A look at some of the opportunities and pitfalls to buying property overseas
Many people are seeking to diversify local risk, including potential currency depreciation, by investing abroad. How does international property fare as an option, and for those familiar with investing in property, is it simply a matter of applying local experience abroad? What are some of the pitfalls and opportunities relating to buying property overseas?
In many respects, buying property overseas is similar to buying property locally. All the same considerations – position, demand, supply and proximity of amenities – still apply. In addition, certain countries allow foreigners to obtain bond finance which is important for investors seeking to gear their property investments in order to extract maximum return on cash invested abroad.
Return on cash invested will also be significantly affected by the movement in exchange rate over time. If, for example, the exchange rate weakens against major currencies in the long-term, then this will have a further multiplying effect on return.
It is prudent, probably essential, for foreign investors to partner with a local property expert to understand the nuances of the market in which they are investing. They also need to consider the laws that deal with the balance between landlord and tenant rights as this can significantly affect their peace of mind and the security of their investment return over time.
According to Grant Gaines from Hampshire Independent Advisors, in addition to considering the country’s tax laws, investors should also investigate the country’s approach to estate duties on foreigners. In certain instances, the investor would need to draw up a foreign will to deal with the property in the investor’s estate. It is important for investors to get professional advice on these subjects to safeguard their long-term goals.
According to Chris Immelman, who heads up Pam Golding International, two popular investment destinations at the moment are Mauritius and Portugal.
Mauritius has been a firm favourite amongst South Africans for some time due to its proximity – only a four hour flight from Johannesburg and Durban. The country has lots of South Africans and English speaking people and it has an established legal and banking infrastructure which lends itself to property investment. People investing in property in Mauritius have primarily a convenience/leisure focus rather than a strict investment return focus as other countries offer better return potential.
It is possible to get bonds in Mauritius at an interest rate of about 4,5% p.a., but it can be fairly complicated and many South Africans opt to purchase for cash instead. Property prices start at about USD350 000 for an apartment but the average purchase price by South Africans is about USD1-million. A property purchase of USD500 000 qualifies the investor for residency which means they can work, live and play in Mauritius.
Portugal has, just in recent years, become more attractive as an investment destination due to a change in legislation which was historically skewed strongly in favour of tenants, but which has now become more landlord/investor friendly. This shift alone has resulted in massive investment and price growth in Portuguese property particularly in Lisbon which has made it the most popular investment destination in Europe over the past three years. According to Chris Immelman, this trend is expected to continue for a 10-year cycle.
Foreigners are not able to get bonds on their first property but can finance second properties geared at about 50% at a fixed interest rate of 1% p.a. for the first four years. This makes for a compelling investment proposition given that rental returns alone are in the region of 4,5%. Apartments start at about EUR250 000 although a EUR500 000 property investment is required in order to qualify for a Golden Visa. Under the visa, investors need to visit the country for seven days every year for five years after which a permanent residency is awarded. Thereafter, investors can apply for citizenship in terms of the Nationality Act.
Porto is Portugal’s second largest city and its property market is also strongly poised for growth. It offers better value than Lisbon with prices about 20% behind the capital. The city boasts the country’s largest port and cork industry and its Doura River and surrounding Doura Valley are akin to our Stellenbosch wine route region.
Both Mauritius and Portugal have double taxation agreements with SA so investors won’t pay tax twice. Income and capital gains tax in Portugal are 28% with no estate duties payable whereas income tax in Mauritius is 15% with no capital gains tax or estate duties.
Foreign investment in property offers all the same benefits of local property investment with the added benefit of diversifying local risk and protecting against potential currency devaluation. While some investors may believe that investing in property overseas is too risky, others – who partner with local market experts and seek professional input – will reap the reward of building
global wealth.