Understanding your overseas property investment

Overseas property investment
Collective investment scheme

Many investors are fond of investing in real estate. With the relatively expensive real estate in Hong Kong, some might seek investment opportunities in mainland China, Asia, and even further in Europe, the U.S., and Australia. There are certain risks and complexities involved when investing in overseas properties. In the event of any unexpected issue or dispute, you may not be able to receive the necessary protection that you have in Hong Kong.

Points to consider when investing in overseas property

Different rules and regulations apply to different places. You not only need to familiarise yourself with the local real estate market, but you must also understand the laws and regulations in respect of property sales and leases applicable to foreigners. Obtain an independent legal opinion if necessary and consider the following:

  • Exchange rate: movements in the exchange rate of the local currency against the Hong Kong dollar will affect the cost and return of your overseas property.
  • Tax: taxation systems vary from country to country. Familiarise yourself with the taxes involved in the sale and purchase of properties. Certain countries impose a capital gains tax on property investment and foreigners may also be charged property levies. Also local taxation policies may change from time to time.
  • Mortgage: if you need to take out a loan for the purchase, look for a bank that can give you a mortgage for overseas properties. Compare the loan-to-value ratios, interest rates, repayment periods, as well as the available currencies of the mortgages offered by different banks.
  • Estate planning: if your overseas properties will form part of your estate planning, you should also understand the relevant local laws and taxes.
  • Completed or uncompleted property: the property developer may offer additional incentives when you are buying an uncompleted property (pre-construction), but that also means higher risks. Since you may not be able to personally and regularly check on construction progress, buying an uncompleted overseas property may involve higher risks. In fact, media reports on overseas property failing to complete, or differing to a large extent from what was advertised before completion, are not rare.

Collective investment schemes

By nature, some investments in overseas properties are not simply buying and selling real estate only. Instead, they may be collective investment schemes (CIS), the sale of which to the Hong Kong public is subject to restrictions under the Securities and Futures Ordinance (SFO).

For the usual property investment, you should have day-to-day control over the management of the property after buying it. For example, you can decide whether you would like to lease out the property, who you would like to lease it to, and how much rent you would like to charge. However, if the property investment is a CIS, you will not have day-to-day control over the management of the property. Instead, there may be a centralised letting and management service to take control of the day-to-day management and leases of your and other investors’ property units. In addition, the rent you receive may not come from the unit you own, but may be pooled. Investments in hotels, serviced apartments, student dormitories and shopping complexes are more likely to be CIS as it is more likely that they need to be managed on behalf of investors.

In general, CIS must be sold by an intermediary licensed or registered with the SFC. CIS that are not authorised by the SFC can only be sold to professional investors or pursuant to one of the other exemptions under the SFO. You can refer to the article “What is a collective investment scheme?” for further information.

Be vigilant when investing in overseas properties

In principle, the power of Hong Kong regulatory bodies may not cover overseas transactions. The Estate Agents Ordinance, for example, only regulates property transactions handled by real estate agents within Hong Kong. Generally speaking, the sale and purchase of overseas properties are not subject to the regulation of the Estate Agents Ordinance. The SFC may also be subject to considerable regulatory limitations where a CIS involves overseas scheme operators and overseas properties. You should also be extra vigilant when you invest in overseas properties. In the unfortunate event that any issue or dispute occurs, regulatory bodies in Hong Kong may not be able to offer assistance.

Investments in overseas properties vis-à-vis CIS are subject to very limited protection and investors may suffer significant losses.

17 June 2016