18 September 2019
Property projects from Britain have done well in Hong Kong. Photo:
Property projects from Britain have done well in Hong Kong. Photo:

Tips for buying residential units in foreign markets

Buying residential units outside the local market is nothing new for Hong Kong residents.

Even in the 1990s, developers in Guangdong province have sold residential units to Hong Kong people. But as Guangdong is close to Hong Kong, units there, which are typically larger, can serve both as an investment and as a weekend vacation home.

In the last ten years, developers from the rest of the Asia-Pacific region and beyond have also tapped into the Hong Kong market. Projects from various mainland markets have been offered to Hong Kong investors.

According to our conversations with front-line sales teams, in the last five years, projects from Japan, the United Kingdom and Australia have done especially well. Hongkongers are also offered projects from Taiwan, Thailand, Malaysia and European countries.

These projects are sold in a variety of channels, but so far the event sales model seems to be the most cost-effective. In this model, the developer, probably after engaging a Hong Kong sales team, hosts a weekend event to explain the local market and the project in question to interested investors.

Often, interested investors would make a decision on the spot and, after the event, a sales team from the local market will help complete the deals.

This sales method would require a group of highly sophisticated buyers, who have enough experience to evaluate the opportunity and make a quick decision.

In fact, for the most successful markets, some agents have formed ecosystems with access to both buyers ready to purchase and developers ready to sell. This development is another facet of Hong Kong being an international financial center, with investors ready and willing to look at investment opportunities outside of the home market.

As a society, having access to foreign markets is beneficial. These foreign markets provide an alternative to investors that may already own a substantial portfolio in the domestic market. It also helps diversify the asset base the society holds in aggregate, lowering any cyclical risks that the local real estate market may create for the wider economy.

However, investing in these markets also involves a significant amount of knowledge. For example, the worth of a residential unit is heavily dependent on the host market’s laws. In some markets, foreign ownership is restricted to certain types of assets, while in other markets, foreign ownership of a single project may not exceed a certain threshold.

If there is enough foreign demand in these markets, the foreign market can evolve its own supply and demand dynamics. Prices of these units eligible to foreign owners will be divorced from the prices of the units eligible to only domestic owners.

Furthermore, the maintenance cost of a residential unit differs from one market to another. Hongkongers are familiar with property taxes, insurance, and management fees, but they still need to understand how these costs are calculated in the target markets. Owners of foreign units will need to ensure that they have the cash balance in the local currency to meet these requirements.

Leasing out the unit will add an additional level of complication. An asset manager, sometimes one that is related to the original sales agent, may help to manage the unit for a fee. How that fee is calculated and how much maintenance work is required often determines the true rental yield of a unit.

In most markets, the rental income is taxable, but the law can recognize cost items in different ways. Depreciation of the brick and mortar, for example, is tax deductible in some markets but not others. Understanding the tax requirement beforehand is crucial to prevent future surprises.

Buying a unit abroad is often fun. This is especially true when the objective is to have a vacation home in a favorite city. But investors should always keep in mind that buying foreign assets requires knowledge and effort.

For those who are not willing to go through the investment process, alternatives such as REITs can also provide similar types of exposure. For those that are willing to invest the time, a thorough understanding of the target markets will minimize surprises and offer a more rewarding investment experience.

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Chief Investment Officer, Admiral Investment Ltd.