As a general rule, don’t buy overseas real estate through the exhibitions that you see in KL. All of the properties are overpriced at least AUD30k to AUD40k from local prices. Case in point, a family friend bought two units of apartments in St Kilda Road, Melbourne. Now he wants to sell them. He told the agent his target price is the price that he bought from the developer.
The agent told him the maximum price he can sell at is about AUD10k cheaper than the purchase price he paid for. He bought the apartments through exhibitions in KL. For example, he bought the apartment at AUD500k, now the agent told him maximum market price can sell for AUD490k. That means most likely you won’t sell for AUD490k.
Rental guaranteed scheme – You have to know that the real outcome is
Most of these apartments are mainly service apartments or student accommodation. Yes, the rental returns maybe high – something like 7 to 8% per annum (gross). But the problem with this type of real estate is that there is almost 100% no capital appreciation. And the risk of price you sell next time will most probably lower than the price you have paid for.
The resell market is very small. You will find out, if you buy student accommodation, the tenants can only be students. Even you can’t live in it. There is a lot of limitations on who can live in the place. As for service apartments, some are only for investment where the owners are not allowed live in them as well. But there are some where owners are allowed to live in. You must find out from the developer – very important.
Tax implication
Foreign investors only buy new real estate. They are not allowed to buy second hand real estate. And out of the rental you receive from your investment property, 30% will be taxed. This is the tax rate for foreign investors. All foreigners have an income tax rate of 30%. Check with the Foreign Investment Review Board before you make any investment decision.
A general overview of the real estate market in Australia
The primary reason now the real estate in Australia is ‘hot’ is because of capital is flowing in from overseas, especially from the Chinese buyers. Another reason is the low interest rate in Australia. Now the central bank cash rate is 2.5% – lowest since the 1950s. But that can change within the next few years.
My forecast
Short term, I think the economy will have another downturn from 2016 to 2020. Much like from 2007 to 2011 that we went through. And I think this time China will be hit hard. The credit bubble in China is about to burst and real estate prices have started going down in China. If this gets bad and hits the economy big time, all emerging markets, including Australia will be badly affected. Note: Australia’s biggest export market is China.
Over the long term, I think China will still continue to grow after 2020 moving forward. So my outlook for Australia is that the 2016 – 2020 period will be when it experiences a the lowest point of it downturn. But over the longer term from 2020 moving forward, Australia may be doing well again. This is because China will continue to grow after that and will go on to become the largest economy in the 21st Century. That is forecasted by some experts to happen by mid 21st century.
Conclusion
End of the day, it depends on what your plan is. But if you can wait out another five years, things would be more settled by then. If you are buying now, you are paying overvalued prices and will be competing with cash-rich investors from China who just want to get out of the country now. I think these Chinese investors are anticipating a crash from 2016 – 2020.
Even Li Ka Shing sold a majority of its real estate investment in China (which is overvalued now) and move to UK to buy utilities companies (which are undervalued now). So what he is doing now is the classic strategy of Buy Low Sell High. A lot of people know that, but cannot do that. If you buy Australian properties now, you are buying on the high side. The risk of it going down is much greater than the reward of it going up.
But if you have a very long term outlook like twenty years and beyond and also your primary reason of investment is the cash flow rather than the capital appreciation, then it’s a different thing.
Summary
In short, be very careful about the properties market in exhibitions or seminars held by Australian developers at five star hotels in Penang, Kuala Lumpur or Singapore. Not advisable to buy rental-guaranteed schemes. They are more like a Ponzi scheme. And if you want to invest in real estate in Australia now, you must understand that it is in the overvalued stage. Also, you can always fly in to check out the properties here yourself. Shop like a local. Talk to as many developers and agents as you want here in Australia.
This article is contributed by Michael Soong in response to his Malaysian readers. He moved to Melbourne since 2004. He currently teaches diploma courses in one of the largest business colleges in Australia. He holds a Bachelor of Finance from Swinburne University of Technology, Hawthorn Campus in Melbourne. – by Michael Soong (co-author of Migrating to Australia Good Meh??? and Making It in Australia: Stories from different walks of life) in response to his Malaysian readers. Michael Soong can be contacted via his email; michaelsoong66@hotmail.com or visit his blog.
