Back home, Singapore investors have also been demonstrating a healthy appetite for overseas properties. The aggressive marketing of foreign properties in Singapore, and the high costs associated with purchasing second or multiple properties in Singapore, have driven local investors beyond our shores.
In January 2013, as part of the property cooling measures introduced into the Singapore residential property market, the additional buyers’ stamp duty (“ABSD”) structure was changed to require Singaporeans to pay a 7% ABSD on all second or subsequent residential property purchases. In June 2013, the Monetary Authority of Singapore (“MAS”) also imposed the rigorous Total Debt Servicing Ratio (TDSR) framework , making it harder for purchasers to obtain financing for property purchases (including overseas property purchases). However this does not appear to have given local investors cold feet. As reported by The Straits Times in 2014, Malaysia and Australia were the most popular markets for Singapore purchasers/investors, and other markets such as London and Japan were gaining ground. We take a look at the prospects of purchasing residential properties in 3 countries: Australia, Japan and the United Kingdom.*
The foreign property markets
- Foreign ownership restrictions: Yes
- On-sale restrictions: Yes
- Tax Implications: variable stamp duty across states (generally between 1.4% up to 5.4%, with additional 3% for foreign purchasers in certain states); no estate duty; up to 45% capital gains tax (subject to applicable reliefs)
Regulatory hurdles: Regulators and policy makers (who are under pressure to rein in what is perceived to be investment-driven surge in Australian property out-pricing locals) have begun to keep a closer watch on foreign investments into the Australian residential property market.
While foreigners were previously permitted to purchase residential property upon obtaining approval from the Foreign Investment Review Board (“FIRB”), a series of legislative reforms commencing from 1 December 2015 are expected to increase the transaction costs for Australian property investments. These include a new application fee (starting from A$10,000 for a property worth more than A$1 million) payable by foreigners applying for FIRB’s mandatory approval to purchase residential properties as well as stricter criminal and civil penalties for illegal foreign purchases of residential property.
To date, the Australian government has also taken several high-profile enforcement actions by clamping down on illegal investments in Australia and serving divestment notices to force owners (who hail from Singapore, Indonesia and China) to sell their illegally purchased homes. As of August this year, more than 400 cases were under investigation for possible breaches of the foreign investment rules. Additionally, foreigners are only permitted to purchase ‘new dwellings’, i.e. new developments purchased directly from developers and not resale residential properties, whether for investment or other purposes.
Taxes & associated Costs: The purchaser is liable to pay a transfer or stamp duty which is pegged to the value of the property. The applicable rate of transfer or stamp duty varies across each state and in certain states (such as New South Wales and Victoria), foreign purchasers must pay an additional 3% in such duties (subject to any concessional rates being applicable). Any rent and rent-related payments received from Australian properties are subject to income taxes at the prevailing rates and a capital gains tax is payable on any capital gains (the difference between the purchase price and disposition price of the property) from the disposition of the properties.
Purchase financing: In line with the proposed legislative reforms, financial institutions in Australia also appear to be less inclined to lend to overseas investors seeking to buy properties in the nation’s popular residential property markets. Certain financial institutions (such as the Westpac Group) have announced that amongst other things, all future home lending applications must contain an Australian residential address and evidence that FIRB approval for the proposed purchase has been obtained. Foreign investors who satisfy the above would then be able to negotiate loans up to 80% of the total property value (being the ceiling LTV ratio set by the Australian Prudential Regulation Authority).
- Foreign ownership restrictions: No
- On-sale restrictions: No
- Tax Implications: 3% real estate acquisition tax; approximately 0.1% stamp duty; up to 50% inheritance tax (subject to applicable reliefs); up to 30% capital gains tax (depending on the duration for which the property was owned)
Regulatory hurdles: The increase in demand for Japanese real estate in recent years (the Nikkei Asian Review reported that real estate deals in Japan totalled 5.06 trillion yen in 2014, up 16% from the previous year, and continued to increase in 2015) is attributable in part to the decline of the yen to 22-year lows and the excitement over the 2020 Tokyo Olympics (a similar trend hit Olympics cities such as Beijing in 2008 and Sydney in 2000).
There are currently no regulatory restrictions on foreign ownership at the point of acquisition nor divestment.
Taxes & associated costs: A 3% real estate acquisition tax is payable on the purchase price of residential properties in addition to a stamp duty which starts from 200 yen (S$2.30) to a maximum of 480,000 yen (S$5,650), depending on the value of the property. A 30% capital gains tax is payable if property is disposed within 5 years of purchase and is reduced to 15% if the property is disposed after 5 years of ownership. Any rent and rent-related payments received from the properties are subject to income taxes at the prevailing rates. Other transaction costs include (if the property is being leased out) tenant management fees payable to the local property managers, which typically range from 2.5% to 5% of the monthly rental.
