REAL ESTATE IN ASIA

WHERE CAN FOREIGNERS OWN PROPERTY IN ASIA?

Not all real estate markets in Asia are on equal terms when it comes to foreign ownership rights. Nor are they fully open to foreign ownership. If you chose any two places on the continent at random, there will almost certainly be vast differences between each of their property laws.

While lots of opportunity exists across Asia’s numerous real estate markets, you’ll often face limits on what types of property you’re able to own as a foreign investor.

A few countries don’t have any restrictions on foreign property buyers whatsoever. Several of these real estate markets include South Korea, Japan, and Malaysia.

You can own freehold property as a foreigner outright in these places. Even land ownership, luxury homes, and commercial real estate aren’t off-limits to foreign nationals.

In other real estate markets, you aren’t allowed to own land or houses as a foreign investor – yet can still buy condo units on a freehold basis.

Countries that restrict foreign land ownership, although still allow condo ownership, include Thailand, the Philippines, and Singapore.

FREEHOLD VS. LEASEHOLD OWNERSHIP

Several countries in Asia won’t let foreigners, or sometimes even their citizens, own freehold property at all. This is usually because of one of two different reasons.

First, it might only be possible for locals to own freehold property. Countries like these include India, Brunei, Myanmar, and Indonesia. They’ll let citizens buy land and condos outright, but you’re out of luck as a foreigner. This is, unless you’re willing to settle for a long-term lease.

Yet these types of leasehold agreements are never ideal from an investment perspective. It’s always better to own property outright with a freehold title.

Second, land is only owned by the state in some countries. For instance, China and Vietnam won’t allow anyone (even local citizens, let alone foreign investors) to own freehold property. Every plot of land is instead leased from the state, typically for a period between 50 and 99 years.

In either of those cases, your sole option as a foreign property investor is to rent or lease the building on a long-term basis.

We don’t think leaseholds are a good idea and strongly advise against them. The main reason is because they’re a depreciating asset. A leasehold is always on a clock, ticking closer to zero.

Imagine trying to resell a 99-year leasehold with only 10 years left on the term!

Asia is home to plenty of nations that allow freehold real estate, and there’s no reason to invest in a country which limits you to leaseholds when it’s not necessary.

WHAT’S THE BEST COUNTRY TO BUY PROPERTY?

Rarely does a “one-size-fits-all solution” ever exist, and international real estate isn’t an exception. The specific details of your ideal property will depend on your own circumstances.

If you’re retiring in Asia or looking to own a second home, then you’re the only one qualified to make that choice. A lifestyle purchase is about where you prefer spending time.

As investors though, we’re primarily concerned with profit and overall returns. Not whether we’d personally enjoy living in the asset that we’re aquiring.

It’s worth noting that a clear majority of long-term investors prefer buying real estate in capital cities or financial hubs instead of resort towns or rural areas.

This strong preference for urban areas is caused by multiple factors.

First off, urban areas are where most of any nation’s economic activity, corporate offices, highly paid jobs, and, educational opportunities are focused. Large cities simply have greater housing demand because of their connectivity and available opportunities.

Secondly, large cities are the main beneficiaries of Asia’s positive demographic trends. Real estate markets in Asia’s frontier markets will especially see their urbanization rates climb, almost inevitably driving up demand for condos and houses in central locations.

You might be asking: what is urbanization rate, and why does it matter when making an offshore real estate investment?

Basically, it’s the percent of any country’s population that currently lives in urban areas. The urbanization rate typically peaks in developed nations, and is low (yet rising!) in emerging and frontier market economies.

In Japan and South Korea, for example, their urbanization rates are 91.7% and 81.5% respectively. That’s indicative of a country filled with office workers who have money to spend.

Emerging markets such as Thailand (50.7%) and the Philippines (47.45%) are about halfway along the economic development scale, and are rising. Meanwhile, in Vietnam, it’s 37.1%. In Cambodia its even lower at 24.2%.

Places like these are often the best real estate markets to invest in Asia. All indicators show that places like the Philippines and Cambodia will benefit from greater demand as their population moves from rural areas into the cities.

A final point: recent events have proven that tourist towns and beach resorts aren’t anywhere near as resilient as major cities during times of crisis.

