Property

Investing Overseas: HK, Germany, Japan, MY, Thailand, USA


New investors to overseas markets can get starry eyed at the thought of fat rental incomes, but the fine print still needs to be read

Hongkongers are great investors, but recent research indicates a relatively small number invest in overseas property, largely due to unfamiliarity with the rules and regulations.

Do you need escrow contracts – where a third party protects you from shady developers?

Do all jurisdictions compel down payments to forfeit if you can’t complete a transaction?

We set out to clarify some of those rules, though this is the tip of the proverbial iceberg.

Herewith, the basics of buying property in 10 overseas locations – and Hong Kong – for your investment consideration. Come back next issue for the rest.

HONG KONG
Freehold or Leasehold Property:
All land in Hong Kong – except the ground underneath the Anglican Cathedral in Central – is leasehold, for a maximum 999 years.
Stamp Duties, Capital Gains and Rental Income Taxes:
Hong Kong has no capital gains tax. Property trading businesses pay a maximum profits tax of 16.5%, the same rate as for rental income.
Escrow System:
For pre-owned property, the buyer pays the deposit directly to the vendor or to the vendor’s solicitor. For new homes, deposits and subsequent payments are made to the developer’s solicitor.
Down Payments and Refunds:
Down payments are now 40% for residential properties under $10 million. If a buyer fails to complete a purchase after signing a provisional or formal sale and purchase agreement, they generally lose their deposit. The buyer may also have to pay the vendor compensation.

Christopher Dillon | Author of Landed Hong Kong | www.landedbook.com

GERMANY
Freehold or Leasehold Property:
With very, very few exceptions the usual structure of property in Germany is freehold.
Stamp Duties, Capital Gains and Rental Income Taxes:
Stamp duty depends on the state and runs 3.5 to 6.5%, with Berlin at 6%. Capital gains and income tax rates depend on the buyer’s personal tax rate. Germans owning an investment property over 10 years are not taxed. Double tax agreements exist with many countries and so vary, but are very transparent for foreign buyers.
Escrow System:
Vendors are paid directly and the purchase process must be supervised by a notary. However, in some cases, seller and buyer can agree on an escrow account, also supervised by the notary administering the contract.
Down Payments and Refunds:
Typical down payments necessary for foreign buyers are 40% to 50%. When buying in the secondary market, the buyer is obliged to pay the purchase price once all maturity requirements agreed in the contract have come into effect. “Cancelling” the contract is not possible and so financing or equity is arranged prior to signing contracts. The primary market is similar, with a different payment schedule. To protect buyers from developer insolvency, payments are made in several smaller tranches according to construction progress. The final tranche is only when buyers take possession of the property in perfect condition.

Sebastian Fischer, MD | Engel & Völkers Berlin Mitte | www.engelvoelkers.com

JAPAN
Freehold or Leasehold Property:
All Japanese property is freehold.
Stamp Duties, Capital Gains and Rental Income Taxes: 
Stamp duty runs from JPY2,000 to 20,000 for purchases priced JPY1 million to 50 million. The transfer capital gains tax is 39% for the first five years and 20% thereafter. For those who are resident in Japan less than 180 days per year the rate is 30% and 15%. Rental income tax is levied at 15%.
Escrow System:
For small, transactions, the landlord or seller receives down payments. For larger transactions, a third party is required.
Down Payments and Refunds:
Down payments are generally 10% of the sales amount, but occasionally a seller may ask for 15% to 20% on some deals and of some investors, such as when funds come from some foreign exchange restriction jurisdictions. In the event a buyer cannot execute the mortgage or secure financing for the balance (settlement), the down payment may forfeit. For high-demand, small transactions (JPY10 to 30 million), competition is keen and buyers may need to pay in cash (JPY1 million or more) to hold the unit for a few days prior to the preliminary agreement.

Joe Law | JL Advisers Ltd. | www.jladvisers.com

MALAYSIA
Freehold or Leasehold Property:
Real estate is freehold and also 99 years depending on the site.
Stamp Duties, Capital Gains and Rental Income Taxes:
Foreign buyers must purchase MYR1 million (HK$2 million) properties in Kuala Lumpur and Penang, and MYR500,000 in parts of Johor. Stamp duties for million Ringgit properties is MYR24,000, scaled to a maximum of 3%. Capital gains on the first five years are 30% and 5% thereafter. Rental income tax is 26%.
Escrow System:
A housing development account governs funds inaccessible to developers until a project reaches 50% of the schedule of payment.
Down Payments and refunds:
Down payment on primary and secondary units are normally 40% to 50% for overseas buyers. Rebates on first-hand properties are common. If a buyer fails to qualify for financing there is a penalty of MYR500, normally from the developer.

Gabriel Choi | Asia Homes | www.asiahomes.com.hk

THAILAND
Freehold or Leasehold Property:
49% of the total area of condominiums in Thailand can be sold as freehold to foreigners; landed properties can only be purchased as leaseholds.
Stamp Duties, Capital Gains and Rental Income Taxes:
Thailand has a transfer fee of 1.0% of the official appraised value of a property, payable once on the day of transfer of ownership. Upon sale, a specific business tax of 3.3% is levied on properties held for less than five years as well as a stamp duty of 0.5% on properties held for more than five years. There is an income tax of 1% to 3% on property value when sold.
Escrow System:
Down payments are received by the developer.
Down Payments and Refunds:
On primary sales properties, down payments are usually 30%/70% final for foreign buyers. Secondary market properties generally demand full payment once both buyer and seller agree on the price. Failure to complete a transaction is forfeiture of all funds.

Kingston Lai | Asia Bankers Club | www.asiabankersclub.com

THE US
Freehold or Leasehold Property:
The United States is predominantly freehold.
Stamp Duties, Capital Gains and Rental Income Taxes:
Stamp duties do not exist in the US, though some cities have mansion taxes on properties over US$1 million. Capital gains taxes are paid at a federal rate of 15% to 23.8% depending on gains for properties held longer than one year. State capital gains taxes range up to 13% with most between 1% and 6%. Overseas owners typically pay limited rental income tax due to depreciation, but federal rates are on a sliding scale from 10% to 39.6% (which is for rental profit over US$439,000). At the state level the sliding scale ranges from 0% to 10%.
Escrow System:
All transactions are done via a third party escrow system. Down payments/deposits are made to an intermediary (title or law firm).
Down Payments and Refunds:
Down payments in the primary market in California are generally 3% upfront and another 7% before closing. In New York deposits range anywhere from 10% to 25%, with 15% the norm (at 10% up front and an extra 5% when a project is “declared effective”). Secondary sales down payments demand 3% in California and 10% in New York. If the buyer is financing the purchase, the agreement will most often have a clause stating the deal can be terminated and deposit refunded if the buyer cannot secure financing.

Sam Van Horebeek | East-West Property Advisors | www.eastwestproperty.com