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The pitfalls to avoid when you invest in foreign property

DISCLAIMER: THIS ARTICLE IS SPONSORED BY RealVantage, an online real estate investment platform.

Millennials who we’ve spoken to about buying property overseas typically fall into two camps.

The first group are H.E.N.R.Ys who are flushed with cash, looking to diversify their portfolios beyond stocks, bonds and CPF. They already own a property here in Singapore and are looking for ways to avoid Additional Buyer Stamp Duty (ABSD) for a second or even third property. 

The latter group is quite different.

They find Singapore property prices high and are often jaded with life here and are looking to escape to somewhere more slow-paced. Typical places mentioned are Chiang Mai, Bali, and Johor. 

No matter which group you fall into (or not at all), there’s no denying that buying foreign property can be a daunting task. 

This article aims to outline some common mistakes people make when they head beyond Singapore to purchase a property.

Not actually owning what they buy

This sounds ridiculous, but it’s actually pretty common. Let me explain.

In many countries in Southeast Asia, property markets are just beginning to open up to foreigners. And there are many restrictions on what they can own.

One common way for investors to get past these restrictions? Buy property using a local’s name via an informal agreement. This is also known as a nominee arrangement.

This sounds good on paper. You get to purchase property without restrictions, and it’s all fun and games. Until a dispute arises.

In scenarios like these, the court often favours the locals. There’s a real chance you will not own the property even if you did pay for everything.

Even in places where foreigners are legally allowed to own property, implementing that law may not be as ideal. Case in point? Even though Vietnam allowed foreign ownership in 2015, there are still folks who do not have their property titles issued to them yet.

Our take? For the reasons above, you might wanna start out in countries with more developed laws. Ownership laws tend to be more transparent, with stronger implementation.

According to the Knight Frank’s Wealth Report 2022, the top three countries Singaporeans to invest in are the US, UK and Australia. Other noteworthy mentions are Malaysia, Japan, South Korea and Thailand; mainly Bangkok.

However, this is not to say that other countries are not worth checking out. After all, lesser developed countries do have a higher risk-reward ratio.

This does mean investors will need to consider the extra effort, as well as apply asset allocation and risk management. I.e. if you are entering a nominee arrangement, do not put a huge portion of your net worth in it!

Not doing your due diligence on developers

You probably heard stories of rogue Interior Designers in Singapore. They take deposits. Start work. Then vanish with the deposits, leaving behind an unfinished job.

Now, imagine this on a far larger scale. A property developer collects down payments, starts some construction, and then stops indefinitely.

In the Asian Financial Crisis, many Singaporean investors learnt the hard way that not all foreign developers have strong balance sheets, and are able to follow through with their projects.

History doesn’t repeat itself, but it does rhyme. In 2021, there were 79 abandoned housing projects just up north in Malaysia.

That said, these often happen to smaller developers which are less able to weather events such as supply chain disruptions and labour shortages. Their marketing strategies also tend to target foreign investors who are less aware of the property landscape.

Our take? If you’re just starting out, it is worth sticking to more reputable developers with a longer track record. These projects might come at a premium, but at least there’s some certainty.

PS: Heartland Boy also shared a piece about how foreign property investing destroyed his family’s wealth back in the day. We think it’s worth a read.

Disclaimer: It is not that Singaporean developers don’t go bust. This happened as recently as 2019.

However, we make the case that this is more likely to happen in places where regulation can be less robust. Seeking recourse can also be more complex if you’re a foreigner.

Watch the exchange rate

We’re just going to put it out there: foreign exchange risk is unavoidable when you invest overseas. This is the price of having a globally diversified real estate portfolio.

Exchange rates affect the value of your property, any rental income you might get, and the financing of your property.

As a Singaporean, there are three broad things you can do to mitigate this risk.

  • Consider the long-term outlook of the currency
  • Based on that, decide whether you should borrow in SGD, local currency, or another currency
  • Give a margin of safety to account for any currency devaluations

Being hustled by ‘good deals’

Ever wondered why some homes cost as little as $1 in places such as Europe or Japan’s Akiya houses? Or fabulously cheap villas in Bali.

Very often, it is important to realise that these ‘cheap’ properties are cheap for a reason.

For example, there are many articles that claim houses cost $1 euro in Europe. What they often leave out is that those require a significant amount of funds to restore the property to a livable or even structurally safe condition.

Similarly, a dream villa in Bali might be cheap, but that might be because it lacks an access road or is structurally unsound.

It is very likely in the process of resolving all the issues related to your purchase, you might actually end up spending far more than you budgeted for; the good deal isn’t such a good deal after all.

Our take: Whenever you encounter deals that are too good to be true, it is often wise to seek multiple opinions from real estate professionals when purchasing the property. Being physically present for an inspection is also a good idea.

This is especially true in places that lack data or have less transparency.

Not factoring in property management

Buying the property is one thing. Making sure it’s a good investment is another. Many new investors forget about the latter.

To ensure maximum property value and investment returns, you’ll need to reduce maintenance costs as well as find good sources of revenue. Both are challenging when you lack a physical presence.

