GAME CHANGER: With more Malaysians making their maiden foray into overseas property, Alice examines the potential pitfalls
Being involved in the business of structuring the financing for the purchase of properties in the United Kingdom, Australia, New Zealand, Canada, US and Singapore for many years, I think the “game” has certainly changed without a doubt. What used to be a ‘status symbol’ in owning a piece of property in London/Sydney is now well within the reach of many Malaysians. Many more “first time buyers of overseas properties” are expected to join the ranks in the coming years.
Back in 1996, a typical one-bedroom apartment in the city centre was selling for about GBP200,000 (RM800,000) in London and A$200,000 (RM 400,000) in Sydney. Today, the average asking price has more than doubled to around GBP500,000 (RM2,570,000) in London and A$500,000 (RM1,509,150) in Sydney. Yet, Malaysians are still flocking there to buy and are some of the biggest property purchasers in London and Australia.
If you are planning to buy your first investment property overseas, or thinking of adding more properties into your portfolio in the future, you should be aware of the following:
a.) Expectation of returns: Have a more reasonable expectation on the rate of return on your investment. The property boom may not be over in some countries but the expected growth rate from now on may not be as high as before. Affordability is increasingly an issue. Do your homework well.
b.) More stringent financing guidelines: Expect more stringent guidelines from central banks especially in booming markets. Make sure you are not too dependent on a high margin of finance. More stringent financing guidelines have been introduced to control the “easy credit” given by banks which have stimulated the property markets in many countries over the past few years.
c.) Monitor markets: Observe the measures by governments to “slow down” the property market. In my opinion, when a government intends to slow down the property market, don’t challenge them by buying in too quickly. If they are desperate enough, the market eventually will give in and hence the property prices will come down.
d.) Multicurrency financing facility: There is no such thing as a bad loan, only a mismatch of loan structure for that particular person. There are different loan structures to meet the financial circumstances of different individuals. It’s always a good idea to seek the advice of an experienced consultant who is familiar with offshore financing, currency movement, various loan repayment structures and who understands your long-term financial goals.
Rule of thumb, you should borrow in the currency where the property is situated e.g. Australian dollar loan for a property in Australia. Alternatively, you can consider borrowing in the currency of your base income. i.e. Ringgit Malaysia. For more sophisticated investors, a multicurrency loan in SGD, USD or EURO where the interest rate is very low can be an additional option. Over the last 18 years, I have clients who have both made and lost money from switching the currency in their loans. Strangely, from my statistics, most of the ones who have made money are housewives.
e.) Choosing the right structure for your purchase: I came across an investor who had bought a property in London using a company name but took up the financing in his personal name. As a result, he cannot offset the mortgage interest against the rental income from the property. It will be very expensive to restructure for him.
Do communicate your long-term plans with your consultant before you make your decision to purchase using your personal name, company, trust or children’s name. The tax and estate issues can haunt you later. One of the saddest stories I have heard was where unwary parents wrote to inform the ex-boyfriend of their daughter’s passing. Instead of condolences, the parents received a lawyer’s demand for part of their daughter’s estate! Be aware of your rights.
f.) Tax implication on your investment: Don’t be overly concerned about the tax rate in other countries. Pay attention to the tax deductible items to lower your taxable income. There is no capital gains tax in the UK and NZ for non-resident investors while in Australia, the tax rate is from 32.5 per cent to 45 per cent. But if you time your sale well, you may end up with no tax due in the year of your sale.
g.) Type of property: Most banks do not finance service apartments with long lease, student accommodation, hotels or apartments which are smaller than 538 sq ft. Don’t be confused with what I said. When the developer launches these properties, they usually sell them with financing facility ready for the first purchaser. In most cases, the facility was given based on the relationship with the developer. The issue only arises when you plan to resell the property for a good profit or to refinance the property for more cash. If banks in general do not finance these properties in the secondary market, you will limit the range of your potential buyers and hence limit the capital growth on your investment property. If you have to choose between capital growth and rental yield, good capital growth is better.
h.) Review your property portfolio: Over time, many things can happen which will impact the overall performance of your portfolio and may require your urgent attention. Just to name a few:
a) A new railway track has been built near your home.
b) You lost your job/retire.
c) Time to pay your children’s university fee.
d) Another financial crisis which causes extreme volatility in the currency market.
e) The bank withdrawing their financing from a specific segment and recalling facilities.
Working your portfolio with a qualified and experienced property consultant can help to lower the risk of sudden surprises and help you change your investment strategy to suit your new financial circumstances.