Q : Japan is struggling with the impact of ageing demographics and very high government debt levels, which limit its long-term GDP growth potential to around 1 per cent per year. Long-term, I don’t see how this can sustain the property market, notwithstanding a rush of investments in the run-up to the Olympics in 2020. I also worry about potential natural disasters such as earthquakes and tsunami as well as any future nuclear fall-out. What’s your take on this?
ZM : First and foremost, in terms of Japan’s ageing demographics and high government debt levels, while the subject of prolonged debate and financial wagers over the last 20 years, is far too complicated a subject to address in this context. While they are both certainly worrying topics, the situation hasn’t changed drastically over the past two decades, and while other economies would be, and indeed have been showing signs of serious economic malaise if faced with such grim statistics – Japan has been pulling through admirably, managing to maintain a bustling and healthy consumer market, and remain the world’s fourth largest economy in the process!
The reasons for this paradox range from mindset/mentality – the Japanese do not “take to the streets”, embark on bank rushes or feature any tendency for civil unrest – all the way to economic factors such as the self-contained nature of this debt, which is held internally in its vast majority, as opposed to other comparable debt structures. Domestic debt in a country which is still very much in “modern feudal” mode, means that the chances of any of the creditors attempting to make good on what the government owes them in case of default are much less of a risk than in other countries.
Additionally, the government can, in theory, continue to compensate with additional easing measures, as long as these are performed in a balanced fashion – read some of Paul Krugman and George Soros’ comments on this subject, both experts who can explain this theory far better than I ever will. In financial circles, the practice of betting on a collapse of Japan’s government bond market has been labelled “the widow maker” for the better part of the last two decades, and for good reason – many have lost massive fortunes doing just that.
This is not meant to make light of these problems, by any means – the solution is widely believed to lie in two complementing policy changes, both of which will assist in addressing both of these problems – one being a significant increase in immigration, which would inject a much needed youth factor and create Ziv Magen, Manager of Asia-Pacific, Nippon Tradings International (NTI), which specialises in assisting investors in capitalising on Japan’s vast and lucrative property market. an increase in the working population – and the other being the inclusion of women in the workforce – which could practically double Japan’s available GDP production capacity if tapped. And, while Japan’s current PM comes from a generally nationalistic, ethnocentric background, and therefore seems to be finding both of these issues difficult to tackle – his grasp of economic realities, I would personally hope, would force him to “see the light” in this respect, as he has on so many challenges facing the country, such as public fund management, dismantling of government subsidiaries and long-lasting, inefficient trade and import/ export monopolies, etc – only time will tell.
However, both these problems and their solutions are extremely longterm views, as will their effect on the economy and, subsequently, the property market. In the meanwhile, as the population decreases and smaller cities and townships conglomerate into bigger metropolitan centres, Japan’s big cities have been enjoying a rise in both population and property prices, and will most likely continue to do so for the next 10-15 years at the very least (I would actually not bank on the build-up to the Olympics as anything but a temporary boost, as research elsewhere in the world has shown any such events to have dubious effect on economies, if any).
In the short-term, however, and on a cash-flow basis, as discussed in this article and countless others, the most important factor to consider in this discussion, in my opinion, is this – Japan’s property market is, by and large, not a capital growth oriented endeavour, regardless of its performance over the last three years. If one is seeking speculation and growth-oriented strategies, there are far better places in the world to consider purchasing in (Australia, UK, Singapore and some of Asia’s emerging economies come to mind). Japan is, however, one of the top destinations in the developed world for rental yields in a stable, regulated and reliable environment – and will remain so for years to come. Add to that equation the fact that, aside from two or three cities, the vast majority of Japan’s metropolitan centres are completely untapped, from the Western investor’s viewpoint – and you will begin to see why we, and so many others, are happy to be investing here, regardless of what property prices, GDP and/or the government bond market will do.
Daniel Vovil, Executive Director, Swiss-Asia Financial Services, is an experienced investor with a global investment portfolio who also advises Australasian HNWIs and family offices.
Q :I am thinking of investing in a property in Australia with a Singapore bank loan to finance it since interest rates there are at record lows. What are the risks involved when embarking on this venture especially in view of the currency volatility worldwide?