In conclusion, the best places to buy property in Asia are in high-growth urban areas which are currently going through a population boom. Think about cities such as Manila, Phnom Penh, and Jakarta.

If you’re a hands-off-investor (a majority of UHNWIs especially are), then buying shares of a managed property funds or REIT is one of your best options.

While real estate investment funds do take a management fee, they can also potentially make higher returns. Their ability to operate on scale adds value, often making it worth the cost of a few percentage points.

Property funds can buy larger commercial properties and office buildings. Generally, these types of buildings generate higher rental yields than residential units.

REITs also take care of the management, rental, and maintenance of the portfolio. Bulk purchases lead to further cost savings on furniture, appliances, and construction projects. These relationship-based discounts are passed down to shareholders.

Having local connections makes it easier to rent properties and keep them tenanted. After all, real estate agents have a choice of which properties to show first. Many realtors give priority to institutional clients since they’re more likely to be repeat customers.

The choice many smaller property investors will make, in particular those who are already living in Asia, is buying a property and managing it themselves.

If you prefer buying property yourself, then your first stop will probably be a real estate agent. This is especially true if you’re purchasing in a developed market like Singapore or Japan.

Meanwhile, if you’re buying a newly-built home or condo, your first stop will be the property developer itself. They’ll walk you through the transfer process

You may also want to hire a lawyer depending on the developer’s reputation, your familiarity with the market, and the specific place you’re buying real estate in. Dealing with a developer directly is suitable in an environment with established, reputable developers like ones in Thailand or Malaysia.

We don’t suggest “going at it alone” in a country like the Philippines or Vietnam though. If you’re doing business in frontier markets, and haven’t already done so before, then you’ll probably want advice.

Great deals can be found by word-of-mouth as well, and in some countries, most listings are private. They aren’t announced and made public through realtors or online listings. However, you may not have access to the local connections required to find these deals as a foreign real estate buyer.

It’s also worth keeping in mind that, depending on the country and its laws, you might not have the ability to own all types of property as a foreigner.

Thailand, for instance, only allows local citizens to own landed properties. But you can still buy shares in a REIT or property fund listed in Thailand. Oftentimes, these funds are focused on commercial real estate or hotels.

Meanwhile, over in India and Indonesia, only locals have the ability to own real estate directly. As a foreigner, the only way to invest in freehold property in both of these countries is through a REIT or fund. 

The CapitaLand India Trust, domiciled in Singapore, is one specific REIT that invests in India’s commercial property market. And unless you’re a local citizen, it’s the only way to invest in India’s real estate market.

Also, keep in mind that if you aren’t actually living in the country where you own property, then you’ll need to hire a property manager.

Dealing with maintenance, managing repairs, and finding tenants is incredibly difficult if you’re based on the other side of the world. And failing to accomplish any of those three things will result in unhappy tenants… or perhaps having none at all.

Management companies can help with the logistics of leasing your property. As a standard rule, such businesses usually charge about 15% of rental income – a similar amount to a property investment fund or REIT.

We mentioned above that some readers might be seeking a lifestyle asset more than an investment. From our experience consulting with clients, we find that people often want to do both things at the same time.

The idea of “buying a summer home that can also be rented out” will pop up occasionally. But it’s very difficult to accomplish both goals at once. We don’t suggest mixing your investments with a lifestyle purchase or a second home.

Why should you separate your investments from your homes? Because the factors that make a good investment aren’t the same ones that make an ideal living situation for you personally. And vice versa.

For example, in Thailand, two-bedroom condos between the size of 80sqm and 120sqm yield the highest and are currently easiest to rent out. What if you only require one bedroom though? Or have a large family which needs three or four?

Items which you might personally enjoy, such as decorations, kitchen upgrades, hot tubs, and built-in stereo systems, typically won’t add any ROI. Worse yet, a tenant might break your expensive upgrades and cause damage to fixtures.

Landlords will realize these problems aren’t fun to deal with at all. Especially if we’re talking about a condo or house that you plan on staying in as a vacation home for part of the year!

Plus, the optimal place to invest in real estate probably isn’t where you happen to enjoy spending your personal time. For example, if cities are the optimal investment, but you enjoy beaches, then you’d have to make two different purchases in order to achieve both goals.

The main takeaway here is: it’s best to spend time in places where you enjoy living, and buy real estate in Asian countries where you’ll make a profit.