Notwithstanding the decrease in property activities within Singapore, there seems to be a pickup in marketing efforts for overseas properties from as near as Malaysia to as far as United Kingdom. Recent weeks have seen an increase in the number of advertisements in major newspapers inviting Singapore investors to exhibitions and road shows.
Investors are increasing attracted by potential opportunities overseas as the local market takes a breather. Understandably, with the current low saving rates and the market being flushed with liquidity, investors are always looking for better yielding opportunities to park their money. Potential price appreciation, income guarantee, low interest rates and favourable exchange rates are some of the main factors attracting investors to these foreign markets. Based on recent Knight Frank Research, Singapore investors formed the third largest group of Asian buyers after China and Hong Kong of prime London properties from July 2009 to June 2010.
Before jumping onto the bandwagon, potential buyers should not assume that the same institutional and legal framework that is applicable in Singapore will also apply in other countries. What should buyers look out for when purchasing overseas properties? What are the risks and who should they consult?
Depending on the objective, many often buy properties in countries which they are familiar with. Some might have studied in that particular country and have developed a sentimental fondness for the location. Others feel safer if their investment is closer to home and prefer to buy one in the neighbouring countries. From experience, up to 20 percent of all buyers who purchased properties during exhibitions have not visited the city, and up to 70 per cent of buyers have not inspected the site. As environments change and the city evolves, it is prudent to re-visit the site and not to rely solely on past memories or gut feel.
For completed overseas properties, it is also good to seek a professional valuation of the property. One may want to reconsider if there is a big difference between the asking price and the valuation. In any case, if bank financing is required, a valuation will be carried out by the bank. Separately, it may also be worthwhile to get a structural survey done too. If significant problems are highlighted, one can either forgo the property or negotiate a lower price to account for the rectification cost.
To add icing on the cake, some projects offer purchasers rental guarantees, some as high as 8 per cent. Rental guarantee refers to a contract between the granter, usually the developer or the vendor to pay the purchaser a fixed income based on a guaranteed rate on the purchase price. For example, a guaranteed rental of 6 per cent on an apartment bought for £250,000 in London amounts to £15,000 per annum.
Generally, most rental guarantees are on a gross basis whereby the buyer is still required to pay all the outgoings which are direct expenses such as maintenance costs for the common property in a condominium and property taxes. As a result, net income less outgoing results in a lower net return.
More often than not, rental guarantees also come at a higher price to compensate the granter for bearing the risk of no income during events when tenants cannot be secured in time or higher vacancies during off peak holiday periods. Buyers should note that actual rental collected may drop after the guarantee period.
It is important to engage reliable managing agents to look for tenants, to collect rent and to look after general repairs. Usually they come with a fee of 5 to 10 per cent of the monthly rent. An agent's commission is payable at one month's rent to secure a tenant for a two-year lease similar to Singapore. Total outgoings average between about 10 to 20 per cent of gross rental income per annum.
There are other miscellaneous administrative costs such as legal fees, stamp duties, valuation, and bank processing fees (typically about 2-3 percent). The amount varies across countries and could be advised by a competent agent or advisor.
Potential buyers should also be aware of tax regulations especially for mature market such as United States and Australia. In many instances, rental income is taxed at the progressive personal income tax scale in the country where the income is sourced. While capital gains tax does not apply in Singapore, it may be applicable in other countries. Buyers should consult tax advisors to ensure that they are aware of the complicated tax laws.
In case of poor workmanship, the sale and purchase agreement should provide for a two- to six-month liability period for the developer to rectify the faults. In instances where there are delays in the completion, purchasers should be compensated or can opt to rescind the purchase with the money refunded. The types of legal recourse available are subject to the terms and conditions in the sale and purchase agreement. Henceforth buyers are advised to read the document carefully before signing and paying the initial reservation fee which is often non-refundable. They can also consider engaging lawyers to advise on their rights when things go awry.
If a developer goes bankrupt during the construction stage, any monies paid directly to the developer rather than to a trust fund, is usually not recoverable. Hence when buying properties 'off-the-plan' or under construction, one should look at the developer's reputation, track record and financial standing to reduce the risk of potential financial losses.
There are also legal considerations to note. Some countries have laws that restrict resale property ownership. For example, in Australia, resale of residential properties is only restricted to local Australians, permanent residents and foreign students or foreign companies that have obtained the Foreign Investment Review Board's approval to buy for owner occupation. In Malaysia, government’s consent is required with regards to the sale of freehold landed properties to non-citizens. In some instances, the property can only be sold to the Bumiputra (indigenous population).
In a nut shell, while there are many success stories, buying that overseas property is not as simple as some think. There are many other considerations in addition to the above. One needs to look beyond the glossy brochures and the glitzy display. Engaging competent and experienced advisors could be a short cut. At the end of the day, it is still back to the adage of caveat emptor (buyers beware).
For further information, please contact:
Png Poh Soon, Senior Manager, Knight Frank Pte Ltd (65) 6228-7393