4 major challenges faced when investing overseas

With no sign that the Singapore government is going to do away with cooling measures, many investors might be looking overseas for good investment opportunities. Many marketers are also holding regular overseas property seminars to generate interest among Singaporean investors.

But before you jump on the bandwagon and decide on committing your money on overseas properties, here are some risks you should be aware of.

Foreign language and culture

Linguistic Challenges

Firstly, the most important factor is of course the country that you are choosing to invest in. For the country you have chosen, one important concern is the main language that is used to communicate, especially for business communications.

In some countries, not speaking and reading the local language can be an issue if you are thinking of investing. For instance, some contracts may be written in the local language. When you are faced with such a contract, you should be able to understand the terms and fine prints in the contract. Otherwise, you can engage a lawyer who can translate and represent you, which will come at a cost and affect your profit.

Communicating with property agents or the management office in the foreign country, and trying to make yourself understood, may also pose as a challenge for you.

For example, in countries like Japan, the average English proficiency levels among professionals’ lag behind countries like Singapore or other countries where English is the first/official language. You may have to struggle with Japanese only official documentation, that may require help of an interpreter.

The main questions can be summarised as:

  • Does the country you are investing in mainly communicate in a local language?
  • Do you have sufficient understanding of the local language?
  • Are you willing to engage a translator / lawyer?

Difference in political, legal and physical climate

When investing in overseas properties, there will be uncertainties due to difference in political, legal and physical climate.

Political Climate

Government institutions will have a huge impact to the country’s housing market. Strong and sound regulations by the government will often lead to a strong housing market. However, in some countries, you may be faced with red-tape or even corruption when trying to invest in or buy properties.

Political unrest in the country will also put a damper on profits. It is hard for property markets to be optimistic if there is constantly chaos in the country. Ask yourself:

  • Are government policies welcoming to foreign investors?
  • Is there a risk of political unrest in the country?

Legal Climate

Just like in Singapore, there will be restrictions placed on foreigners when buying overseas properties. You will have to keep track of changes to these regulations and how it would affect you and your investment decision.

After you have successfully bought or invested in the overseas property, you may still be faced with legal disputes. For example, you may have a complaint against developers if there are any defects in your property. If you are renting out your property, you may face disputes over missing rent or evacuation of tenants.

The legal systems in place are also different between different countries. Before investing, it is good to first get a sense of the legal regulations in that country. Imagine being faced with a long and tedious legal battle, and still being unable to recover damages!

Another issue deals with property taxes. Different countries will also have different ways to calculate taxes. Transaction costs of buying properties will also impact your profit. This will be important to investors, as it affects the overall profit from the property.

Questions include:

  • Are there restrictions on foreign ownership of property?
  • Does the country have an efficient legal system?
  • How are property taxes computed in that country?
  • What are the transaction costs involving property in that country?

Management of the property

Another challenge is managing the property. Unlike investing in local properties, where you can easily check on the condition of the property in person, this is not the case for overseas properties!

Instead of taking a thirty minutes drive to check on your property, you will have to rely heavily on foreign-based entities for the most basic of updates. Even if you do get progress reports, it is hard to constantly verify how true these details are.

Before investing, you should also check if overseas projects include property management services on your behalf. Even if services are included, it would be wise to check whether the service provider is reliable and has a good track record.

If property management services are not included, you will have to engage one on your own. Some may turn to family and friends staying overseas to help them in management, but they are helping you out of goodwill and not professionally.

Questions include:

  • How will you receive updates on your foreign investments?
  • How will you manage your overseas property investments?

Economic Climate

An economic risk that will affect your profits is currency risk. Simply put, currency risk is risk to the value of foreign currency. When investing overseas, you will probably be using foreign currency instead of SGD. When you get your returns, again it will be in foreign currency as well.

You probably will prefer to hold the profits in your home currency or SGD instead. Thus, the exchange rate, or the differences in values between currencies in two countries, will affect how much your return is.

Thus, before investing in overseas properties, you always have to be aware of potential currency fluctuations

Questions include:

  • Does the country have a strong currency?

Physical Climate

In Singapore, we are really lucky to be living in a region with one of the lowest risk of natural disasters!

Natural disasters can cause extensive damage to infrastructure. You can keep your finger’s crossed; nobody wants their overseas property to be damaged by natural disasters!

Also, damage to infrastructure such as roads, rail-lines and ports will affect economic growth in the country. This will no doubt affect the health of that country’s housing market.

Questions include

  • Is the country prone to natural disasters?
  • Does the country have enough protection against natural disasters?

Investing in overseas real estate can be a complex matter, and contain additional risks compared to investing locally. It is a must to do the necessary research, and get the help of a professional.

Clive Chng

Clive graduated on the Dean’s list from Nanyang Technological University with an Engineering degree. Prior to joining Redbrick, he not only served as a Project Manager for Keppel Shipyard where he oversaw multi-million dollar marine projects, but was also the Vice President for Keppel Young Leaders, focused on the development of future leaders. Being a fan of low-cost Index Funds, his passion in Investing and strong interest in understanding how financial markets shape economies ultimately fuelled his move from the field of engineering into the financial industry where his personality trait as a servant leader further allows him to service his clients effectively.
Clive Chng

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