While these line items appear numerous, the total acquisition costs of a Japanese residential property (estimated to be between 4% to 6% of the purchase price) are not necessarily higher than that of Singapore’s residential investments, after including the ABSD applicable to subsequent property purchases in Singapore.
Purchase financing: However, for many foreigners looking to buy real estate in Japan, trying to obtain mortgage financing from a Japanese bank can be a nightmare. Japanese financial institutions typically require borrowers to be a resident of Japan, with proof of income, amongst other things. While the easing of credit by the Bank of Japan has caused certain financial institutions to be more willing to lend to foreign nationals, these come with stringent requirements (including ability to speak Japanese, Japanese permanent residency status and/or having an income guarantor). As such, offshore buyers who are unable to obtain property loans from banks in Japan must either purchase using cash or through financing in their own countries.
(iii) The United Kingdom
- Foreign ownership restrictions: No
- On-sale restrictions: No
- Tax Implications: up to 12% stamp duty; up to 40% inheritance tax (subject to applicable reliefs); up to 28% capital gains tax (subject to applicable reliefs)
Regulatory hurdles: There are currently no regulatory restrictions on foreign ownership.
Taxes & associated costs: The reform of the UK stamp duty land tax regime in December 2014 from a flat to a tiered system has decreased the stamp duties payable for the acquisition of the majority of UK properties but increased the stamp duties payable for the acquisition of UK properties with a purchase price of at least £1.5 million (by between 4% to 12%).
The UK government has also for the first time forced foreign buyers of UK property to pay capital gains tax. The disposal of certain types of properties (e.g. a property which is not the main residence of the seller) after 5 April 2015 would attract a 28% capital gains tax (subject to certain reliefs and allowances being applicable).
Purchase financing: Foreign purchasers would be able to negotiate loans of up to 60% of the property value with UK financial institutions.
Nonetheless, against the backdrop of a more expensive pound against Asian currencies (the pound has gained more than 14% against the Singapore dollar between May 2013 and September 2015) and the overall uncertainty in economic outlook, it has been observed that the overall demand for prime London properties have fallen in the first half of 2015, in particular, there has been a softening of interest from Asian investors in London’s prime properties (and the number of Singapore investors fell from 3.8% to 1.4%).
Other considerations of investing in foreign property markets
Prospective investors would also need to be aware of exchange rate risks, the overall property market trends and the political, social and natural climate of the country, which could affect the value of the property investments.
Unless the foreign property will be disposed of during the lifetime of the purchaser, it would also be necessary to understand the applicable inheritance laws of the relevant country where the property is located (as the proper law for the determination of inheritance issues under Singapore’s conflict of laws is the law of the country in which the immovable property is situated). For example, the fact that the inheritance laws of Japan state that inter alia, beneficiaries are subject to inheritance tax at the prevailing rates even if the beneficiaries are not domiciled in Japan, as long as the property that they inherited is situated in Japan, would likely be a relevant consideration for many investors in deciding when and whether to dispose their properties in Japan. The United Kingdom also has a substantial death tax. In certain cases purchasers may also wish to execute a will dealing specifically with properties located overseas.
Dangers and Opportunities
About 200 Singaporeans who purchased units in development projects in various cities, including London, Leicester and Birmingham, are facing the prospect of losing about S$20 million this year after the British developer Key Homes became insolvent and was put into administration. In 2001, about 90 Singaporeans who paid for units in the Villa Temasek development in Bintan suffered substantial losses after the developer ran into funding problems and disappeared before the development was completed. The Consumers Association of Singapore has received several complaints in 2013 and 2014 involving consumers who had invested in foreign properties but were unable to get back their promised returns or payouts.
Unlike local properties, there are more risk factors in overseas property purchases. In a warning issued on 11 May 2015, the MAS highlighted that in markets where there is uncertainty of supply or no effective regulation of supply, investments can lose their value, or it may be difficult to find tenants for investment properties.
Foreign developers who market overseas properties directly to Singapore consumers are currently not regulated to the same degree as Singapore advertising and estate agencies. Pending the introduction of stronger regulations, consumers bear a heavy onus to guard against making hasty foreign property purchases on the initial promises of strategic location or high yields. Amongst other things, consumers must exercise due diligence (which includes finding out about rules or restrictions on foreign property purchases and ownership, taxes payable, the financial standing of the developer and a proper valuation of the property) to minimize their chances of becoming another headline of a botched foreign property investment.
Overseas markets can be an oasis of opportunities for investors amidst the various cooling measures in the Singapore property market. If prospective investors exercise due diligence, there is no reason that they should not be part of the next outbound property-shopping tour en route to seize these opportunities.
*The information on foreign property acquisitions has been taken from publicly available sources. TSMP Law Corporation does not advise on the laws of any country other than Singapore. This article does not purport to provide advice to potential investors on property investment in any jurisdiction, and investors should consult their own professional advisers should they wish to make any investment in Singapore or offshore.