[Practical Finance] Overseas Real Estate with 'Attractive Rental Income'... "Be as Cautious as You Are Interested in Investing"

New York City, USA / Photo by Getty Images Bank

[Asia Economy Reporter Noh Kyung-jo] As the domestic real estate market freezes, more investors are turning their eyes overseas. Some earn rental income later from homes purchased for their children's schooling, while others directly invest after judging that there are practical benefits when considering market prices, loan interest rates, taxes, and rents.

In particular, Japan is emerging as an attractive investment destination due to the depreciation of the yen and relatively low loan interest rates. However, since most countries continue to raise interest rates, caution is required regarding variables such as decreased transaction volumes in overseas real estate markets.

Low Regulations and Stable Demand... Interest in U.S., Europe, and Japan Real Estate

Individual interest in overseas real estate markets is not a recent phenomenon. According to data obtained from the National Tax Service by Jin Sun-mi, a member of the National Assembly's Planning and Finance Committee from the Democratic Party of Korea, the number and amount of overseas real estate acquisitions by domestic residents in the first half of this year were 1,136 cases and 330 million dollars, respectively. Among these, acquisitions for investment purposes numbered 850 cases, about three times more than those for residential purposes (286 cases), which is similar to previous years.

Last year, the number of overseas real estate acquisitions was 2,455 cases, amounting to 600 million dollars. Individuals accounted for about 98%, with 2,404 cases (580 million dollars) acquired. By purpose, more than 7 out of 10 cases were for investment. Specifically, there were 1,871 investment cases (350 million dollars) and 584 residential cases (250 million dollars), showing about a threefold difference.

The increase in overseas real estate investment scale is analyzed to be largely due to the abolition of remittance limits for acquisitions three years ago. Although acquisition amount restrictions were fully abolished in 2008, the remittance limit for down payments (200,000 dollars) remained, causing inconvenience. Accordingly, the government removed this limit in 2019. However, the ratio limit (10% of acquisition amount) to prevent tax evasion and asset flight continues to be applied.

Preferred countries for investment are the U.S., Europe, and Japan. These countries have relatively fewer regulations and stable demand, especially in major cities. Despite the weak yen situation, some investors prefer London in the UK or Frankfurt in Germany over Tokyo, but industry insiders say Japan is definitely attracting attention.

So-called "big players," such as institutions, moved first. The Nihon Keizai (Nikkei) newspaper reported in August that Hong Kong investment firm Gao Capital Partners plans to invest about 500 billion yen (approximately 4.9 trillion won) in the real estate market over the next two years. Singapore's sovereign wealth fund, the Government of Singapore Investment Corporation (GIC), and the U.S. Teachers Insurance and Annuity Association (TIAA) have also entered the Japanese real estate market.

This contrasts with the declining foreign buying trend in Korean real estate. Last month, 101 foreigners purchased real estate in Seoul, the lowest since 97 in September 2013. Although the number had steadily remained in the mid-100s this year, it gradually decreased from 154 in July, 133 in August, to 101 in September.

Concerns Over Global Economic Recession Call for Attention to Changing Conditions

However, amid international economic trends characterized by inflation and high interest rates, overseas real estate investment cannot be viewed optimistically. While Japan is showing exceptional phenomena, the U.S., Europe, and others are concerned about stagflation (economic stagnation plus inflation), similar to Korea. Moreover, in Japan, public opinion is spreading that "the central bank, the Bank of Japan, needs to reconsider its (low interest rate) policy."

An official from real estate consulting firm Genstar Mate said, "In a survey conducted at the end of June this year targeting investors and asset managers, 33% expressed intentions to expand overseas real estate investment, much higher than the 6% domestically, but this may have changed now. Since then, several base rate hikes have been implemented in the U.S. and Korea, and as further hikes are likely, individuals should pay attention to changing conditions."

According to an economic trend report published this month by the National Assembly Budget Office (NABO), the U.S. has seen a sharp rise in mortgage interest rates due to consecutive base rate hikes, and housing transaction volumes are decreasing. As of last month, the 30-year fixed mortgage rate in the U.S. was 6.11%, nearly 3 percentage points higher than 3.64% in January. Also, the volume of existing home sales, which account for 90% of U.S. housing transactions, decreased from 6.49 million units in January to 4.8 million units in August.

In Australia, the base interest rate rose from 0.1% in April this year to 2.6% currently. The problem is that inflation is expected to exceed the central bank's target (2%), so further rate hikes are likely to continue for the time being. The report expressed concern, stating, "Australia's household debt is large, and the proportion of variable-rate loans is high, making it vulnerable to high interest rates." As of 2020, Australian household debt reached 203% of disposable income, and 85-90% of total loans are variable-rate. Most fixed-rate loans are also set to expire in the second half of 2023.

The report said, "Concerns about housing price adjustments and declines are growing in most countries," and added, "Preparations are needed for interest repayment burdens due to rate hikes and shocks to the real market caused by price declines."