International residential hotspots for the global investor
Searching outside Singapore for better returns? Here are some options.
WITH the spectre of higher stamp duties looming large over investment decisions, property-mad Singaporean investors are finding it increasingly more expensive to put money in the city-state’s residential real estate. The strength of the Singapore dollar, coupled with higher interest rates as well as rental growth coming to a halt in the republic, are pushing more investors outbound in search of potentially better returns – or a well-appointed holiday home overseas.
Economic volatility is seemingly a given, and the risk of policy changes ever present. With shifting market dynamics swaying potential returns, it is crucial to stay informed about the factors that can impact investment decisions.
Navigating price volatility in overseas real estate
Inflation, which can rapidly ramp up cost of living, can be both an opportunity and a challenge for investors. The rising costs of construction and building materials inevitably drive up housing prices, resulting in a higher barrier of entry for investors looking to enter the real estate market. Yet, we are seeing the flight of money to hard assets such as real estate in this high inflationary environment.
This is because the rise in rents is able to catch up with, or even exceed, the growth in housing prices. Hence, the yields that investors get are still attractive, and this suggests strong capital value growth especially in countries like the United States and United Kingdom.
However, if housing prices escalate out of proportion and macroeconomic conditions such as employment and wage growth are not able to support such growth, there may be risks of a market correction. When that happens, it will be an opportune time for investors to enter the market.
In every recession, there will always be some countries entering recession earlier and potentially recovering earlier and faster than others. Diversifying your investment portfolio for properties across different countries can provide a hedge against country-specific risks.
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The effect of interest rates and currency moves
Interest rates play a pivotal role in the real estate market. The direction of interest rates can significantly affect property affordability, mortgage availability, and investor sentiment.
Countries that use interest rates as a monetary policy tool typically have mortgage rates that tend to react to government bond yields, which take guidance from central bank interest rates. Rising interest rates will effectively increase government bond yields and in turn lead to higher mortgage rates, as we have seen in UK and US mortgage and bond yields. This can hit demand for real estate in the short term if the cost of debt is too expensive to obtain.
Foreign exchange is another important determinant of overseas investors’ appetite for foreign investment. With the strengthening of the SGD against many currencies since 2020, it now costs less for Singaporeans to own overseas properties.
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Emerging overseas residential hotspots
While established real estate markets like the UK remain attractive, countries in Asia and Europe are increasingly gaining attention from savvy investors. Several countries stand out as promising destinations for overseas residential investment:
UK: London and Manchester draw foreigners because the former is a global financial hub, and the latter city is a gateway to northern England. Wealthy individuals have long been snapping up prime London properties as trophy assets. Furthermore, major suburbs in London have undergone regeneration and now provide attractive high yields with low vacancy rates. The potential of capital growth is enhanced by huge government spending to improve infrastructure, and major developers improving neighbourhood façades and amenities through master planning.
According to the Zoopla Rental Index, both London and Manchester are among the top local markets in terms of the rental growth over the last two years. Rental growth in London was 17.9 per cent year on year from July 2022 and 12.4 per cent year on year (yoy) from July 2023. In Manchester, rental growth from July 2022 was 15.1 per cent yoy and 13.1 per cent yoy from July 2023. The top hotspots currently for London are Brent Cross-Hendon-Acton, Greenwich Peninsula and The City of London. Investors interested in Manchester have been targeting the city centre within the ring road.
Portugal: Portugal, with its strategic location in Europe, offers easy access to other European markets. Additionally, the government has implemented various incentives and tax benefits to encourage investment in sectors such as renewable energy, tourism, real estate, and technology. Combined with the relatively affordable cost of living compared to the rest of Europe, Portugal is an appealing choice for both businesses and individuals.
Looking at the House Price Index published by the Instituto Nacional de Estatistica, the six-year average property price growth in Portugal is 12.9 per cent per year from Q1 2017 to Q1 2023.
The top investment hotspots are Lisbon, the capital city; Porto in the north, known for its rich history, stunning architecture, and picturesque landscapes; and Faro, a popular tourist destination beautiful beaches and warm climate. The Global Property Guide puts their yields at 5.67 per cent for Lisbon, 5.49 per cent for Porto, and 5.08 per cent for Faro.
Australia: Several factors make Australia an attractive investment destination: a strong economy, a stable political environment, and a mature legal system. This has allowed the country to experience consistent economic growth over the years, with its real estate market showing resilience even during global economic downturns.
Australia’s property market is well-regulated, ensuring transparency and protecting the rights of investors.
Strong demand for housing is a result of Australia’s growing population and high rate of urbanisation, with people moving to cities for better job opportunities and lifestyle. This trend drives demand for rental properties and increases potential for capital appreciation. CoreLogic’s data has shown how tight the rental market is, with the rental vacancy rate in Australian capital cities sitting at only 1.1 per cent.
The Residential Property Price Indexes chart from the Australian Bureau of Statistics plots a strong trajectory for top hotspot cities like Sydney and Melbourne. Over the last 10-year period from December 2011 to December 2021, property prices in Sydney grew by 12.2 per cent per year on average, and Melbourne grew by 8.57 per cent per year on average.
Other popular cities include Brisbane, Perth, and Adelaide. These cities have strong economies with well-known universities and high population growth that encourages a vibrant real estate market.
Japan: Under Abenomics, Japan has risen from a country of anaemic growth and deflation to an economy with a healthy level of inflation. This has benefited businesses and in turn, the real estate market. Average growth rates of real estate prices from 2014 to 2022 for Tokyo and Osaka ring in at about 5.3 per cent and 4.4 per cent respectively, according to OECD statistics. Both cities have been steadily gaining traction from the local as well as foreign investors. Though Japan’s growth rate is relatively lower than other major countries, cities such as Tokyo and Osaka present stable rental yields, due to urbanisation resulting in inter-city migration.
The confirmed first integrated resort slated to complete in 2029 in Osaka also shows the country’s commitment to increase domestic and international tourism.
Tokyo, being the capital city, offers a wide range of investment opportunities. It is a major financial, business and tourism hub, with a strong rental market with average yields of 4.16 per cent, according to the Global Property Guide, and high demand for properties.
Osaka is the second-largest city in Japan and known for its vibrant economy and thriving business sector. It has a strong rental market with low vacancy and average rental yield of 4.19 per cent, and offers a variety of investment options, including residential and commercial properties.
Sapporo is the largest city in Hokkaido, the northernmost island of Japan. It is a popular tourist destination, with opportunities including vacation rentals and commercial properties.
Ruben Koh and Adrian Lim are co-heads and senior directors of international residential sales at Savills Singapore
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