For the majority of the population, buying your home can be the largest investment decision. We agree that, compared to not owning your home, becoming a homeowner is typically a sound investment decision, especially over the long run.
It builds equity, as mortgage payments pay down debt, and it reduces the needs of a family to consider moving every two or three years.
Investing in overseas REITs
Nonetheless, for investors that can invest beyond their primary home, getting real estate exposure abroad is worth considering. The supply and demand dynamics of real estate is by definition local, as an asset cannot be moved once it is built and can only serve the demand in that particular city.
Thus, even though cities around the Asia Pacific region have highly connected economies, one may expect these economies to have broadly similar cycles. The difference in supply, driven by government policies and availability of land, can create very different real estate cycles.
That is a primary motive why most REIT portfolios are regional or even global in nature. REITs are professionally managed trust structures that own mostly rental real estate and pay investors most of its after-expense income as dividends.
The vast majority of REITs trade on stock exchanges, meaning that buying a foreign REIT is as simple as buying stocks from foreign exchanges. That saves time, as stock transactions are typically completed in days, and it provides liquidity, as there is an open market whenever the stock markets themselves are opened.
Lastly, many REIT markets are covered by well-established indices, meaning that for investors that do not have the knowledge to pick individual REITs, they can always invest in REITs by mimicking the index.
REITs offer diversified exposure overseas
Thus, for most investors, including the largest institutional investors, REITs represent the easiest way to invest in foreign markets.
Institutional investors typically keep a portion of their real estate capital in REITs to cover smaller markets in which they do not have the expertise, and any portfolio rebalancing is often done through changing their REIT allocation.
REITs and their underlying markets typically also respond to economic developments at slightly different times, with the general rule of thumb being that REIT performance leads the physical market by six to eighteen months. Thus, a thoughtful allocation to REITs can introduce another level of diversification benefits.
Direct investments in foreign property
Beyond REITs, investors also invest in real estate directly. For institutional investors, investments in physical properties are either through private equity funds or direct ownership.
The former is managed by professional managers and can address specific investment styles, while the latter allows the investor to customise his or her exposure to fit the investment thesis directly.
For individual investors, buying physical real estate often means buying residential units in foreign markets. Buying foreign units is not a new development, as Hong Kong investors have started to buy units in Guangdong almost as soon as Chinese land laws were updated to allow for it in the 1980s.
Many investors also bought units for their children when their children study abroad. Sometimes the capital appreciation from these markets was more than the tuition fees, effectively giving the children a free education.
What investors need to know
However, to make a foreign purchase a pleasant experience, investors would need knowledge in several areas.
First, land laws vary by country, and this impacts both the execution and what assets are available to investors.
The amount of down payment, for example, and how the investor pays for a pre-sale unit differ from country to country, and what documentation is needed to complete the transaction varies.
In many countries, including Australia and Thailand, foreign investors are restricted from buying certain types of assets. Buying landed properties in Australia, for example, is very difficult for foreign investors.
These rules will affect the availability of investment opportunities, and in some cases can lead to segregated markets for foreign and domestic investors.
After completion, investors also need to decide if leasing out the units is desirable. Leasing out the units generates rental income, but the income may be taxable.
Managing the leasing process, including finding a tenant, collecting rent, and responding to any requests, require efforts that may or may not be outsourced to local agents or management companies.
Lastly, city development, such as the building of MRT and other infrastructure, can affect a unit’s worth in the long run. Thus, knowledge of a city’s plans is crucial in picking a winner.
Buying a unit abroad is often fun. It’s especially true when the objective is to have a vacation home in a favourite city. But investors should always keep in mind that buying foreign assets requires knowledge and effort.