the value of the underlying asset such as the overseas property is insufficient to cover it. In this case, the lender can go after the personal assets of the borrower. While recourse loans may be easier for borrowers to obtain, it subjects the other assets of the borrowers to risk in events of default.
Other than getting bank loans, consumers may consider other options such as directly paying using cash or use developer financing. Cash payment allows the deal to close more quickly, but it is recommended only if the property is already built. There is a risk that the developer may face financial difficulties and delay project completion, so it can be difficult to get the cash returned in these situations. Depending on the region, you may also fund using developer financing if you are investing in a property undergoing development. Such financing usually involves less paperwork and less onerous restrictions, and sometimes may even be interest-free because developers are motivated to close sales.
As a rule of thumb, developers resorting to such financing measures tend to be less established players or are faced with challenging sales conditions and investors need to be wary of such scenarios.
4) Asset Management
Asset management aims to maximise property value and investment returns by reducing expenditures, mitigating liability, and risk, as well as finding the best sources of revenue. However, it can be a hassle for you to closely manage your overseas property due to geographical inconvenience and many choose to hire a property manager for this task.
Usually, property managers manage the real estate properties and their responsibilities include renting out the property to achieve the best tenancy mix and rental income, to run marketing events or programs to upkeep the property. In return, the property manager is paid a property management fee out of the investment asset. As seasoned investors will share, even finding a good property manager is no easy task.
In order to hire the most suitable property manager, you should try to research more about the experience and track record of the manager as well as look at the fee structure to ensure that investor interests are protected.
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5) Tax and Structuring
There are various tax considerations you need to consider for your overseas property investment, depending on where you invest. Because this is a potentially complicated topic, investors should seek to procure tax advice from credible sources and not overly rely on information provided by real estate agents who are not equipped to handle questions on this topic. Depending on the investment region and its jurisdiction, one can seek ways to minimise their investment tax exposure. As such, investors should get familiar with the local and foreign tax policy with prudent tax planning done ahead of investment to maximise returns.
6) Legal Consideration
For most countries, the right for foreign investors to purchase property does not translate to the equal right to live, work, and stay in that country. Depending on the country of investment, property laws may reflect a certain level of institutional risk as the laws can be restrictive or non-flexible for foreign investors.
Depending on the land zoning, some countries such as Thailand require properties to be held under a local nominee’s name, resulting in a high risk for the actual buyer. Some other countries limit foreign investors to only 30-40% of property ownership but there have been cases of developers breaching that limit, to the detriment of foreign investors who have already paid for their units.
As such, investors need to equip themselves with a good understanding of the legal considerations in the country of investment. Similarly, take into consideration the level of regulatory risk. Finding countries with a stable regulatory regime that favours foreign investment is a good way to narrow down investment options.
Top Countries for Property Investments by Singaporeans
According to the 2019 EdgeProp-Knight Frank Homebuyers’ Sentiment Survey, Singaporeans’ top 3 cities for overseas property investment were Melbourne at 23%, London at 21.7% and Bangkok at 17.9%. Melbourne is a popular investment option because many Singaporeans are well-versed in the regulations and the Australian market, as well as its relative proximity to Singapore. Declining house prices in London have made it a favourable market for investment for Singaporeans, along with its positioning as a highly connected gateway city. Bangkok also remains in the top 3 as a safe investment option, given the steady housing prices in the city.
Co-Investment in Overseas Properties
Despite the benefits of overseas real estate investment, it remains a capital-intensive activity. To circumvent this challenge, investors may consider co-investing with family members and friends to reduce their individual investment ticket size and manage over-concentration risk. This can be a viable route, provided all co-investors are aligned in terms of expectations and investment horizons, are good with their respective obligations and there is at least one person within the group that is sufficiently equipped with the requisite experience and knowledge to manage the investment.
Unfortunately, these conditions are vulnerable to changes in this dynamic world and are extremely difficult to fulfil in practice and such loose arrangements leave ample room for disagreements or worse, legal suits. As an example of a potential complication, consider the scenario where one person in the group defaults on their mortgage payment, and everyone in the group becomes liable for the breach. The arrangement may sour the relationship if the decision is not in everyone’s interest.
Fortunately, the advent of co-investment platforms allows investors to surmount many of the challenges faced by investors at the individual level. Indeed, the popularity of such platforms has taken off significantly in recent years as investors come to recognise the benefits they bring. With the right selection of such a platform, investors can capitalise on realising the benefits while reducing the challenges that had traditionally accompanied cross-border property investments. For example, good deals filtered out by professionals can reduce the hassle for investors to choose and to manage the investment themselves.
All in all, overseas property investment yields great benefits under the right avenue with prudent financial planning. Potential investors should equip themselves with sufficient knowledge such as market understanding and closely follow the relevant laws and regulations. Successful investment into overseas properties is not merely a resource-consuming process, it also requires domain-specific expertise that takes years to develop. With the advent of co-investment platforms, investors can now benefit from real estate investment while avoiding over-concentration risks, provided they pick the right platforms.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.