To invest or not to invest abroad?

By THE STAR
PETER, a Malaysian living Kuala Lumpur, purchased his third apartment in London a couple of years ago. Because of his background, he has a deeper insight into the real estate sector than most people.
He has no issues finding tenants for all three of his properties, which he purchased at different times.
All three properties were tenanted within a month or two. With the exception of one located in a university town, the other two are located in London. Peter says the lettings market is strong but this depends on location.
“It does not mean every project will be occupied immediately upon completion. University towns offer strong areas.”
Peter describes himself as “conservative.” He saw a £250,000 (RM1.4mil) apartment years ago but was “too conservative”.
“That apartment has quadrupled.” He was emboldened by that “loss”. That was when the subsequent three purchases came.
“In London, in the last two years, you can buy anything and the price would have gone up,” he says.
Last month, Singapore’s central bank warned Singaporeans of the risks attached to buying properties overseas, after data showed a surge in their investment in real estate abroad.
The Monetary Authority of Singapore (MAS) said local real estate agencies had handled overseas property deals worth S$2bil last year – a 43% rise since 2012, AFP reported.
MAS reminded potential investors “to be mindful” of foreign exchange and interest rate risks, among other risks.
Last week, the International Monetary Fund (IMF) warned that the overall acceleration of global house prices from already high levels has emerged as one of the largest threats to economic stability, with countries making limited progress in keeping them under control. IMF deputy managing director Min Zhu said house prices “remain well above the historical averages for a majority of countries” in relation to incomes and rents.
It is this low interest rates environment, the flush of liquidity that is pushing Malaysians to invest in properties abroad and/or buy several properties at home.
Since 2009, Malaysians have joined the trail of Singaporean and Hong Kong buyers. Bank Negara does not have the total amount of investments for overseas properties investment. “Loans for this purpose is not significant,” a Bank Negara source says in an email.
In any case, “banks do require proper credit assessment,” the source says.
Two reasons underpin the London interest. Property prices plunged between 30% and 35% in 2008/2009. Secondly, the pound had weakened, trading at around RM5 to a pound, compared to about RM7 prior to the fall of Lehman Brothers in the last quarter of 2008.
It has since bounced back to hover around RM5.50.
With Britain’s economy on the road to recovery, the pound on the rise, and talks of interest rates rising, should those who have not entered the market stay out?
Waning interest
While interest in London continues, its intensity seems to have somewhat dissipated, at least in Malaysia.
Savills Rahim & Co managing director Robert Ang says exhibitors are offering their fare in Singapore and Hong Kong but skipping Malaysia. “The markets there are much deeper. Malaysians with RM3.5mil to spend on a property have a lot of choices. In Singapore and Hong Kong, they may not. Although we have a bigger population, the wealth numbers here are not that big,” says Ang.
Ang says a London apartment may be £700,000 (RM3.5mil). That is equivalent to about S$1.3mil-S$1.4mil; your choices may be limited in Singapore. But you can get 500 sq ft one bedder in London and you will be diversifying your portfolio.
“In that sense, British developers and house builders find it difficult to push their products here,” says Ang.
The London market is attractive because one pays only 10% to 20% buying off-plan and the rest when the property is completed. Among Malaysian agencies, Henry Butcher has been the most aggressive in promoting London properties since early 2009. Director Lim Eng Chong declines to say the value of transactions undertaken by the company since 2009.
“The years between 2011 and 2013 were equally strong in the sales,” he says.
Lim says it is still seeing a healthy level of interest, predominantly for those priced between £250,000 (RM1.4mil) and £800,000 RM4.4mil). “However, due to strong recovery for the past three years, some investors especially those who have bought before, are more selective with their purchases. But there are constantly new investors,” he says.
Lim is also seeing a growth in re-sale market transaction. Investors who bought in 2009 are now offering their units for sale to local London buyers.
“With the fast pick up of local London market activities, there is a strong appetite for this segment, apart from new sales/launches,” Lim says.
Foreign exchange, a driver?
BNP Paribas Real Estate’s UK development and residential agency director Julian Sedgwick says in an email that the rising pound should not be a key decision driver.
“The currency will have an impact on entry point for investors but, equally over recent years, acquisitions of real estate on rising pound have added to the returns which an investor may see on exit,” he says.
Sedgwick says historic long-term data underpins the consistent returns and maturity of the (property) market outperforming other asset classes including government bonds, gilts and gold over a 30-year period.
“With the shortage of supply, a recovering economy and a mature market, now is a good time to enter the market,” he says.
Sedgwick says the London residential market is different from other UK cities and has historically seen minimal corrections.
“This variance between demand and supply underpins the market and is the reason why there is not, in our view, a bubble,” says Sedgwick.
London, with a population of about 14 million, needs about 50,000 new homes annually. Only about 21,000 are being delivered, he says. Added to this shortage is the British government’s “Help to Buy” programme, introduced last year. This has stimulated building in the broader UK market.
Within London itself, he says infrastructure projects including Crossrail are also creating new markets and opportunities around the improved transport hubs from the west to the east of London. On a long-term basis, there is predicted growth, he says.
Slow change in interest rates
Jones Lang LaSalle MD (Singapore and South-East Asia) Christopher Fossick says although there has been talks that interest rates will be moving up, “it will be a slow change”.
“If you bought three years ago in London, you will feel better (with today’s increasing prices). Prices have gone up 20% to 30% today and current growth would be less,” Fossick says.
The overall London story, however, has not changed, he says. It remains a city of growth. The pound remains relatively weak and it will be a while before it goes back to pre-Lehman Brothers days (Lehman fell in October 2008), particularly in respect of the Singapore dollar and London will continue to be a safe haven for capital around the world.
In the last five years, there has been a balance between Asians, Europeans, Middle Eastern and Eastern European investors looking to put their money into the residential sector.
Fossick says the interest in properties as an asset class is not specific to London, but is a global interest spurred on by the low interest rate environment.
“We are seeing more debt going into the property market, whether it is Asian or US, residential or commercial,” says Fossick. He was speaking to StarBizWeek after having acquired 49% of YY Property Solutions Sdn Bhd, which will now trade as JLL Property Services (Malaysia) Sdn Bhd.
Fossick says the acquisition was in alignment with JLL’s global commitment to expand its service to its clients in the “rapidly expanding” Malaysian and regional markets. JLL Malaysia, headed by Y.Y. Lau and formerly managing director of YY Property Solutions, will focus on commercial leasing and buying and selling of real estate locally and globally.