DV : You are correct in highlighting the massive currency volatility we are seeing worldwide currently. I feel that most investors do not fully appreciate the risks of multicurrency loans and are simply blinded by the cheaper funding costs. To give an example, say you were looking at buying your property in Australia in AUD and you were using a SGD bank loan to fund. If we purchased this property 12 months ago, the AUD to SGD exchange rate was 1.17, meaning 1 Australian Dollar equals 1.17 Singapore dollars. However, over the past 12 months the SGD has appreciated against the AUD, by about 10%! So, if you were holding SGD debt against AUD asset, your debt has just gone up by 10% because your asset value and equity are no longer worth as much in SGD. And it is even worse if we look back on the currency movements over a 2-3 year period. Another consideration that many investors don’t realize is that should the currency go against you (i.e. the currency of the domicile of the asset depreciates against the currency of the domicile of the debt), then you may be subject to a margin call which means the bank will ask you to deliver more security in the form of cash to bring the loan back within the approved LVR. This could be devastating and result in the investor becoming a forced seller. The other consideration to note in cross currency loans is that the banks usually take much higher fees in the foreign exchange translation which is usually where they also get further revenue off you the customer in addition to the usual fees and charges, and the interest rate spread.
Of course there are potential gains if I can speculate that the currency moves in my favour, but I would prefer to sleep well at night knowing that my assets are matched by my liabilities in the same currency, and not take the risk.
Q : Referring to your answer to Question no. 1, what if the country where the asset is located does not offer property loans to foreigners?
DV :Usually if the country does not offer property loans to foreigners, they are also unlikely to have laws that allow property to be purchased by a foreigner without many restrictions. Complexity can also be increased by the fact that some of these countries may also require sophisticated structures or partnering with a local investor or property purchaser in order to gain ownership/rights over the land.
Alternatively, there are other ways one can fund a property purchase without domestic mortgage from a domestic bank. For example, one can use offshore lending through a private bank facility or drawing down a multicurrency loan against property in another country. One still needs to be careful, as you don’t want to over-leverage yourself if your security is in a different currency to the loan you are seeking. However if you took out a GBP loan against your Australian property to buy in the UK, your asset is somewhat hedged as you are using GBP loan for a GBP denominated asset. But In this instance you still have to be careful not to leverage too much against your Australian asset or else you may be subject to a margin call. Another option that I have helped high net worth clients with, is to take out a margin loan facility against a diversified portfolio of liquid securities in a portfolio. This is obviously a strategy for sophisticated investors.
Sam Helmy is a serial entrepreneur, property investment expert and speaker in Dubai, London and Kuala Lumpur.
Q :You are now basing yourself in Kuala Lumpur after years in Dubai and London. A few other savvy expatriates have done likewise. What are the secret attractions of KL that you have discovered that makes you set up base there compared to its more popular neighbours, Singapore and Bangkok?
SH : Objectively, living in Kuala Lumpur has great advantages over its neighbours. For starters, the standard of living for the same amount of money is much higher in KL than in Singapore, Hong Kong or Bangkok. An expatriate’s salary takes them much farther.
Rent, fuel and cars are at least two to three times costlier in Singapore than it is in KL, while the development level and infrastructure of Singapore are only just a tad ahead. Bangkok is slightly more expensive in terms of rental and prices of consumer goods.
Second, there is high potential for growth in KL. Both business and property opportunities are thriving. Expatriates recognise that and many who are coming are attracted by these opportunities.
Third, the country has created a smart programme called MM2H which allows affluent foreign expats to legally reside in Malaysia without having to work at a multinational here. They get to semi-retire in this tropical country while their personal wealth and income streams from abroad help maintain their lifestyle. I believe around 50,000 expats have successfully acquired residency through that programme, and it was beneficial to both Malaysia and those expats.
From a real estate perspective, KL has always been attractive to foreign buyers because prices are comparatively low for what would be considered a high-end lifestyle property. From an investment perspective, investors will get a good return on their money since rent yields are stable and capital appreciation has been consistently growing. The country’s housing price index did not have a single negative year since 2000; neither Hong Kong nor Singapore has that stability.
Aside from all that, when I came to KL in 2008, I came because I simply fell in love with it and felt it was a great place for me and my family to live. The weather, the nature, the friendly smiles and warm people – it was an easy decision.
For me, KL is a lot more than the sum of its economic parts, it just comes together beautifully to provide a happy place to be. Since I came to KL, I did not feel like “the grass may be greener” on any other side. It is as simple as that for me.
Andrew Bouhlas, the General Manager (Acquisitions & Development) in Psaros, has a wealth of experience across all property sectors.
Q : In light of recent developments in Australia e.g. a proposed AUD5K application fee for purchase of residential property by foreigners and the forcible sale of a Sydney mansion believed to belong to a Chinese businessman, as well as the recommendation of the parliamentary committee to make monitoring of foreign investment activity stricter, do you still think Australia is the top destination for foreign property buyers? Further, under Australia’s foreign investment policy, non-resident foreign nationals cannot buy established dwellings as homes or investments. Isn’t this too restrictive for the foreign purchaser who is not resident in Australia? Is there a way of getting around this restriction?
