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by Investors Offshore Editorial Team, November 2011, 18 November, 2011
While many international investors choose to invest directly in their own homes (first, second or third, as the case may be!), one very interesting way of putting surplus funds into real estate is through a REIT.
In an increasing number of countries, real estate funds often take advantage of REIT status (stands for Real Estate Investment Trust). Typically, a REIT is a fund, publicly listed or not, which holds real estate assets, and is tax-transparent (pass-through) as long as it distributes 90% of its gains and profits to its shareholders. Countries with REIT legislation in place include the USA, the UK, Hong Kong, Malaysia, Singapore, Japan, Germany, Australia, and the Netherlands.
Publicly-traded REIT stocks are nothing if not volatile: in the four years to 2006 international REIT indices rose by more than 150%, only to fall back, as you would expect, by 50% in 2007 and 2008. Of course they rose again in 2009, by a resounding 40%, and returns have been healthy so far in 2011, although volatility in the latter half of the year has taken the shine off of this performance somewhat; as of October 27, 2011, the MSCI US REIT Index was 8.95% higher than it was on January 1, having risen 27% over three years. That doesn't mean that an individual REIT fund would behave in the same way; like any other stock it will reflect local conditions and its own particular investment goals. But as a general proposition one can say that REITs are a good proxy for the real estate market as a whole.
The US real estate investment trust (REIT) industry significantly outperformed the broader equity market in the first nine months of 2011, in spite of losing ground to the S&P 500 in the third quarter, according to NAREIT, the National Association of Real Estate Investment Trusts.
NAREIT reported the total return of the FTSE NAREIT All REITs Index, the broadest US REIT Index, was down 6.14%, and the FTSE NAREIT All Equity REITs Index was down 6.05% in the first nine months of the year, ended September 30. By comparison, the S&P 500 was down 8.68% in the same period.
Substantial REIT dividends accounted for much of the total return advantage over the S&P 500 in the first three quarters of 2011. The FTSE NAREIT All REITs Index’s cash dividend yield at September 30 was 5.23% compared to 2.13% for the S&P 500.
In the third quarter, the total return of the FTSE NAREIT All REITs Index was down 14.62% and the FTSE NAREIT All Equity REITs Index was down 15.07%, while the S&P 500 was down 13.87%. On a 12-month basis ended September 30, the FTSE NAREIT All REITs Index delivered a total return of 1.06% and the FTSE NAREIT All Equity REITs delivered 0.93% compared with 1.14% for the S&P 500.
Top performing sectors of the REIT market in the first nine months of the year were Manufactured Homes, up 12.55%; Self-Storage, up 10.42%; and
Apartments, up 1.84%. The same sectors led the REIT market on a 12-month trailing basis ended September 30, with Manufactured Homes up 18.35%; Self-Storage up 16.69% and Apartments up 12.73%.
Individuals can invest in REITs either by buying their shares, if they are publicly-listed, or by making direct investments into fund units. Dividends or returns paid to share- or unit-holders are untaxed in the REIT, and are taxable (or not, according to where you invest from) in the hands of the investor. There may be 'exit' or 'withholding' taxes on foreign distributions in certain countries - it is always wise to check first!
A REIT usually has to fulfil various other conditions besides the distribution rule. In the US, for instance, where REITs have been established for many years, a REIT must:
REITs In The UK
As you would expect, UK REITs followed the real estate sector into a severe downturn in 2008 and 2009, but recovered in 2010.
In the UK, property companies have created a new internet portal and supporting publicity campaign, called Reita, as an impartial source of expert information on quoted property investment, REITs and the funds that will invest in them.
Members of the REITs and Quoted Property Group, the organisation behind the Reita campaign, include eight of the biggest quoted property companies – some of which have announced that they intend to convert into REITs and others that are likely to maintain their current structure – nine of the leading fund managers, the London Stock Exchange, ten merchant banks and advisers, the British Property Federation and the Investment Property Forum.
Historically, most investment in quoted property companies has been institutional. The UK's REITs regime, by exempting eligible quoted property companies from corporation tax, ended the double taxation of the sector, making it attractive to a whole new world of investors who want to hold tax efficient indirect property investments in their portfolios. In addition to REITs, there are quoted property companies and other vehicles for indirect investment that private investors could consider.
The British Property Federation (BPF) is a founder member of The REITs and Quoted Property Group and played a key role in its establishment and in the creation of the Reita campaign. BPF Chief Executive, Liz Peace, commented:
“The long awaited arrival of UK REITs on New Year’s Day 2007 marks an important and exciting milestone in property investment in Britain. It opens up a host of opportunities for property companies, financial services providers, financial advisers and investors to significantly increase the level of investment in the commercial property sector. But while there is a clear appetite for property among private investors, there is little unbiased information publicly available on REITs and quoted property. We wanted to create something to fill this gap and we are confident that reita.org will be widely welcomed and used.”
