Local investors need to do their homework on overseas property

Britain and Australia are seen as safe havens but local investors need to do their homework

PUBLISHED : Wednesday, 26 June, 2013, 12:00am
UPDATED : Wednesday, 26 June, 2013, 5:36am

CBRE has seen a 20 per cent increase in inquiries by local investors about overseas homes - a direct result of cooling measures imposed by the government in Hong Kong.

Favourable currency conversions have also prompted more interest.

Venturing into a foreign property market may seem somewhat daunting, especially for first-time investors, and it is paramount that they educate themselves about the market they're going into, as well as the company they are making a purchase through.

A key factor for consideration is entry costs, including legal fees and stamp duties. Questions that need to be asked include: Are there any restraints on foreign investment? Is the legal system transparent? Can advice be obtained on legal, tax and financial issues? Is there access to finance? Is there local demand for the product? Is there an active sales market? And if their purchase is purely for investment, is there an active rental market? Buyers also need to ask why they are getting the opportunity to buy.

We are seeing demand for properties in parts of Europe, the United States, and in parts of Asia such as Bangkok and, increasingly, Tokyo. There has also been demand for projects in Britain and Australia.

The UK represents a good opportunity as it is a mature market and seen as a safe haven. For foreign buyers, properties purchased in individual's names are exempt from capital gains tax when selling the property. As a foreign investor, any income derived in the UK is subject to income tax. However, income tax payable can be offset against holding costs. Stamp duty is payable only upon completion. Purchasing off-plan requires an initial 10 per cent of the purchase price with developers generally requiring minimal progress payments sometimes between 10 to 20 per cent during construction.

Many of the fastest-selling schemes in London owe much of their success to early launches in Hong Kong, Singapore and Kuala Lumpur to investors looking to make the most of a healthy rental market. Some 48 per cent of properties in London sold over the last year were pre-completion sales. A staggering 38 per cent of purchasers for new-built projects in central London last year were buyers from Southeast Asia, with Hong Kong and Singapore being the biggest contributors.

One of the most successful projects was Fitzroy Place in Fitzrovia. Now selling for an average of £1,850 (HK$22,150) per sq ft, Fitzroy Place generated £290 million last year with 175 apartments sold in just eight months.

Australia is also seen as a safe haven due to a strong economy, stable government and a mature property market. Investors see the educational facilities offered in Australia as a good opportunity for their children. But the taxation system there is more complex and buyers should be mindful of a capital gains tax of up to 50 per cent when selling a property. This can be legally paid off or offset by what is called "negative gearing".

With a mortgage of around 80 per cent of the purchase price, a property will be neutrally geared (the rent received will be equivalent to all property holding costs, including interest on the mortgage). However, when purchasing new property there are large depreciation benefits available as well. These annual depreciation benefits will ensure that from a tax perspective the property is negatively geared. This annual tax loss or "tax credit" can be used to reduce capital gains tax on the sale of the property. Buyers need to be aware of how the tax system works and employ consultants to manage their investment effectively.

Sydney is one of the favoured locations for investment in Australia, although opportunities can be limited because of strong local demand. Both Sydney and London are markets with a supply problem as both have difficulties with planning guidelines and constraints over land. The shortage of supply, combined with ongoing demand, has resulted in considerable capital appreciation in recent years and an expectation by the main property agencies that this will continue.

A key project in Sydney is Barangaroo by Lend Lease - a new precinct in the central business district by the harbour. The mixed-use site includes residential, commercial and retail space, with major companies such as KPMG, Westpac and Lend Lease relocating to the area. It is reported that a second casino licence may be granted in Sydney with James Packer's Crown planning to develop Australia's first six-star casino and hotel on the site.

James Hall is CBRE's regional director, international project marketing, Asia.