Holiday homes in region look cheap, but there are drawbacks
GOT Phuket - or Bali or Cebu - on your mind? Your holiday there was wonderful, the local currency is cheap, and you are tempted to buy yourself a little retreat away from Hong Kong's rat race.
But experts warn would-be holiday-home buyers to take time out for a reality check, and some due diligence, before jumping into faraway property markets. 'It's a very emotional decision,' said Sam Leung Wing-kay, Colliers Jardine's director for international properties. 'Particularly in these resort areas.' He and other property consultants said now was a good time to start looking, but they urged potential buyers to study the local property-market cycle, find out about development plans pending in the area, and seek professional advice before making any commitments.
There was no need to rush, they said, because regional currencies, economies and property markets would take some time to settle - and just because property prices were lower than in Hong Kong did not necessarily mean they were good deals.
'It can look very cheap. The question is: is it as cheap as it could be?' said David Edwards, head of Jones Lang Wootton's Asian corporate subscriber's service. 'There's no need to overpay the market by 30 per cent . . . That's something Hong Kong investors have sometimes fallen down on in the past because Hong Kong property is so expensive.' When contemplating a holiday-home purchase, he said, get to know the local market. Find out what has happened over the past two or three years, get a feel for how the market works, and look into what is planned for the future. But, he warned, do not necessarily rely on local property owners and agents for your information.
'You'll be told all sorts of tall stories. There's still a lot of denial throughout Southeast Asia,' said Mr Edwards, who lived in Thailand until this year. 'Some of the developers are now conceding to the current situation and are accepting the cut in value, but there's still some denial. And therefore, meeting with a local developer, you might be open to a lot of misleading advice as to what sort of worth the property has.' Also, remember that currency volatility cuts both ways, and there is nothing to prevent the baht - rupiah, peso or any other currency - from depreciating even further after you buy your home-away-from-home, turning your beachfront bargain into an overpriced money pit.
This is particularly true because the banking crises in many Southeast Asian countries make it virtually impossible for foreigners to get local-currency mortgages. This forces overseas home buyers to seek their mortgages elsewhere and in other currencies, leaving them exposed to foreign-exchange risk.
'If you were to borrow in United States dollars and the baht was to drop further . . . you could very quickly find yourself with a mortgage that's growing at a faster rate than the value of the property,' said Brooke Hillier Parker partner David Faulkner.
In Indonesia, meanwhile, many property prices are still being quoted in fixed, US-dollar terms rather than in rupiah, even though the Indonesian currency has dropped 60 per cent against the US dollar since July 1.
This practice might appear to limit a foreign buyer's exchange risk, but Mr Edwards said it was bound to change - and when it did, US-dollar property values would drop dramatically.
'Something will give,' he said. 'The market is not going to be isolated from the devaluation in the currency.' A potential buyer's best strategy, Mr Edwards said, was to go into a market with a US or Hong Kong-dollar price in mind and be prepared to weather short-term variations around that figure. 'You have to take it as being a medium-term play at least,' he said.
Foreign-ownership restrictions must also be factored into any overseas property purchase. Many countries in Asia prohibit foreigners from owning land, a law that could rule out your dream of owning a small bungalow surrounded by swaying palm trees. If a house is what you want, you will probably end up buying a long leasehold rather than a freehold.
'There are still a fair number of ownership restrictions in the region, but they're starting to remove them as the markets get softer,' Mr Faulkner said.
In Thailand, for example, foreigners were usually granted 30-year leases. Renewal rights were available, but only if the freehold remained in the same owner's name at the beginning and end of the 30-year leasehold. In the Philippines, you could get a leasehold for up to 50 years.
New developments in Malaysia tended to offer 99-year leases, but in Singapore, it seemed to be the older developments that were freehold, he said.