Residential property ownership, either as an owner occupier or investor, is embedded in Australia’s culture.  It is often referred to as “the great Australian dream” to own residential property.  Property rights are relatively secure and investors can use a plethora of historical performance data to determine what sort of return they can expect to achieve over the long term.

However, not all overseas property markets operate in the same way as the Australian property market does.  As a simple example, in some countries it is necessary for a foreign investor to have a local ‘partner’ to own property which then introduces potential problems if the investor wants to sell or if the investor passes away.  Also, in some countries there are ‘anti flipping’ rules that prevent an investor selling a property they have acquired within a certain time frame.

Based on our experience in dealing with expatriates, the key advantages of owning overseas residential property may include:

  • Strong capital growth – we have seen strong capital growth in international cities such as London since the Global Financial Crisis, where there is a general shortage of available property and strong demand from local and overseas investors.
  • Currency gains – at times when the Australian dollar is falling against other major currencies, it can be beneficial to invest in property which is denominated in a currency that is performing better than the  AUD – that is providing the underlying property prices are also rising in the country where you have invested.
  • Low or no tax – Australia’s income and property taxes are relatively high compared with other countries.  There are still countries where capital gains tax will not be payable on the net proceeds earned from a property investment but investors need to be aware that any property investment they hold after they have returned to Australia will be subject to Australian capital gains tax from the date the investor becomes resident for tax purposes.
  • Lifestyle benefits – owning a ski chalet in Switzerland or a beach house on the French Riviera may provide both investment and lifestyle benefits.

The key disadvantages of owning overseas residential property can include:

  • Negative growth – there are many property companies happy to spruik investment properties to inexperienced or ill advised clients.  If you don’t know the local market then you could end up losing money rather than making money.
  • Taxes – in some countries you will have to pay tax to local state and federal authorities and may even be subject to estate taxes on death or gift taxes if you subsequently decide to gift the property to a family member.
  • Construction of off the plan property is delayed – some investors in some developments in the United Arab Emirates have had to ‘sit tight’ for many more years than they expected while their off-the-plan property is completed.  If there is an economic downturn and the developer is struggling or has goes broke, there isn’t much the investor can do … other than wait and hope.
  • Off the plan property is not built to specification – we have heard of some property investors in the Middle East who were handed over title to a property that was 15% smaller than the property specified in the plans they were shown prior to signing up.  Once again, if the local legal system is weak, there is not much a foreign investor can do if the property they receive is not the same as the one they were promised.
  • Legislative changes – unexpected legislative changes such as a new or increased capital gains tax or changes to property ownership laws could leave investors out of pocket.
  • Agency issues – real estate agents in foreign countries are not necessarily as diligent as their Australian counterparts.  If you are not able to visit your property on a regular basis, then you don’t know what damage a tenant might be doing to your property unless your local agent tells you.  Your ability to find a replacement tenant might also be impaired if you don’t have a good agent.
  • Political instability – one classic example is the mass exodus of foreign firms from Bahrain a number of years ago when there was local fighting between rival Sunni and Shia extremists.  The fighting has ceased but it seems the multi-nationals are in no rush to return to that part of the world.  Most property investors in Bahrain would be suffering due to the lack of expatriates in the country and the illiquid market.

On balance, there are many more negatives associated with investing in non Australian property investments.  That is not to say that you should never invest in overseas property … but it does say that you need to do your homework!

Australian property investors take a lot for granted … if you are investing in overseas property you need to be a lot more careful