When it comes to investing in foreign properties, DollarsAndSense usually advocates a cautious approach. This is because investors face asymmetric information – with much of the information in the hands of the developers while investors don’t know much about the state of the local rental market, the location of the property or the local rules and regulations
Nevertheless, this hasn’t stopped property investors from Singapore from ploughing over $37.2 billion in overseas properties in 2017. This also makes us the “fifth largest source of capital globally”. The increasingly expensive and restrictive Singapore residential property market will only spur this trend.
We Only Hear About The Failed Overseas Property Investments
Many may avoid foreign property investments due to headlines in the news and horror stories from friends – these usually involve non-profitable investments, investments that turned south, and even outright scams.
The reason for this is simple – successful overseas property investment aren’t good stories.
There’s no denying that investing in foreign properties always come with risk and uncertainties. Most recently, Malaysia’s Mahathir commented about barring foreigners from buying properties in the Forest City mega project in Johor.
However, this does not mean there aren’t viable investment opportunities.
As a proxy, we can see that many trusted local property developers, including City Development Holdings (CDL), CapitaLand, UOL, Frasers Property, GuocoLand, Oxley, GSH, KOP, FigTree, Tuan Sing, and many more have ventured into foreign property markets. These Singapore Exchange (SGX)-listed companies have also done well in neighbouring property markets, including Malaysia, Indonesia, Vietnam, Myanmar, China, Australia and more.
Who May Be Interested In Foreign Property Investments?
# 1 Those Who Have Decoupled
Those who have decoupled and have each invested in a local property may look to invest in overseas properties. For those who haven’t they could consider selling their entire stake in a single property to their partners, and purchase another property in Singapore.
This way, investors would be able to avoid the Additional Buyer’s Stamp Duty (ABSD), which was raised by an additional 5% for each new residential property purchase, except Singapore Citizens and Singapore Permanent Residents buying their first residential properties.
# 2 Investors Seeking Recurring And Passive Income
Those seeking recurring and passive rental income may find overseas properties attractive. Many overseas property investments are increasingly being sold along with professional property managers. This minimises the amount of knowledge, time and effort needed by investors to start earning a return on their investment.
# 3 Investors Who Already Have Large Exposure To The Singapore Property Market
Some investors may also already have purchase three, four or even five properties in Singapore. Many of these investors would most likely have done so before the implementation of the property cooling measures, first introduced in 2009.
With so much of their wealth already concentrated in Singapore, and the addition of the hefty ABSD costs, investing in overseas properties might seem more attractive.
# 4 Investors Who Have Greater Insights Into Overseas Property Markets
Singapore is a multi-cultural city, and many who live here have ties to neighbouring countries. Our knowledge of a neighbouring city or country provides an opportunity to invest in the regions. We will understand, better than most, the local economic and social conditions.
# 5 Those Looking For An Overseas Holiday/ Retirement Home + Want A Return On Their Investment
Lastly, those who are simply seeking a holiday or retirement home may be attracted by overseas property investments.
Suspicious Perks? There’s A Logical Explanation In Some Cases
In a previous article, we listed some “promises” that overseas property developers may make to boost sales. In some cases, there are logical explanations for these perks.
i) Guaranteed Returns
Guaranteed returns are usually to placate investors who want certainty that the properties they invest in can be rented out.
Most of the time, Singapore investors would not have as much knowledge of the local rental market or channels to get their properties rented out as the developers. The guaranteed returns are usually offered for one or two years, to get the investors familiar with the markets they have invested in.
Taking one recent overseas property launch as an example, Montigo Resorts in Nongsa guarantees up to 8% returns for the first two years after investment, and thereafter provide a revenue-share arrangement with owners. They can do this by appointing a professional villa operator that has keen insights in the market, as well as experience in managing such properties.
ii) Sell-Back Guarantee
Some overseas property developers also offer a sell-back guarantee. If offered, this too is a way to allay the fears of investors. After the sell-back period passes, investors should have gained a better understanding and appreciation of their investments.
iii) Upcoming Mega Infrastructure Projects That Will Uplift The Property Values
While some unscrupulous developers may play up non-existent infrastructure projects or blatantly lie to unsuspecting investors, most of the time, developers have as much information as any other property investor. They’re simply playing up the strengths of their property.
Whether the local government will follow through with their plans is another question. This is why it is so important for us to understand the local market slightly better before investing in it. We can do this either via already having existing connections locally or visiting the plot before making an investment. Often, simple desktop research about the developer or location may give us a good indication if we’re getting into a scam.
iv) Limited Time Deals
We can’t blame overseas property developers for this one, as local property developers, and not to mention any other business, would be just as likely to do this to increase sales.
While they’re not true most of the time, the only way we can guard against it is to be prepared to let the investment go. This way, it gives you the time you require to properly assess the market and investment viability.
If you act too slow, you may miss out on a good investment. However, if you act too fact, you could lose a lot of your life savings.
Be Aware Of The Risks That Are Involved
As with many things in life, some risks are avoidable, some risks are manageable and some risks are unavoidable – as far as possible, our job is to minimise the amount of risks that we unnecessarily take on.
Risks That You Can Avoid
Typically called developer risk, this is when we purchase a property and it is never completed due to an unreliable developer. Of course, there are simple ways to mitigate this risk. We should always perform a desktop research about the developer. Often just understanding the developer’s track record of properties, seeing its reviews online or assessing its size is sufficient to determine if it is trustworthy. As mentioned earlier, many Singapore property developers are also listed companies on the SGX, which is another indication of a company’s quality.
Before purchasing the property, we should consider seeing the investment for ourselves. This is to ensure we are investing in a real place rather than an outright scam. One way to entirely avoid this risk is to invest in properties that have already been developed and/or rented out.
Risks That Are Manageable
One type of risk that is manageable is foreign exchange or FX risk. While it is entirely out of our control, it’s also out of the control of the developer.
We can manage this risk by converting the sum we’re willing to invest in the overseas property to the foreign currency at the point of agreement. This will take away the possibility of foreign currency moving against us, but of course, also when it moves in our favour.
Another point to note is that we can also manage country risk. By investing overseas, we aren’t concentrating our portfolio in our home market, thereby diversifying our exposure to specific countries.
Risks That Are Unavoidable
Political risk is unavoidable. The risk that the country we invest in experiences political upheaval or a change in government, and along with it, the adjustment of housing policies. There’s no way to predict this risk from occurring – either from us or property developers.
Lastly, since we are experiencing more risks than investing in a local property, we should typically expect to receive a premium on our returns. Do note that higher risk doesn’t just come with higher returns, they also come with higher possibility that our investment turns south.