Can foreign investors be solely blamed for rising property prices?
As property has become a valuable investment asset, many investors have been looking further afield than home turf when purchasing property. Thailand is no different. Many foreign investors seek property in the Kingdom as a second home or to generate a healthy rental yield. However foreigners are not freely allowed to buy any property. They can own a leasehold property but they cannot own land.
These are the restrictions that Thailand opposes on overseas investors in order to control to control their purchasing power. In recent years many more cities across the globe have enforced similar regulations. Mainly in a bid to help cool markets. Since the global financial crisis in 2008 property markets in some 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 Thai investors purchasing property due to the lower price tags on offer. With discounts up to as much as 20 percent due to the exchange rate.
However often foreign investors aren’t welcomed with open arms. They are often blamed for rising property prices whilst simultaneously pushing out locals. Hence many governments have introduced measures to deter foreign investors.
A recent study, ‘Assessing the impact of foreign ownership on residential markets’, by JLL has delved further into the issue. The real estate firm can reveal that there are four reasons that foreigners purchase property outside of their home country.
1. Own use.
The United Nation’s Migration Report 2015 revealed that 3.3 percent of the world’s population live in a country that is not their own. This figure is rising and is expected to continue to increase due to lowering costs for air travel and technological advances.
2. Children’s education.
Between 2015 and 2016 nearly one-fifth of all university students in the UK were international students. In Singapore at the National University Singapore and Nanvang Technological Technology this figure is higher at 30 percent. Many parents purchase property for their children’s use whilst studying overseas and is a common theme for Thais purchasing property overseas.
3. Buy-to-let investment.
Property in Thailand generates a healthy rental yield. This is attractive to foreign investors however in many global cities such as London, rental yields are low due to high property prices. Therefore this is less likely to be a motive for overseas investors going forward.
4. Wealth preservation and diversification.
Cities such as London, Singapore and Hong Kong are considered safe havens. A good place to park your money. They are politically sound that ensue investor confidence. Typically they also receive significant capital appreciation. For example before the market softened in Singapore, prices increased by as much as 70 percent.
But how many foreign investors are there in some of the leading global cities?
- Sydney: foreigners are only permitted to purchase new projects and are estimated to make up to 15 to 25 percent of purchases in 2016.
- London: different studies reveal varying figures. One suggests less than 20 percent, the other 13 percent.
- 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.
- Hong Kong: foreign buyers make up four to five percent of total residential transactions.
Findings
From the research JLL were able to draw on a few conclusions to help understand the role foreign investors play on local markets.
1. Foreign investors do not increase vacancy rates.
Despite popular belief many foreign investors do not leave their properties empty. 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.
2. Rising rents and affordability cannot be blamed on foreign investors.
Using Hong Kong as an example, rents can be considered as unaffordable making up 43 percent of household incomes. But the number of foreign purchasers here is not that high. Rather JLL state that rent affordability can be blamed for a lack of affordable housing and wealth distribution management. Housing policies should consider these in order to tackle affordability.
3. Foreign purchasers contribute to eroding price affordability.
The role foreigners do play in local housing markets is pushing up sale prices. This can be seen in London, Hong Kong, Sydney and Melbourne, where there the supply and demand is out of kilter and is further influenced by foreign purchasers.
Overall conclusion
From the research gathered, JLL believe that the key driver behind affordability is not foreign investment but a chronic lack of supply. This is nowhere more apparent than in London and Hong Kong. Both of these markets face of shortage where one house is built for 5.4 and 4.5 additional persons.
However many developers need foreign investors to inject money into the projects as many are willing to purchase property through pre-sales. This helps reduce their risk. So there is a need for foreign investors and interestingly they help to increase supply to the rental market. So some could argue that without this housing stock would be even less.
Despite many governments introducing measures to dampen foreign investors through higher transactions taxes, JLL believe that these are inefficient. They suggest that owners who leave their property vacant should be taxed instead. A concept that has recently been introduced in Australia. This alongside allowing owners to use platforms such as Airbnb will help keep occupancy rates high.
