Beware of pitfalls in overseas property markets

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Eager buyers can fall prey to promises of big discounts and guaranteed returns 

It's no surprise that alarm bells are starting to ring over the huge amounts Singaporeans are pouring into property overseas.

An estimated $2 billion was invested last year alone as local investors looked for returns in foreign fields that promised more than the increasingly regulated market here.

Different markets have different rules, and they can change

The Monetary Authority of Singapore (MAS) has warned potential buyers to take note of the risks before taking the plunge into real estate overseas.

The Council for Estate Agencies also recently published an online guide highlighting the main pitfalls.

And indeed, there are pitfalls in every step of the property-buying process if you are dabbling in an unfamiliar market.

Budgeting

Many Singaporeans who have turned overseas for real estate investments are doing so because cooling measures introduced over the past few years have made it more expensive to buy properties here.

But eager buyers can be easy prey to the glitzy adverts and marketing material that promise big discounts, fee waivers and high or guaranteed returns.

The CEA warns in its online guide that this is a common pitfall.

In some cases, it notes, discounts in the purchase price and guaranteed returns or rental rates have already been factored into the final price and costs a buyer has to pay.

Buyers should ask for evidence of high returns, such as investment reports from independent and credible sources.

They should also ensure that these guaranteed returns and any fee waivers or financial incentives are included in the final sale and purchase agreement.

Some buyers forget to take into account other miscellaneous costs.

United Overseas Bank's head of secured loans, Ms Chia Siew Cheng, says: "When doing their sums, buyers should consider the different taxes applicable such as capital gains, income or inheritance tax, as well as property maintenance and miscellaneous costs, including fire insurance and tax consultant fees.

"If they are renting out the property, buyers should also consider the fees required to appoint a good property management agent."

Furthermore, they should note the potential shortfall between rental income and expenses when planning their cash flow, she says.

Investors should also be aware that the required down payment on overseas properties may be up to 20 per cent or even higher in some countries, Ms Chia notes.

Although the balance sum is payable only upon completion of the property in certain countries, buyers should ensure that they are eligible for a loan if they decide to hold on to the property.

The total debt servicing ratio framework, which caps a consumer's total debt obligations to 60 per cent of his monthly income, applies to overseas property purchases as well, so buyers should assess their eligibility for a loan before making a commitment, she adds.

Alternatively, they should ensure that they have sufficient cash to make full repayment.

Choosing the right agent and developer

Marketing material and showrooms are designed to attract buyers but they may not reveal much about the developers behind the project.

Before making a bet on a property, buyers should do their research on the people behind the development, says Ms Linda Lee, DBS Bank's executive director of deposits and secured lending.

"Study the track record of the property developer by checking on the previous projects developed. Ascertain if those projects had been completed by the stipulated timeline and with the promised quality."

ECG Holdings chief executive Eric Cheng agrees, saying that Internet forums are a good starting point for investors to find feedback from other buyers about any developer's past projects.

But investors should dig deeper too. Sometimes, Mr Cheng warns, the developer you are buying the unit from might not even be the project's actual developer.

"In some markets, such as the Philippines, the developer of the project might sell the units to 10 different sub-developers who would then sell the units on to the market, so you might not be buying from the original source," he says.

To find out the actual owner of the site, he advises asking to see a copy of the caveat from the agent.

Choosing the right agency is also important, he adds.

Some agencies tie up with foreign partners to market a project. Buyers find that once they have signed a sale and purchase agreement, a foreign agency then takes over as their new point of contact.

"I have heard of cases where, three years after the purchase, the partnership agreement between the local and the foreign agencies has lapsed and the foreign agency has in fact shut down so the buyer is left without representation at all," Mr Cheng says.

In such cases, the buyers would have to hire lawyers to represent them, which would incur more costs.

To avoid that situation, he says it may be best to go with an agency that has its own staff in the foreign market.

Foreign exchange, interest rate and other financial risks

Here is a quirk of buying property: Buyers often visit showrooms on weekends but financial markets are open only from Mondays to Fridays.

What this means, Mr Cheng says, is that buyers often calculate their purchases using slightly outdated foreign exchange rates.

"If let's say there is a big movement in the forex rate when the market opens, the price of the unit could shoot up by as much as $20,000," he says.

And these forex rates could also work against the investor after he has bought his unit.

If he buys a home in Malaysia and its value appreciates by 50 per cent over five years, but the value of the ringgit depreciates against the Singdollar by 60 per cent over the same period, he will effectively make a 10 per cent loss on his investment if he sells.

DBS' Ms Lee notes: "If the buyer takes a loan in his local currency, he would be less affected by foreign exchange fluctuations."

Borrowers should be prudent and take potential interest rate increases into account when establishing their budget, she adds.

As interest rates rise, the mortgage repayments on their home will also increase. If this has not been factored in at the point of purchase, the buyer will find himself over-extended.

Understanding foreign rules

Simply put, different markets have different rules and these can change.

The CEA notes that in Singapore, the lease period is commonly defined as 99-year leasehold or freehold. Other markets might define these periods differently.

Taxes also vary from country to country. Some markets levy taxes on foreigners buying a property, some on the sale of the property.

In Malaysia and Hong Kong, for example, investors have to pay a capital gains tax on the profit they make from any sale.

There might also be property taxes for owner occupation or when the property is rented out.

Stamp duties, withholding tax and estate duty might be imposed as well.

There might also be restrictions on ownership, Mr Cheng says.

"In Thailand, for example, foreigners can buy only 49 per cent of the units in a given project so your choices can be limited," he notes.

"In Australia, buying is easy but when you want to sell, you can sell only to locals because foreigners are not allowed to buy resale homes."

The CEA guide also notes that buyers should pay careful attention to any restrictions on the use of the property they plan to invest in.

Some properties, for example, are solely meant for student accommodation so the buyers would not be able to use them for their own stay - unless they are students.

yasminey@sph.com.sg

Source: Straits Times, 1 Jun 2014