Considerations when buying property overseas
- The pandemic hasn’t dimmed the interest in buying property overseas.
- Some draws include diversification, lower cost of ownership for a second home, getting ready for children’s university years.
- Beyond selecting a location and type of property, it is necessary to get familiar with local laws, and identify potential additional costs.
- As it is challenging to get an overseas home loan, many buyers tap on property financing solutions to manage their cashflows and spread the repayments over a longer period vs paying all at once.
Interested in knowing your options?
Despite facing the deadliest viral outbreak in over a century, it hasn’t stopped Singaporeans from buying property overseas1, 2. Underlying this interest is rising inflation, property cooling measures in Singapore, and real estate’s reputation for value retention and stability.
What makes overseas property such a draw, and how different are such purchases from local purchases?
Magnify your why
Beyond the performance of real estate in the last few years – for instance, the 72% growth in Australia’s home prices over the past 10 years3 – these reasons form the common denominator of why overseas property purchases are so popular.
To diversify investment portfolios
Diversification is a strategy of mixing and matching different types of asset classes to reduce the overall risk of investment portfolios. Property is one such asset class.
According to research published in the Journal of Real Estate Research, as much as 60% to 94% of the risk in European and US property investments can be diversified away4. This is due to the low correlation between returns on real estate assets and conventional equity assets. So, even when equity prices go down, real estate prices tend to be less affected.
To take advantage of currency diversification
Diversification isn’t just about investing in different asset classes. Having exposure to different currencies also helps to mitigate exchange rate risk.
Compared to five years ago, the Singapore Dollar (SGD) has strengthened against currencies like the Sterling Pound (GBP) and Australian Dollar (AUD). Naturally, this means a lower cost of maintaining your mortgage in a foreign currency.
While currencies fluctuate in value and the SGD may move either direction in future, the current strength of SGD does help to keep the cost of ownership for your overseas property lower.
To lower cost of ownership for a second home
In recent years, the cost of owning a second residential property in Singapore has been rising with higher Additional Buyer Stamp Duty (ABSD) charges. When purchasing a second property, Singapore citizens need to pay an additional 17% of stamp duties which must be funded in cash and cannot be part of the mortgage.
Compared to owning two or more homes in Singapore, it makes more economical sense to own these property overseas.
To invest in a holiday or retirement home
Purchasing a holiday or retirement home in a favourite destination adds practical value to your purchase.
Take the UK for instance, which was ranked by Tripadvisor as the top summer destination for Singaporeans in 2022 for its vibrant culture and array of entertainment options. Those with holiday homes in London, have their yearly holiday accommodation settled beforehand.
When not staying there, the apartment can potentially be rented out to professionals and students for extra income to offset the monthly mortgage repayments. Done long enough, the rental income could even pay for the entire home. To reduce the hassle of managing the property and finding tenants, there are property management firms that specialise in making the rental process a stress-free and pleasant one. There are different regulations in various countries that govern property rental. When in doubt, consult your legal adviser on the options available.
And eventually, the property would form part of the legacy passed on to the next generation.
Getting ready for the university years
According to Knight Frank’s The Wealth Report 2022, UK, Australia, and US are the top three countries for Singaporeans investing in overseas property6. A key appeal for these destinations is the convenience to their children of living close to prestigious universities.
Being forward-thinking also provides cost-savings. In response to rising demand for student accommodation and ‘significant’ waitlists, the UK’s largest student landlord expects to hike rents by 4.5% to 5% in the 2023/24 academic year7.
Upon completing their university education, the property is an opportunity to earn rental income. For instance, rental yields in London’s Zone 1 and Zone 2 were between 3% to 5% in 20228.
Identify important considerations before purchasing property overseas
In the short-term, there are commitments such as the location and type of property, paperwork and documentation to settle. And in the long-term: considerations of cash management and profitability.
Familiarise yourself with local laws
Start with local property laws, as there may be ownership or selling restrictions that you need to be aware of.
In Australia, for example, foreign buyers will need approval from Australia’s Foreign Investment Review Board (FIRB) before acquiring an interest in a property. There may also be additional conditions on newly built properties that have yet to be approved as an investment property, or an existing one that has yet to be occupied.