Our educated guess is that you won’t fly to Melbourne to fix roof damage, or evict a rogue tenant.

You’re going to need a property manager that – and they will come at a cost. Of course, finding a good property manager who’ll actually do their job well is a whole different matter altogether.

Our take? In order to hire the most suitable property manager, you should try to conduct more research on the experience and track record of the manager and look at the fee structure to ensure that investor interests are protected.

Finally, beware of concentration risk

Concentration risk doesn’t just apply to foreign real estate, mind you. It applies to all investments.

That said, properties as an asset class are particularly susceptible to concentration risk, purely because of how high their price tags are.

Let me explain.

Suppose you want to buy an apartment in Melbourne, Australia for $750,000, when you have a total net worth of $100,000 (excluding CPF).

You could afford the 5%-12% downpayment needed by lenders, for sure. ($37500-$90,000). However, in doing so, you’ll put a large part of your entire net worth into the property.

Chances are, you’ll have to put all your money into it. This means no room for any diversification into other asset classes.

Not good.

Our take? Avoid putting too much of your net worth into one single property, local or not. Our limit for foreign property investment is 10-20% of our total net worth, but everyone is different.

(If you want to get exposure to property, it’s also worth considering REITS, or fractional property investing)

Not everyone should invest in property overseas, that’s for sure.

The word on the street is that it’s only for the well-heeled.

It’s true to a certain degree. There’s a reason why it’s CNA Luxury that writes about overseas investing. This is opposed to just the regular CNA. The amount of money needed is considerable.

It also makes sense that the wealthy travel more, so they are more familiar and confident with the locales that they will be buying into.

But for what it’s worth, the world is becoming more global. To only limit yourself to the opportunities Singapore offers isn’t always ideal.

This is true for both your career and your investments.

Many younger Singaporeans already unknowingly do this: they invest in both the US and Singapore stock market. Some of them even go to the extent of skipping the latter all together.

What does this tell us?

The world is global. The opportunities are global. The risks are global.

Perhaps we need to think global as well.

Stay woke, salaryman.

A message from our sponsor, RealVantage

RealVantage is an online real estate investment platform that offers investment opportunities into properties in Singapore, Australia, the UK, the US and Hong Kong with more accessible amounts. Here’s why you might want to consider investing with them:

  1. Clear ownership of the underlying real estate assets: When you invest with RealVantage, they create a special company known as a “Special Purpose Vehicle” for you to invest in. This means that even if RealVantage’s business operations were to cease, the underlying property still belongs to you – not RealVantage.
  2. Rigorous vetting and due diligence conducted on the real estate investment deals. RealVantage has an investment committee who curates deals based on their investment viability. They include former C-suites of Sasseur REIT, Suntec REIT, KeppelLand and ARA Asset Management.
  3. Taking care of your real estate investments end-to-end: The structuring, analysis as well as asset management are left to the real estate professionals.  You will receive quarterly reports from them, which will provide insights into your investment, distributions and final divestment.
  1. Diversify to avoid concentration risk. Investors can invest from as little as $25,000, instead of the hundreds of thousands of dollars typically needed for overseas property. This can allow investors to invest into multiple properties in various countries instead of putting all their eggs into one basket. (Which is in turn, key in managing risk in the face of economic and geopolitical turbulence and confusion).

Singapore-based real estate co-investment platform RealVantage has been granted a capital markets services (CMS) licence by the Monetary Authority of Singapore (MAS) and has been regulated by the Authority since 2021.
Further reading:

https://www.realvantage.co/insights/important-considerations-when-buying-overseas-properties/

https://www.realvantage.co/insights/episode-2-overseas-real-estate-investing/

https://stackedhomes.com/editorial/7-mythbusters-of-buying-overseas-property/#gs.bothmh

https://stackedhomes.com/editorial/e1-homes-in-italy-are-a-huge-draw-for-singaporeans-but-is-it-too-good-to-be-true/#gs.cld7ec

https://www.iproperty.com.my/property-insights/delayed-housing-development-malaysia-why-is-this-happening-76929

https://www.knightfrank.com/siteassets/subscribe/the-wealth-report-2022.pdf

https://content.knightfrank.com/research/1026/documents/en/global-residential-cities-index-q2-2022-9333.pdf

Disclaimers:
RV SG Pte. Ltd. (hereafter “RV”) and the author makes no guarantee, representations or warranties that the information in the advertorial is accurate, up-to-date and/or complete.

Further, in providing such information, RV (including its directors, employees, representatives and agents) have not taken into consideration the reader’s specific investment objectives or goals, or the reader’s financial needs and/or obligations. Any information regarding RealVantage’s past performance shall not be treated as a warranty or representation of its future performance. The reader should carefully consider whether any investment product or service is appropriate, having regard to his/her personal investment experience and aforesaid considerations. The reader must not treat the contents of this advertorial as legal, financial, tax and/or other advice, and must obtain his/her own independent legal, financial, tax and/or other advice before making any investment decision.

RV shall not be responsible for any loss arising from any investment premised on any information contained in this advertorial.

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