A Straits Times report published a couple of days ago described the plight of a group of Singaporean and Malaysian property investors in New Zealand after the developer there went bust. The outrageous part of it is that they only failed to recover any of their initial deposits, amounting to about S$9.2 million, but have now been successfully sued to pay the remaining S$33 million to the holding company that sold the land to the developer.
In other words, it appears that they have to bear the liabilities, which the developer failed to keep.
Investing in overseas properties started gaining traction in Singapore over the past 4 to 5 years. As property prices in Singapore started rising, and cooling measures were introduced to curb speculation and make it harder to buy local residential properties, people started looking overseas for investment opportunities.
Overseas developers naturally started intensively marketing to local investors. The media (both online and mainstream) was soon bombarded by advertisements on how people got rich investing in multiple overseas properties.
We think it is high time to address this topic and to shed some light on the various types of risks we are exposed to when we invest in overseas properties. And having read some of this points, you should highlight them to your family and friends buying overseas properties, as they may not know better.
1. Policy Risk
Unlike Singapore, most of the neighbouring countries around us do not have great political stability. This adds a significant level of additional risk to any property investments made.
Even a country that is politically stable would still change their policy from time to time. A good example would be Singapore itself. Over the past 4 years, we have introduced multiple rounds of cooling measures to curb the property market. These include Additional Buyer’s Stamp Duty (ABSD), which is payable for any foreigners or locals who already own at least one residential property buying a residential property in Singapore.
Countries like Malaysia and Australia have their own forms of restrictions when it comes to foreigners buying or selling properties. For example, in Malaysia, foreigners can only purchase properties priced at RM 1 million or above in certain states. Australia has tough property ownership laws for foreigners such as only allowing foreigners to purchase new developments (which by default means you can only sell to locals).
For most countries, these restrictions were introduced for political reasons and typically serve as a disadvantage to foreign property investors, like us.
Read Also: 3 Myths To Debunk About Overseas Property
2. Developer Risk
Unlike the purchase of a condominium unit from a reputable developer like Far East Organisation (FEO), City Development Limited (CDL) or MCL, many overseas developers are relative unknowns.
Most, if not all, of them will claim some sort of association with a bigger organisation. At times, they may even claim to have one or two directors on their board that has connections with the land authorities in the country.
The developer would typically promise guaranteed returns (e.g. 6% for first 3 years) and show you beautiful artist impression of how your property is going to look. All these claims don’t matter, not when the company you are actually buying from is a shell company, which can wind up anytime when things turn south.
3. Asymmetric Information
Asymmetric information refers to the situation where one party has more or better information than another.
In the context of overseas property investing, this is a real problem that investors need to be aware of. Developers and their marketing agents have abundantly more information than us. They know the actual value of the product they are selling and the risks that are involved. We don’t.
At this point, some common sense should be brought in to the equation. For example, why would a property development in a country like Japan or New Zealand want to market itself here? Do the Japanese not have enough money to invest in their own development? Or is the development unable to attract local investors? Why is that so?
The fact that the New Zealand development in question did not have a single local investor (only Singaporeans and Malaysians) should have been a red flag to investors.
We don’t need to understand the New Zealand property market to be able to understand the logic that if it isn’t good enough for the locals, it shouldn’t be good enough for us.
4. Foreign Exchange Risk
Most people ignore the foreign exchange risk that they are exposed to whenever they invest in overseas properties.
Here is the thing. We stay in Singapore and we use Singapore Dollar as a means of payment.
Whenever we invest in overseas properties, we are exposed to the risk that the currency of the country would depreciate against the Singapore Dollar. For example, we could have bought a property in Australia when the exchange rate was at AUD $1 to SGD $1.2. As of today, the rate is at AUD $1 to SGD 1.02, or a decline of about 18%.
Foreign exchange risk is an additional risk that is taken whenever a person invests in overseas properties.
Similarly, your rental returns will also suffer foreign exchange risks. In addition, you will also have to incur further loses to convert the rental returns into Singapore dollars.
Understand What You Are Investing In…
The investing world is not perfect and this holds true to property investing. We won’t deny that there are hidden gems to be found in the right foreign property investments.
We haven’t even begun to touch on the kinds of problems that may arise finding a tenant for your foreign property. You would not know exactly what is happening until too late. One foreign property owner we spoke to recently got his hands burnt by a tenant who prematurely broke a rental agreement in Malaysia. Nothing could be done as the person was a foreigner himself and returned to his country. In addition, the owner found out that the utilities had not been paid for over a year, amount to several thousand ringgit.
We know of a few Singaporeans who have been successful in investing in multiple properties overseas. These investors are highly knowledgeable and extremely familiar in the countries where they have put their money in. They are the exceptions, rather than the norm.
Unless you are an expert like one of these people, we suggest for you to avoid investing in overseas property.
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