Buy a flat in Hong Kong and inside a few weeks you’re likely to be inundated with “offers” from banks and other financial institutions, as well as “opportunities” from estate agencies. Property investors get targeted in the same ways, and even if they’re savvy veterans in the market for a new piece of real estate weeding out the junk from the smart moves can be fraught with stress.
Taxed Before Even Buying
Come talk of taxes, no matter the time of year, investors should be aware of where they stand, but even the wisest can be caught off guard by sudden policy changes elsewhere or fluctuating currencies. But there are safe harbours to take advantage of that, come tax time, won’t hurt and could leave investors in the black.
Price can be the final factor, or at the least a very, very critical one, in whether a property investment is right for an individual buyer, but there are other equally valid considerations to bear in mind. Taking factors such as cost of living (if an investor plans to spend any time at the property), the cost of access and property taxes a year down the road, a variety of duties and levies in the purchasing stage can be deal breakers. These become part of the acquisition cost.
A look at five popular investment locations — Hong Kong, Singapore, New York, London and Kuala Lumpur — illustrates the story. Given Hong Kong’s stamp and special buyer duties, a US$1 million property incurs a whopping 24 percent addition to the sales price for an acquisition cost totalling $225,000. Singapore runs a close second at 17.9 percent and $175,640. New York is the only market of the five without a stamp duty, but is has higher legal fees for an additional 4.4 percent. London’s stamp duty is only $40,000 and part of an extra 4.3 percent. Kuala Lumpur is the winner, with a paltry 3.8 percent acquisition cost.
So if you don’t want to get dinged by taxes before you even own a second home, never mind afterwards, where should you look? Tim Murphy, CEO at IP Global, who did the comparative analysis, is fond of core markets like London (where prices are predicted to jump almost 26 percent in the next five years) and New York (currently in the grip of an inventory crunch) for a laundry list of similar reasons (financial hub status, culture, lifestyle, education). However, the aforementioned Kuala Lumpur and emerging ASEAN markets are demanding attention.
“Malaysia maintained strong economic growth at 4.4 percent in 2012 despite a slowdown in exports to China. The country’s strong currency and low-tax environment is very attractive to property investors,” says Murphy. KL performed well in 2012 and its condominium prices increased 14 percent over the prior year and residential sales rose 9 percent.
Murphy and IPG are also looking carefully at spots like Indonesia, who major agencies like Knight Frank and CBRE think is primed for a boom. “[Indonesia] is ranked the number one real estate investment market in Asia according to ULI’s Emerging Trends report. Its economic growth, expanding domestic market and rising income are all telling the growth story,” Murphy states.
So how much should investors expect tax season to hurt? The relationship between residency, rental income and tax obligations varies from jurisdiction to jurisdiction, but Murphy recommends thorough research before any purchase. “Even if a property is competitively priced, high taxes will hurt investment returns,” he cautions, using Hong Kong and Singapore as prime examples. Prices have caught overseas investor eyes, but those duties are devastating. Property taxes aren’t particularly outrageous, but neither city is known for high yields. For further evidence look at France and its new socialist government led by François Hollande, where property investment money is practically flying out of the country on the threat of increased taxes. The one notable exception is the dismissal of rumblings from the UK about new taxes on properties valued over £2 million. The UK, and London specifically, is as strong as it’s ever been.
As long as the UK and the United States remain flexible and reasonable with tax demands for non-resident investors, and the fundamentals remain strong, London and New York will remain high on the list of ideal investment locations. Malaysia and Indonesia’s surge to the head of the class in Asia will be as sustained as their low initial outlays allow for. Though Indonesian acquisition costs are higher than New York’s or London’s, they’re much lower than Hong Kong’s.
The cocktail of no stamp duties, no rental income tax, high yields and low cost exists in the realm of fantasy — at least for now. Until that Shangri-La emerges, investors are going to have to settle for the taxes that are least likely to sting. Because really. The taxman is always going to find you.