In developed countries like Singapore, there are always interests and demand from investors for properties in emerging markets.
The reasons are obvious. Properties in emerging markets tend to be relatively cheaper than those in their home countries. Emerging market properties also provide diversification purposes for investors. Risks are higher in emerging markets (political, currency, legal, market risks etc) but investors can still be comfortable with the higher risks, in view of the higher potential returns in comparison with the returns in their home country.
Having spent many years in an emerging market helping real estate developers there, SPK was fortunate to have developed a good understanding of investing in emerging market properties. Let SPK share with readers here 6 things to take note before buying an emerging market property:
1. Credibility of the Developer
This is probably the most fundamental thing that all investors will need to find out prior to buying a property from an overseas developer – whether the developer has a strong reputation in its home country, the financial standing of the developer, quality of the developer’s projects, any issues with their government or lawsuits etc. Internet and Google will probably be an important source of information when doing due diligence. It will also help to speak to friends from that particular country to find out how the locals perceive that developer and find out any off-market rumors about the developer.
2. Sales and Purchase Agreement
Unlike in Singapore where we have the standard form of the sale and purchase agreements, sale and purchase agreements for emerging market properties are usually drafted by the developers and some of them can be loosely drafted with insufficient clauses to protect the buyer’s interest (since it is drafted by the developer anyway). Hence, it is important to have a thorough read of the agreement and consult lawyers or advisors if necessary.
The fundamentals of the agreement are the commercial terms contained within, such as the price, area, completion date, compensation, price adjustment, payment schedule, undertakings, termination clause, just to name a few. These are important things buyer need to go through and understand the implications in the context of the emerging market.
It is important to know whether such a sale and purchase agreement is duly recognized in the overseas judicial system so that your interests are protected in the event of a lawsuit in the emerging country. Buyers should make sure that the agreements are stamped in the seller’s country with all the stamp fees duly paid.
Buyers should find out who is the entity that is signing the agreement on behalf of the developer. Is it the company that owns the land and develop the project (preferred option)? Or is it a shell company or special purpose vehicle set up for payment collection (less preferred option)?
In the event that the executed version of the agreement is in foreign writing and even when a translated version is provided for reference, it is still necessary to go through a third party translator to make sure that the translation is accurate.
3. Repatriation of Funds
For overseas developers that bring their property to Singapore to sell, they probably already have an idea to facilitate the fund repatriation process to make it seamless and fuss-free for buyers and reduce a potential barrier that might put off buyers.
Nonetheless, buyers should try to understand the entire fund repatriation process to find out what could be their risk exposure in the process. Also, a buyer needs to know the process when he is getting his money back in the event that he leases out the property or exit from the property.
There might be foreign exchange control restrictions for some countries and buyers should also take note of this.
4. Tax Laws
“In this world nothing can be said to be certain, except death and taxes” – Benjamin Franklin
There is a lot of truth to these words said by Benjamin Franklin. What are possible taxes that investors need to take note? The usual ones are withholding taxes for repatriating profits or interests, property taxes, income taxes on your rental income and capital gain tax on your profit from a sale. So for investors in emerging market properties, please remember to watch out for the possible taxes involved.
5. Legal Ownership and Proper Titles
Unlike in Singapore (once again), where we have proper systems and records of land and strata title ownership, it is very different in emerging countries. Some of them may not even have a system of tracking ownership. Many times, people have to rely on physical title certificates that might have been issued many years back for ownership verification and this is prone to fraud and disputes. It is not uncommon to hear of cases where fake copies of land titles were made to falsify ownership, which lead to land disputes. Again, it might be difficult for buyers to do a full-scale due diligence on the ownership and titles but probably what they can do is to do a quick search on the internet or speak to the friends there to find out any potential issues.
6. Lease and Asset Management of Property
Imagine that you are buying a condominium under construction. Upon TOP, you will have to take possession of the unit, do defects rectification, renovate and fit-out the unit, engage agents to lease out the unit, ensure proper documentation and registration of tenancy agreement, pay maintenance fees, taxes if any.
Then imagine that if you buy a condominium overseas in an emerging country, you will also need to do all these! It is no easy feat to do these for a property in overseas. You will not be able to travel down regularly to manage the property, the tenant, and administrative matters. Hence, as an absentee owner of a property in an emerging country, it is important to take into account of all these before buying a property. A reliable overseas agent is necessary to assist in running the day-to-day matters of the property.
The above list is not exhaustive and there could be a lot more things to take note if SPK drills deeper into the details. Probably a key takeaway that SPK would like to share with readers is to do a lot of due diligence and understanding of the overseas market before jumping into it.
Fortunately, there are some good real estate advisory firms and agencies around that do provide a lot of useful information and guides to assist buyers in understanding and doing their due diligence.
A good source of information for buying properties in Thailand will be Daryl’s blog – www.daryllum.com and www.investbangkokproperty.com. Readers can find a lot of useful information there such as market knowledge and payment procedure for buying Thailand property.
And for investors who are keen on the more exotic market like Myanmar, there is a well-established real estate advisory firm from Singapore – www.asianacre.com that is based full-time in Myanmar. Their facebook page is a good source of information for news and market development in Myanmar.
They can be a good source of information or contact for buyers to do their due diligence when investing in emerging markets.
if you have any stories on overseas property purchase, please feel free to share!