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PROPERTY: Foreign Investment Starter Guide

By Stella Thng

Q1) ARE YOU ELIGIBLE TO BUY?

Rules for foreign investors differ according to country. Malaysia, for example, allows foreigners to buy new or resale apartments, land, landed residential properties or commercial shop-offices. However, these properties must be valued at above RM500,000 (S$207,000) and cannot fall under the category of low and low-medium cost housing. Properties built on Malay reserved land or properties allocated to Bumiputera (indigenous Malay) interests are off-limits to foreigners too.

Australia, on the other hand, does not allow foreign investors to buy from the resale market. You can buy a piece of land to build your own house, purchase an apartment or townhouse in a proposed development (commonly known as “buying off the plan”) or buy a newly completed property. First, you need to apply to the Foreign Investment Review Board (FIRB) for permission to purchase, regardless of the property’s cost or size. Even if the co-owner is Australian or a Permanent Resident, you’ll still need to put in your application to the FIRB.

You have to apply stating the exact property you’re interested in – there’s no such thing as getting “blanket permission” before you start shopping. When you sign a real estate contract, make sure it includes a clause that the purchase can only proceed if you get the FIRB’s approval, and that 30 days must be allowed for the results of the review.

Q2) LONG TERM INVESTMENT OR TO FLIP?

“For a long-term investment, pick a good location for easy rental,” says Benjamin Heng, associate marketing director at real estate firm Propnex. He recommends places such as downtown Melbourne, Perth or Kuala Lumpur (KL).

If you intend to flip your property (buying with the intention of selling for a profit), do your research to avoid getting burnt. Benjamin suggests spending at least two weeks in the area you’re keen on.

“Personally view the properties for sale,” he says. He researched and observed the market before investing in a RM640,000 studio apartment in trendy Bukit Bintang, originally with the intention to flip it. As he anticipates that his unit can fetch a rental yield of at least 6 per cent per annum (p.a.), he may rent it out for a spell when it is ready in two years’ time. “Only buy a property that you’re confident can fetch good rental yield on top of capital gain, in case you can’t flip it as quickly as you’d hoped,” he advocates.

Factor in rental income tax and capital gains tax. The Real Property Gains Tax in Malaysia was recently increased to 10 per cent for any property sold within two years of the date of acquisition, and five per cent for those disposed from the third to the fifth year. Rental income, after deducting expenses, will be taxed at a flat rate of 26 per cent.

On the other hand, Australian property investors have to pay Capital Gains Tax regardless of when you sell. “I advise investors to hold on for at least a year to reduce the amount they’ll be taxed,” says Wendy Yong, an overseas project marketing consultant with First National Real Estate Balwyn. Properties sold after 12 months of acquisition are eligible for the 50 per cent discount scheme. This means you’ll only be taxed on half of what you’ve profited, after deducting expenses. Unlike Malaysia’s fixed rental income and Real Property Gain Tax rates, Australia simply adds your capital gains and net rental income to your overall taxable annual income.

Q3) APARTMENT OR LANDED PROPERTY?

“I recommend first-timers to start with a lower investment, like a small condominium unit,” says Benjamin. In Malaysia, condo apartments generally fetch a better rental yield. According to a 2010 report by Global Property Guide, KL apartments of about 1,291sqf fare best with an almost 7 per cent rental yield p.a., compared to 3,766sqf bungalows that fetch about 4.5 per cent. This could be due to the lower monthly rent and tenants’ preference for condo facilities.

Wendy says that in Australia, it also depends on the location and whether you are aiming for rental yield or capital gain. A Singaporean who now lives in Melbourne, she first bought a two-bedroom apartment in the city (a safe choice for a first-time investor) in 2002. It attracted a steady stream of tenants with 5 to 6 per cent rental yield per annum.

“Selling it off seven years later was easy, but I didn’t make much capital gain,” recalls Wendy. She feels that apartments in the city are good for rental yield, but their capital appreciation can be slow. Landed properties there usually enjoy higher capital growth due to their larger acreage, as the value of land appreciates over time. She now prefers to invest in homes and land in growing suburbs.

She has set her eye on the West Melbourne area, which is now undergoing robust development. She adds that prices in areas such as Point Cook have increased tremendously since 2006.

Q4) WHO’S THE DEVELOPER AND MANAGEMENT AGENT?

“The safest way is to go with the big developers,” says Benjamin, who recommends checking out their previous projects for reference. When Singaporean investor Mrs Leo JS researched the developer of a downtown KL condominium she was interested in, she was alarmed to find out that it was scheduled for completion in 2010 – and was still unfinished a year later. “I read from online property forums that this developer has a history of not delivering its projects on time. Buyers were unable to claim compensation and many complained of shoddy workmanship.”

She decided to invest in The Haven Lakeside Residences, a luxury resort condotel in Ipoh, partly because of the good reputation of its developer, Superboom Projects. It has won several international and local awards, including “Best Perak Developer” at the SC Cheah Awards 2011 organised by Malaysian newspaper New Straits Times.

“Plus, it will be professionally managed by Best Western International, which offers me five years of guaranteed rental income of 6 to 7 per cent p.a.,” says Mrs Leo. Mdm Tang XF and her business partners bought two-bedroom units in Lavender House at Limehouse Basin in London because they were happy with the service from their management agent Hurford Salvi Carr. “We paid about £320,000 (S$629,000) for each of our three apartments, which came fully furnished.

Even before our paperwork was completed, the management agent already found us tenants at £350 per week for each unit. The most attractive part is that our deal includes a lucrative lease during the Olympics this year – we’ll be getting over S$20,000 per unit just for those four weeks!”

Q5) WHICH BANK TO BORROW FROM?

Should you apply for a bank loan in Singapore or in the country of your foreign property? It depends. Singapore banks currently offer attractive interest rates but if you already hold one or more property loans here, some banks may offer a smaller loan quantum.

If you’re getting a loan from the country of your foreign property, you may be surprised to find a big disparity between the interest rate, quantum and length of loan offered by local and international banks.

“International banks seemed to be more foreigner-friendly. I was offered an 80 per cent loan, up to age 65, with HSBC Malaysia at an interest rate of 4.2 per cent. One Malaysian bank only offered a 60 per cent loan for just 10 years, at 4.5 per cent interest rate,” shares Mrs Leo. However, more relaxed rules apply at the local bank if one partner is Malaysian – you could borrow up to 80 per cent, up to age 70.

If you have spare money but want to keep your cash-flow fluid without paying off the full loan, one solution is to put your money in an overseas account, which is what a client of Benjamin’s did in Australia.

“The interest they earn for their Aussie savings is significantly higher than what they’ll get for their Singapore deposits. This helps offset the interest on the Australian bank loan,” he says.

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