Due diligence and research are paramount when it comes to whether, where, and what to invest in outside of your country.
Investing is as much a tool for shaping your present financial situation as it is in forming your future. International investment is about dropping your previous perception and taking on a new pair of glasses and understanding a new environment from it. Just as there is a reason to invest, there is also a big reason not to invest – lack of knowledge. The foremost principle therefore is to study the fundamentals about the place that you wish to invest in and if possible make a site visit. The visit may reveal a totally different picture than what you have imagined previously.
Investors tend to think that owning a property is the same anywhere in the world. They forget that each jurisdiction has a different set of legal criteria. Be it a democratic, socialist or monarchy government, property ownership ranges from absolute to a periodic lease, while a different set of rules is usually applied for foreign investors.
1. Due diligence on ownership
A country’s laws play an important role in the protection of property ownership. The risk of buying a property is definitely higher when the property might be seized by the government without any reason or compensated disproportionately to the amount invested without any recourse to the courts. It is also important to look at the land registration system of the country – whether they practise the deeds system or Torrens system (mostly in the Commonwealth countries) or even any other system. Under the Deeds system, the government does not act as the keeper for all land titles and record unlike the Torrens system. It is left to the prospective purchaser of land to investigate all deeds in the chain of titles before finalizing the purchase because the owner as shown on the land registry record does not necessarily mean he has good title to transfer. The title is liable to be defeasible hence due diligence is needed. On the other hand, in a country where the Torrens system of land registration is practised, investors can safely assume ownership recorded in the Torrens land registry is correct.
2. Eligibility & tenure
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Each country has a different set of criteria for foreign ownership of property. For example, in Australia, a foreigner is only allowed to buy real estate to be developed, to be redeveloped or existing only at the planning stage and provided approval from the Foreign Investment Review Board is obtained after taking into account the purpose of purchase.
Therefore, it is not only a question of affordability, but also a question of eligibility to own a certain type property in a foreign country and most of the time, approval from the authorities is required. Discriminatory treatment against foreign investors is also common. In Vietnam, a longer land tenure existing for locals would be shortened significantly for disposal to any foreigner.
In Singapore, under the Residential Property Act, a foreigner is prohibited to use the residential property for investment and other income-generating activities, but only serve as a dwelling house for own or family’s occupation.
Some may not realize that in some countries, there is no freehold title unlike Malaysia which grants freehold and leasehold tenure. Leasehold tenure too varies according to countries. In Hong Kong, all property is leasehold and the term ranges from 50 years, 75 years, 99 years and some 999 years. A foreigner in Vietnam can only hold the property on lease to a maximum of 50 years. Further, there is a term that says unless consent for extension from the relevant authority is obtained, the property will revert to the government at the expiry of the leasehold. Therefore, the value of leasehold property tends to depreciate over the years when their lease period is coming to an end as complexity in the process of renewal of the lease will affect the marketability of the leasehold property. Land tenure therefore should be a key factor in your decision on where to invest.
3. Financing challenges
Finding financing for overseas real estate can be challenging due to the lack of information of the buyer which affects his or her credibility and creditworthiness. Hence, investors need to have comprehensive financial planning to generate smooth cash flow in their overseas investments. This would involve matters such as source of financing (local or foreign, developer or bank), interest rate and repayment process as well as currency fluctuation – a risk that has to be managed for any international investment.
4. Overseas representative
One must also select carefully your foreign representative to deal with the sale and purchase transaction as well as all related matters overseas. The culture and standard of professionalism is not the same worldwide. Investors are advised to do some research to identify the scope of work, aftersales responsibility and terms of engagement before selecting the right one to forestall any problem later. As most international investors operate on “remote control”, a good team of professionals would make a world of difference.
5. Costs & Fees
Last but not least is the cost and expenses when you buy a property. There will be fees beyond just the mortgage costs including the entry costs and on-going costs. The costs and expenses investors should expect include the stamp duty, gains tax, land tax, levy, professional fees and maintenance fees. Again, bear in mind that the fee rates are not going to be the same as your home country. Be sure to include this when working out your overall budget to avoid making the mistake of underestimating the outgoings.
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Chris Tan is the Managing Partner of Chur Associates, a boutique legal practice that thrives in delivering business friendly solutions for its clients.