Pitfalls of Buying Off-Plan Overseas

Buying Off-Plan Property is a well established practice in Hong Kong. Buyers enjoy a discount, staged payments, and more choices to choose from. This popularity is built on the foundation of regulations that protects the buyers, results of painful experience of yesteryears. With the current surge of outbound investments, especially in residential markets that are familiar to many, investors should examine these opportunities when buying Off-Plan. 

Many assume that the Common Law countries would provide the same level of protection as does Hong Kong, being a former British colony. However, selling Off-Plan Properties was not a common practice, and such sales are much less regulated than in Hong Kong. There is no shortage of examples where overseas buyers lose money on these deals due to lack of oversight. These issues may range from delays in completion, over budget, building quality, developer solvency issues, or even outright cheating investors. Oftentimes, the process of planning permissions and other government approvals may take much longer than in Hong Kong.

Taxation and law differences are often overlooked by oversea investors. Unlike Hong Kong, many countries do not experience a high rate of value appreciation in real estate, and have policies to keep the residential market from overheating via fees and tax, wiping out the bulk of the investment return. In addition, mortgages may be easily obtained, especially for foreign investors. Local law may have material impact on the investment as well. In Australia, when the S&P agreement is signed, the buyer is on the hook to complete, and there is no simply forfeiting the deposit like in Hong Kong. 

When investing overseas, many have the same assumptions from their hometown. In Hong Kong, apartment flats near public transportation are desirable and can fetch a premium. The opposite is true in Japanese suburbs. In Western countries, houses are preferred over apartments located in busy districts. Buyers may find it difficult to exit their investment if they were equipped with wrong assumptions.

Overseas investors may still enjoy the benefits associated with pre sales, or buying Off-Plan. However, one must fully understand the local market, laws, fees involved, and proper due diligence on the developers. 

 

Bloomberg: Hong Kong’s Rich Are Preparing for a Worst-Case Scenario

https://www.bloomberg.com/news/articles/2020-06-13/hong-kong-s-rich-are-preparing-for-a-worst-case-scenario

While many predict Hong Kong’s real estate will experience increased pressure under the unresolved Covid-19 situation and National Security Laws, one must understand the Hong Kong real estate market is quite unique. While other mega metropolitan cities do provide relatively flush liquidity, their property markets have very different characteristics. Unlike Hong Kong, the bulk of the value of a development lies in the structure rather than the land, prices are driven by yield rather than speculations, and a host of fees and taxes that keeps prices certain sectors in check. London’s residential market, for example, is yielding multiples of that of Hong Kong’s while on the surface. However, landlord’s rental returns are quickly eroded by government fees and tax, and additional penalties for overseas landlord. While it is shrewd to have diversification, one should acquire comprehensive and holistic understanding of a foreign market before allocating one’s asset into it.