Purchasing property abroad can be like playing with fire, according to two property investors. If property investors do want to consider looking far outside of their own backyard, here are the things they need to consider.
The three factors that override everything when it comes to property investment is security of tenure (to a good title to the property), sovereign risk (or unstable government), and foreign exchange fluctuations, according to property investors Sharon and Tony MacNevin, who were guests in an episode of the Smart Property Investment Show.
“Buying into distant markets in non-English speaking countries and non-western cultures is often fraught with strange pitfalls,” Mr MacNevin said.
The couple shared their 40-year success story investing in Sydney’s booming housing market in an interview with Smart Property Investment Show host Phil Tarrant as retirees living out their ninth year in the same rental property on the east coast of Bali.
“We have never considered buying property in Indonesia, or anywhere else in the world for that matter, and we never will. For us it is safe to rent a beautiful property in Bali for a quarter of the price in Australia, because we are not set on living in tourist traps,” Mrs MacNevin added.
“We make money from renting out our Sydney home while renting in Bali, as our property in Australia appreciates at a much higher rate than in Indonesia.”
According to Mr and Mrs MacNevin, investors must be familiar with the local laws and regulations in foreign property markets to avoid being slapped with unexpected fines or, in extreme cases, incarceration. Often an agent is necessary to do this and “they are certainly entitled to their fee.”
“The first consideration when investing in properties is how you’re going to manage them. The further away they are, the more costly and difficult, especially if something goes wrong,” Mrs MacNevin said.
“Otherwise it becomes too difficult and expensive to manage the tenants and maintain the property.” Mrs MacNevin said.
The couple invested in two seaside properties on Sydney’s Northern Beaches in the early 1970s, as owner-occupiers living within walking distance of their second investment. Both remain adamant that investing in the same city, better yet the same suburb, is ideal.
Mr and Mrs MacNevin added that many countries have laws to discourage foreign ownership of land.
“We lived in Mexico in the 1980s, but it’s become much more dangerous to live there today in many places. Had we invested in property, there’s a good chance we would be at a loss,” Mr MacNevin said
Australians, however, have special rights to ownership in other countries – in particular New Zealand.
Mr MacNevin added that many investors went to the USA after the global financial crisis to pick up properties, where the owners were unable to service their loans and resulted in forced sales. As the American dollar strengthened, many of these investments succeeded.
Nevertheless, the property investment duo asserted that westerners can be easily taken advantage of in foreign markets.
Navigating any new market is a challenging process, especially when language barriers, international currencies and cultural diversity adds layers of complexity for foreign investors.
Behind smokescreens of detached cultural lenses – as newcomers in competitive foreign markets – it may be difficult to determine quality, durability and growth potential of new properties and developments before investing money into them.
In Indonesia, only citizens can own property and what is often marketed as a freehold title is not what is understood in Australia.
“The only way non-citizens in Indonesia could buy property in the past was through a private agreement in the name of an Indonesian citizen, called a sponsor,” Mr MacNevin said.
“Over two years ago the Indonesian government in Jakarta declared all such agreements illegal and foreign owners were given 18 months to fix it.”
Mrs MacNevin added that it is up to the overseas investor to know the law, while in many cases the seller is not considered responsible.
According to the property investment duo, trade wars between China and the US have caused housing prices in Indonesia to drop. The prediction for this year is to see real estate prices drop further.
“As well as decreasing value of Indonesia currency, it’s so unstable… all you need is a terrorist attack for real estate prices to plummet, Mrs MacNevin added.
“If we had invested in property when we moved here seven years ago and wanted to sell in the next few years – particularly with the exchange rate falling to the Australian dollar and skyrocketing US dollar – it would have created a greater loss now and would likely be even greater in the foreseeable future.”
Foreign investors will often stand out like sore thumbs in overseas markets, while competing against local investors and scammers abroad, who are equally eager to make money.
According to Mr and Mrs MacNevin, foreign investors will often be promised they are buying exactly what they want – their dream home or renovation – only to end up with “exactly the opposite.”
“You think it’s expensive to invest in your own country… it’s super expensive if you are not aware of the problems that can occur when investing overseas,” Mrs MacNevin added.