Foreign investors and local markets

Foreign investors are often blamed for rising property prices but are they really to blame? 

Malaysia has welcomed foreign investment with the scheme Malaysia My Second Home. It has generated significant revenue stream for the country. Buying property overseas is not a new concept. Many do so for a variety of reasons but for some countries foreign investors are not welcome. This is exactly why JLL have looked further into the issue with their recent research report, ‘Assessing the impact of foreign ownership on residential markets’.

The real estate firm argues that since the 2008 global financial crisis some property markets in global cities have taken an upbeat turn. Low interest rates, high liquidity and more overseas investors have been cited as reasons for this. Even more recently in the UK, the devaluing of the sterling has resulted in many Asian investors purchasing property here due to favourable exchange rates.

But how many foreigners are there?
  1. Sydney: foreigners are only permitted to purchase new projects and are estimated to make up to 15 to 25 percent of purchases in 2016.
  2. London: different studies reveal varying figures. One suggests less than 20 percent, the other 13 percent.
  3. Singapore: foreigners consist of between six and seven percent of sales volume in the private residential market, which makes up 25 percent of total residential stock and 30 of yearly residential transactions in Singapore.
  4. Hong Kong: foreign buyers make up four to five percent of total residential transactions.

In JLL’s study they revealed why people are interested in investing in property overseas.

1. For offspring’s overseas education.

In Singapore at the National University Singapore and Nanvang Technological Technology international students make up 30 percent of attendees. Plus international students in the UK make up to 20 percent of the student population.

1. Owner occupiers.

The United Nation’s Migration Report 2015 revealed that 3.3 percent of the world’s population live in a foreign country. A figure that continues to rise due to lowering costs for air travel and technological advances.

3. Generate a rental yield.

Buy-to-let investments are popular as they generate a healthy rental yield. However this may a less likely investment asset as some global cities such as London no longer enjoy a sizable rental yield due to high property prices. Therefore this may become less of a reason for overseas investors in the future.

4. Wealth diversification and preservation.

Cities such as Singapore, London and Hong Kong are considered safe havens. A good place to park your money. They are politically sound that ensue investor confidence. Traditionally they also receive significant capital appreciation, e.g. before the market softened in Singapore, prices increased by as much as 70 percent.

Report findings

JLL were able to draw on a number of themes throughout the study as follows:

1. High vacancy rate are not a result of foreign investors.

85 percent of Asian owners in London plan to let their property out. Many want to generate an additional income from their property so the vacancy rate is down to supply and demand rather than the number of foreign investors. So contrary to popular belief many foreign investors do not leave property empty.

2. Overseas investors do not increase rents.

In Hong Kong rents make up 43 percent of household incomes. But the number of foreign purchasers here is not that high. JLL believe that rent affordability is due to a lack of affordable housing and wealth distribution management.

3. Foreign purchasers do erode price affordability.

What foreign investors do is push up prices. This can be seen in London, Hong Kong, Sydney and Melbourne, where there the supply and demand mechanism is not balanced and is pushed even more out of kilter by foreigners placing even more demand on the market.

Final conclusion

So can we blame foreign investors for contributing rising property prices? JLL blame a lack of supply rather than foreigners for this. They use London and Hong Kong as good examples as both markets face of shortage where one house is built for 5.4 and 4.5 additional persons exacerbating the situation.

Interestingly foreign investors are needed. Not only do they increase the supply to rental markets but they help fund projects through pre-sales. Essential according to developers in reducing their risk.

However JLL do state that many cooling measures such as higher taxes enforced on foreign investors are inefficient. Rather they believe an empty property tax should be levied instead to help alleviate vacancy rates. Plus governments should allow owners to use platforms such as Airbnb will help keep occupancy rates high.