In the UK, while property investment is not restricted to UK citizens or permanent residents (PRs), many UK lenders will not be willing to lend to a non-UK resident.
As for taxation law, capital gain tax and rental income tax are commonly applied to most foreign investors. Be sure to check if the taxes paid still allow you to make a positive gain on your property investment.
And if you are planning to buy the property under someone else’s name (e.g. trust, your child), that’s another piece of law you need to take into consideration.
Factor in additional costs
Additional costs usually fall into two categories:
- Transaction costs (stamp duty, brokerage fees, legal fees etc.) and
- Operating costs (taxes, insurance, maintenance fees etc.).
In Australia, foreign investors have to pay a Foreign Citizen Stamp Duty in addition to the usual property duties that Australian citizens and PRs pay on their property.
In the UK, foreign buyers face an additional 2% stamp duty surcharge on top of the regular stamp duty fees. Buy-to-let properties and second homes attract another 3% surcharge.
Here’s an example of the costs involved to purchase a first property in London worth GBP1,000,000:
Stamp duty land tax
Additional stamp duty (Foreign investor)
£7,500 to £35,000
£1,074,750 to £1,102,250
Note: The above figures are for illustration purposes only. This list of cost is not exhaustive and depends on the location and type of property.
Understand Currency Risks
Due to fluctuating exchange rates, the value of your overseas property and rental income will vary when converted back to SGD.
For instance, living in Singapore, your savings and income are in SGD. If you plan to purchase a property in London, the property will be valued in GBP. A dramatic swing of GBP against SGD may mean you may lose out on the currency exchange.
The flipside is that a weaker GBP lowers the effective cost of your purchase.
Zoom in on your finances
When investing in an overseas property, it must be 100% financed with cash. You cannot utilise your CPF monies as that is only available for Singapore properties.
Many property investors thus tap on property financing solutions for better cash management: the cash is not all tied up in a single real estate, and you can repay the cost with monthly instalments.
With DBS Overseas Property Financing, you also have the option to pay monthly instalments for your London and Australia properties in GBP and AUD from your multicurrency wallet. This helps you minimise the risk of being exposed to currency fluctuations.
Having a clear picture of what you want to achieve from your overseas property investment is fundamental to developing a strong strategy. Interested in knowing your options?
1 Michael Penn, 23 August 2021. Duke Global Health Institute. Accessed 04 January 2023. https://globalhealth.duke.edu/news/statistics-say-large-pandemics-are-more-likely-we-thought
2 Kissa Casteneda, 28 May 2022. CNA Luxury. Accessed 04 January 2023. https://cnaluxury.channelnewsasia.com/obsessions/singaporeans-overseas-property-investment-200321
3 Kate Burke, 31 August 2022. The Sydney Morning Herald. Accessed 04 January 2023. https://www.smh.com.au/property/news/how-much-have-property-prices-risen-over-the-past-30-years-20220830-p5bdwa.html
4 De Wit, Dirk P.M., Real Estate Diversification Benefits (1997). Journal of Real Estate Research, Vol. 14, No. 1/2, 1997, Available at SSRN: https://ssrn.com/abstract=3178111
5 Kristin Mariano, 23 May 2022. Travel Daily Media. Accessed 04 January 2022. https://www.traveldailymedia.com/most-popular-destinations-for-singaporeans-this-summer/
6 The Wealth Report 2022. Knight Frank. Accessed 04 January 2022. https://www.knightfrank.com/wealthreport/
7 Camilla Canocchi, 10 October 2022. This is Money.co.uk. Accessed 04 January 2022. https://www.thisismoney.co.uk/money/markets/article-11299151/UKs-largest-student-landlord-Unite-hike-rents-5-amid-rising-demand.html
8 Portico. Accessed 04 January 2022. https://www.portico.com/buy/yields
9 Samantha Partington with contributions from David Nicholson. Accessed 04 January 2022. https://www.idealhome.co.uk/property-advice/estate-agent-fees-305521
Disclaimers and Important Notice
This article is for information only and should not be relied upon as financial advice. Any views, opinions or recommendation expressed in this article does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability. This article is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.