International investments of residential properties are undoubtedly becoming more popular. This is due to the fact that people understand the benefits and importance of diversification, which are to mitigate risks as well as being able to capitalize on opportunities with higher growth potential than the assets available in Singapore.
As such, more often to collect extra rental income or capital appreciation rather than occupying the property, there is an increasing number of Singaporeans who seek to purchase overseas properties. If you are one of them, here are some key considerations to ponder.
Trusted Property Management Partners
An important, yet constantly overlooked, key consideration is the partnership with a property management company. It is essential to seek expert advice and assistance with regards to overseas properties. As such, there is a need to engage an established company to assist with issues such as leasing, facilities management as well tax advice amongst others, in order to ensure minimal complications, maximize cost effectiveness as well as raking in a clean amount of net operating income.
Another reason why this is extremely important is due to familiarity with the real estate market and social conditions. Doing things on your own such as finding a tenant or refurbishing your new foreign property can be extremely time consuming as well as expensive. Henceforth, outsourcing such duties to credible parties would alleviate most of these complications. (Note the word ‘credible’ – please do prior research before hiring one!)
Currency / Interest Rate Risk
The fluctuations of a specific foreign country’s currency value against the Singapore dollar is one that must always be considered. The real estate market or economic climates of a country, of course, are the other key factors that may affect the projected value of an overseas property investment. However, any appreciation or depreciation of the foreign currency will also affect the overall returns from the investment due to its fluctuations. Hence, it is important to always keep track of the movement of a country’s currency value.
On that note, it is also important to keep track of United State’s interest rates. The movement of their interest rates made by the Fed (Federal Reserve) has often causes a ripple to the interest rates of other countries, albeit varying degrees. As such, besides the currency rates, it is also important to simultaneously examine the interest rate as well.
Taxes and Fees
Various countries differ in their forms of taxes and fees, as well as the amount payable for each of them. Besides the level of taxes, the number and type of fees may also differ for various countries. Prior investigation is required of these factors is absolutely important before making a decision to purchase, as the differences may be huge.
For instance, property stamp fees in Singapore may be capped at $500, however, stamping fees in Malaysia has no cap and merely based on contract value (as such, there is a common possibility of paying about S$20,000 for a million-dollar property)! As such, it is highly recommended to do preliminary research on the possible costs incurred while determining the required returns from the property.
Another factor that should not be taken for granted is loans. The process of financing an overseas investment may not be as easy as it seems. Singaporean investors are much less likely to obtain financing from the foreign country that they seek to invest in. Henceforth, the purchase of an overseas property is usually financed by a local Singapore-based bank, or fully purchased by cash. Nevertheless, this may still prove to be a much viable option due to the fact that loans in Singapore typically charge lower interest rates as compared to loans from foreign banks.
Location is also important in obtaining an attractive loan package. Investments in properties within developed countries (such as London, Australia, etc.) are proven to be easier in obtaining financing than developing countries (such as Cambodia, Myanmar, Malaysia, etc.) due to the level of stability of the respective countries’ economies.
However, even within a country itself, banks will further scrutinize the specific locational attributes of the asset. For instance, residential properties within Zone 3 of London are less preferred by banks to allow financing as compared to properties in Zones 1 and 2 that are regarded more of a ‘safe haven’ due to their close proximity to the city center and ever-present high demand. Henceforth, core properties within city centers have proven to be easier in accessing financing from banks as compared to those in rural areas or the outskirts of the city.
Finally, a proper exit plan is very crucial in ensuring the success of an overseas property investment. Always have a specific target group of buyers within a specified period of time. It is highly unadvisable to buy a property without doing prior real estate market analysis and merely based on speculation. Having a time frame in mind, a target value to sell or a rental income to hit, as well as target buyers would greatly allow a clearer investment objective.
One tip is to buy what the locals would and can afford to buy – to ensure that the property can be sold of easily at a reasonable target price. This is because should by any chance the property cycle hit its peak, disposing of property would be extremely difficult as prospective buyers would wait for sometime for the market to cool down instead, thus diminishing your returns.
Simultaneously, beware of the presence of capital gain taxes – there is a possibility that the shorter the holding period, the higher the tax payable should you decide to sell it off.