As Malaysians living in Malaysia, we rarely think about how different everyday life is for non-locals, be it foreign labourers or exaptriates. While the former group are simply here to earn a living and (more often than not) send money back to their families, those in the latter category are usually skilled white-collar workers earning high salaries, who have moved here with their families for at least a few years. Therefore, it is not surprising to find that some expats are interested in real estate investment opportunities within their host countries.
But is it really that simple – or feasible – for expats to invest in foreign real estate?
Let’s be real: property, taxes and currency exchange go hand-in-hand when you’re an expat trying to buy real estate overseas. According to the Knight Frank Global Tax Report 2015 – developed jointly with Ernst & Young – expats investing in property around the world need to consider real estate taxes as well as currency exchange and the shifting fiscal environment. The report analyses the buying, holding and selling costs for foreign buyers of prime residential property over a fives years (2015 – 2020), and provides illustrative taxation costs in 15 key cities worldwide, including four Asian cities (Hong Kong, Mumbai, Shanghai and Singapore). The main criteria was a foreign individual buying a US$1m or US$10m property in their own name as an investment, and renting it out over the five-year period.
Many governments use tax as a measure to slow down booming markets and address domestic affordability issues. Changes in the fiscal environment will implicate investors. Additional taxes during purchase, stamp duties and capital gains can have a significant impact on total returns, which in turn affect investors’ decision to purchase property in foreign countries.
“When looking across borders, investors should therefore not only consider market, currency, management and liquidity costs, and risks, but also the tax implications over the lifetime of their investment,” said Nicholas Holt, Head of Research at Knight Frank Asia Pacific.
Besides that, other factors such as currency shifts, wealth flows, tax changes and fluctuating levels of supply and demand have all had a bearing on the performance of prime residential markets worldwide. As the rate of price growth slows in many global city markets, transaction costs and taxation are becoming increasingly important considerations for investors/expats.
When analysing those cities where property costs are highest, Knight Frank and Ernst & Young have determined Paris (15.3%), Berlin (13.3%) and Geneva (12.6%) to impact foreign investors with the highest property costs at the $1m mark. Geneva replaces Paris when considering property costs at the $10m level, charging investors 13.2% of the five year sales price, followed by Berlin (11.3%) and Monaco (10.8%). Considering the tax costs across the 15 cities, it is a different story. Taxation is highest in Sao Paulo both at the $1m and $10m level, costing investors 31.5% over the five year period. It is followed by Hong Kong. Investors here are charged 22.4% of the $1m property cost over a five year period but Sydney replaces Hong Kong at the $10m mark charging foreign buyers 26.0% in tax.
Dominic Heaton-Watson, Senior Manager, International Project Marketing, Knight Frank Malaysia, says, “As more of our investors become global citizens, the importance of understanding true property costs becomes even greater. The traditional hubs of the UK and Australia have remained the clear favoured residential investment destinations for our Malaysian investors. Main drivers include education, security, lifestyle and capital appreciation. Despite some recent alterations to the UK’s taxation policy, London very much remains in the middle of the pack on a global taxation scale and offers a safe-haven destination from global fluctuations. We expect Malaysian investment appetite for good-grade, well located international property to continue and Knight Frank will be well placed to offer the best-in-class developments.”
Taxes provide income for policymakers, and property tax is undoubtedly the most profitable, especially from foreign investors. However, in the long run, perhaps having a more attractive residential property tax package for expatriates would help draw in more long-term investors. Malaysia is trying to lure in foreign investors with big economic projects like Iskandar Malaysia in Johor and Bandar Malaysia in Kuala Lumpur, which definitely look promising to investors. Considering Malaysia’s stable fiscal environment (despite the various scandals and controversies), strategic location within Asia Pacific, cost of living and being one of the top three countries where expats can adjust quickly and feel at home, you can be sure that the foreign investors won’t stop coming in for a while yet.
You can access the full Global Tax Report 2015 PDF here.