AB :The Melbourne and Sydney property markets have become overheated due to the high levels of demand. The introduction of the application fee is a mechanism to help cool down demand, however it is our understanding that this fee would more than likely be picked up by developers in some way. There is no actual way of getting around Australia’s foreign investment policy; in fact this has always been the case as governments would like foreign investment to help stimulate the economy which is done through creating or expanding the construction industry. I believe things are likely to get tougher in the future, hence making your investment decision now is definitely the right time. In fact, the current market conditions with regards to interest and exchange rates and the undervalued Perth market make Perth a great option [when considering the Australian market].
Agnes Wong, the Managing Partner of Syarikat Ong Group of Companies specialises in tax consultancy for corporate restructuring, business advisory and GST.
Q : I plan to buy a SOHO (Small Office Home Office) in Kuala Lumpur later this year but am worried about the GST implications, since I understand only residential properties are exempted. Does it mean that the purchase price is now 6% more expensive as well as all other incidental expenses such as solicitors’ fees and bank loan documentations will be subject to an additional 6%? What other documentations and charges will be affected e.g. assessments, quit rent, utilities, renovations?
AW: All non-residential properties sold will be charged a 6% GST after 1st April 2015. This include situations where you have purchased such a property before 1st April, but progress billings continue past that date. If you are buying a non-residential property using a non-GST registered entity, then the 6% GST paid by you cannot be claimed back and this additional outlay will then form part of your investment cost on the property. However if you have purchased the property using a GSTregistered entity, then the GST that you now pay on the purchase price can be treated as an input tax credit and form part of your GST calculation when doing your periodical GST submission.
Solicitors fees are currently under service tax, so the replacement of GST will not create additional cash outflow as far as solicitors fee is concerned. However, it is important to note that reimbursement charges by solicitors will now be subjected to GST, unlike under service tax where no service tax is rendered on reimbursement charges.
Example of reimbursement charges by a solicitor are miscellaneous expenses, cost of extra work, travelling or accommodation expenses, allowances for the time of the solicitor and his clerk and all usual and necessary attendances, and charges for normal copying and stationery. All charges and fees, excluding disbursements imposed for services provided will be subject to GST.
No GST will be imposed on disbursements. ‘Disbursements’ is defined as money which they have to pay to third parties in connection with the matter they are dealing with on behalf of the client. These may include court fees, fees for medical or other expert reports or search fees in a property transaction.
The loan facilities have been classified as GST-exempt while assessments and quit rent have been classified as supply that is Out Of the Scope of GST. Hence, no GST will be rendered. Electricity for domestic use has its first 300 units being classified as zero-rated with the balance being chargeable with 6%. However, electricity for commercial usage will have its total usage subjected to GST at 6%.
Renovation costs will depend on whether you are using a GSTregistered renovator or non-GST registered renovator. It is important to note that non-GST registered renovator may not necessarily be cheaper than GSTregistered renovator as renovation materials will be embedded with GST cost already. So as an investor, it is part of your homework to get more than one quote to compare before proceeding with the renovations.
Steven Craig is the Managing Director of JLL Korea, and he also heads the Capital Markets team.
Q: Is South Korean property a safe bet for foreign investors amid talk that its economy is headed for a prolonged slowdown similar to Japan?
While nothing is truly a ‘safe bet’, the policy on foreign real estate investment in Korea is very transparent and has really been a non-issue for investors. The certainty of government policy has been validated by the ongoing strong levels of foreign investment since the market opened back in the late 1990s. Foreigners have generally done very well in Korea, especially those who arrived early or were able to get their hands on core assets.
With improving fundamentals (a five-year long office supply cycle is now behind us), solid economic growth and uncannily stable rental growth, the story for investing in Korea remains as strong as ever. And it’s clear that foreign investors have received that message – last year they accounted for 40% of transaction volumes for the year and there are many more foreigners actively reviewing opportunities and committed to doing deals here over the next 12 months.
In regard to following Japan’s path, the government knows that it needs to think long-term to overcome the challenges of an ageing population and to change the fundamental structure of the economy to a more service-oriented developed economy as well as diversifying away from the handful of large conglomerates which dominate most sectors of the economy.
When you consider the incredible transformation that the country has undergone in the last 60 years, there is no reason to think that Korea won’t be successful in realigning its economy and avoiding its own ‘lost decades’. The great thing for Korea is that it has seen the mistakes that Japan made and is well aware of the danger of following a similar path.
While the days of 10% plus per annum growth that was common in the 1980s and even the 5% plus growth of the 2000s prior to the Great Financial Crisis (GFC) are unlikely to return, the economy keeps growing at 3.0-3.5% per annum. Nowadays, that isn’t bad when you look at the economic situation globally. It’s also a lot better than what Japan has been able to achieve even under ‘Abenomics’!