We speak to Alex Bellingham, Director of IP Global on some of the most frequently-asked questions on investing in overseas property.
1. What are the five things an investor must know before investing in an overseas property?
a. Understand the market First and foremost, an investor must have an understanding of the target market. In a recent survey IP Global commissioned, we found that the biggest barrier for Singaporeans investing in property overseas was a lack of understanding of the market’s legal environment. For property, like any other investment, you need all the facts before committing capital to it.
b. Pockets of value It is not simply enough to choose a city, you need to know the ins and outs of the city itself. At IP Global, we focus on specific locations within a city that represent pockets of value. These are locations in safe-haven markets that we believe will deliver stable, sustainable yields and capital appreciation over 5-10 years as a result of rising populations, major infrastructure upgrades and economic growth.
c. Supply and Demand One of the most important indicators is supply and demand. When selecting a property to invest in, investors should compare projected demand in the local area with the future residential construction pipeline. When supply is not set to meet demand, as we are seeing in specific areas of outer London, Manchester, and Melbourne for example, it creates an imbalance which drives property prices up.
d. Strong Liquidity Regardless of the attractiveness of a property’s prospective yield, an investor’s ability to unlock its capital potential is contingent on attracting local buyers to purchase the asset. This is why we take care to ensure properties we recommend will be attractive for buyers over the longer term, and recommend different approaches in different markets – for example, while in Asia we often recommend smaller units, in Australia or the UK we’ll very seldom recommend investors purchase this type of dwelling.
e. Attention to Detail When it comes to the details, a number of more technical variables are important to lock down before deciding on a particular investment, especially the credibility and track records of both the property developer and managing agent. Other details like completion dates, access to mortgage financing, local taxation and laws, ease of resale, and your strategy for lettings and management are also important factors to address before committing to the investment.
2. What are the pros and cons of investing outside of your own country’s boundary?
• Diversification: A balanced global portfolio shields investors from volatility in any one market.
• Holding assets in other currencies can be beneficial to guard against currency volatility. It is also an opportunity to get exceptional value on your investments. For example, the Singapore dollar and Hong Kong Dollar are both comparatively strong against the Euro, AUD and GBP at the moment, which means Singaporean and Hong Kong investors have better buying power in these markets.
• Overseas property in cities such as London and Melbourne often present a safe haven for investors based in less economically or politically stable locations. Investing in transparent and legally accessible markets enables investors to protect and grow their wealth sustainably.
• Lack of knowledge: In a recent survey commissioned by IP Global, we found that 54% of Singaporeans are put off investing overseas by a lack of understanding of the laws in the country they are looking to invest in. Over half (52%) also felt that not understanding the local market was a barrier to investment. Collating and understanding all the facts is a challenging but necessary process.
• Property management: The physical challenge of managing an overseas property is also a key concern.
3. Prices of real estate in cities like Hong Kong and Singapore have skyrocketed sharply in the past few years (particularly in the luxury segment). Is it still worth it to invest in these cities especially in light of the Additional Buyers Stamp Duty imposed and the potential bubble risk?
I would advise potential investors to adopt a wait and see approach when it comes to investing in the local Hong Kong and Singapore property markets.
In Hong Kong, government measures to subvert the increase in property prices are beginning to take their toll, with property transactions in Hong Kong hitting a 19-month low last October. Increases in stamp duty and property transaction tax rates have been aimed at non-permanent resident buyers in recent years, while mortgage borrowing has also been limited, with 40% LTV the maximum financing level allowed in some cases. These factors are reasons to urge caution in the property market of Hong Kong. In Singapore, we have seen transactions and prices slowing as a result of the Additional Buyers Stamp Duty.
4. Which nationalities are the biggest property investors (in the residential segment) in Asia Pacific?
China remains one of the biggest property investors in Asia Pacific. According to a report by Knight Frank, Chinese outbound real estate investment grew strongly in 2015 to nearly US$30 billion, doubling that of 2014. Despite some unease about how recent market volatility in China will impact these figures, we remain confident and Melbourne were tied at second place, attracting a total of US$3.8 billion of Chinese investment. London placed third, which mirrors the momentum of previous years.
As for IP Global, our Asia Pacific headquarters is in Hong Kong, with further bases in Singapore, Kuala Lumpur and Shanghai – these are the markets where we’ve experienced most demand from local clients looking to invest overseas. In addition to China, we’re also excited about expanding further into Indonesia over the next few months.
5. And which are the top cities most sought after by these investors?
List the pros and cons of investing in each of these cities. Traditionally, Manhattan, London and Sydney have been the most sought after markets for overseas investments. However, in recent years, we have also seen a surge in investors focusing on less traditional markets, centre in England. At 6.02%, Manchester residential property commands the UK’s highest average rental yields and 26.4% property price growth is forecast between 2016 and 2020.
Elsewhere in Europe, we see exceptional value in Berlin, which has established itself as something of an investment stronghold within continental Europe over the last few years. The German economy has proven itself incredibly robust throughout a difficult period across the Eurozone, and Berlin in particular has benefited from its diversified economy to record GDP growth of 17.4% between 2005 and 2012. Despite this, home ownership in Berlin is very low at a rate of just 16% and we see it growing significantly as the German property sales market increases.
In Australia, while Sydney is often the first port of call for overseas buyers, strong price returns in recent years have led to a surge in residential development in Melbourne.
Investors should be careful before committing to a market where high prices and increased supply make strong returns difficult to achieve.
6. How are luxury properties performing amid the current uncertainty in the global economy?
In London, the cost of transactions at the upper end of the property market has made this prospect less attractive to investors over the last 12 months. In fact, at IP Global, we have observed a growing demand for properties in the GBP300,000– 700,000 price range.
Those who purchase luxury real estate tend to be motivated by different drivers, such as emotional, status-driven factors, including the desire for a trophy. Alternatively, overseas investors may also be motivated by a desire to preserve their wealth in a safe haven market, with less of a focus on capital appreciation or yields. This desire to preserve wealth is often heightened during periods of economic or political uncertainty in their local market.
7. In light of currency gyrations, how should an investor with a volatile Asian currency, say, Ringgit, plan his real estate portfolio?
Global currencies are currently in a volatile phase – which of course creates opportunities as well as challenges for investors. We’re seeing weaknesses all over the world, including Sterling which is currently at a 7-year low against the USD. The AUD is also comparatively weaker than many major currencies. We’re seeing more and more people holding weaker or more volatile currencies investing in stable asset classes such as overseas property, to ensure they are not solely Rand or Ringgitasset based (for example). The strategy for all investors should be to invest in a wellregulated country with stable growth and borrow at sensible levels of interest.