Patrick Sumner, Chairman of The REITs and Quoted Property Group added:
“We are delighted to have received such tremendous support for the group, which now has the backing of so many senior organisations right across the industry. Our portal will be the UK’s first non-partisan resource for information on REITs and property investment, providing a definitive reference point, covering all the key issues and addressing any questions which the visitor has, whether they are a professional adviser, stockbroker or even a private investor."
“Our aim is to really add value to professional advisers’ business and ensure that reita.org can provide a one-stop resource for comprehensive, non-partisan and regularly updated information."
“The subject matter may appear complex to some, but our aim is to expand and educate a wider audience to the benefits of property investment. With such a great team behind us, we are extremely well placed to do this.”
Although most UK REITs list on the LSE, some have opted for the Channel Islands Stock Exchange (CISX), which already listed more than 40 offshore property funds before REITs were introduced in 2007.
Following an informal consultation on proposed changes to the UK's Real Estate Investment Trust (REIT) regime in 2011, the government has agreed that the levy payable by companies which convert into REITS should be scrapped.
The consultation, which concluded in June, focused on changes originally outlined in the 2011 Budget. 53 written responses were received from a wide range of interested parties including REITs, house builders, fund managers and property investment companies. The Treasury also conducted around 20 meetings with a range of stakeholders.
According to the Treasury, all respondents to the consultation fully supported a proposal to scrap the 2% conversion charge payable on the market value of all the qualifying assets held at the year end (less qualifying assets held at the beginning of the accounting period). The Treasury has therefore agreed that this charge will be abolished.
As explained above, one of the main advantage of REITs is that they pay out most of their income in the form of dividends but do not pay income tax. However, the conversion charge has been seen by many as a barrier to the expansion of the REITs sector.
The government has also agreed that listing requirements should be relaxed to allow REITS to list on non-regulated stock exchanges. The consultation highlighted that this would lead to increased accessibility to markets for start ups and smaller companies by making it possible to raise small amounts of capital at a cheaper cost. In addition, the government believes this would mean less onerous rules relating to trading history, and lighter governance and reporting requirements which means that ongoing running costs are also reduced.
REITs In Dubai
The Dubai Financial Services Authority (DFSA) announced in August, 2006, that rules to permit the operation of real estate investment trusts (REITS) within the Dubai International Financial Centre (DIFC) were introduced with effect from 6th August 2006.
The rules followed the approval on 1st August 2006 of the Investment Trust Law, DIFC Law No. 5 of 2006 by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE, and Ruler of Dubai.
Commenting upon the new rules, DFSA Chief Executive David Knott noted that:
“In many of the world’s major capital markets REITS have become the most favoured method for attracting public ownership in property investments. They provide a convenient form for listed and tradable property ownership with transparent pricing and liquidity."
He continued: "The REITS industry attracts widespread investor support in countries including United States of America, Australia, Canada and Hong Kong.
"Under these Rules it will be possible to issue REITS for the first time in this region, utilizing the facilities of the DIFX. It will add a significant new dimension to the UAE’s property market.”
However, the collapse in the Dubai real estate sector that took place in 2008 put paid to early hopes for Dubai REITs, whether regular or Islamic, and it was only in 2010 that prospects began to open up again.
In November 2010, a joint venture was announced that led to the creation of Dubai's first REIT in January 2011. Based in the DIFC, the Shariah Emirates REIT is governed by the Dubai Financial Services Authority and invests exclusively in high-quality, income-producing commercial and residential properties. Emirates REIT professionally manages the assets in order to maximise revenue and increase the overall value of the company.
A key feature of Emirates REIT is that at least 80% of the company’s net income must be returned to shareholders annually in the form of dividends.
The REIT was jointly developed by DIB, one of the UAE’s largest financial institutions, and Eiffel Management, a pioneer of REITs in France.
Abdulla Al Hamli, CEO, Dubai Islamic Bank, and Chairman, Emirates REIT Management, said: “Dubai Islamic Bank is proud to support Emirates REIT, which will have a positive impact not only for the real estate sector but also the UAE’s overall economic environment. Emirates REIT will be run to the highest international standards and highlights Dubai Islamic Bank’s long-standing tradition of excellence and innovation in Islamic finance.”
Sylvain Vieujot, CEO, Eiffel Management, and Vice Chairman, Emirates REIT, said: “Dubai’s first REIT is being launched at a time of improving confidence in the Emirate’s real estate market. As the Middle East economy recovers from the global economic slowdown, international investors, and those in the region, are looking for long-term, low-risk and secure investments in the Middle East. Emirates REIT can offer all of these advantages.”
The Dubai Financial Services Authority (DFSA) is considering allowing private property funds located in the Dubai International Financial Centre (DIFC), to convert into REITs. "We have had a number of debates with firms and legal representatives who are thinking of starting as private property funds and then metamorphosing into a REIT. But to achieve that we will have to consider certain waivers from our rules, which we might then consider," Simon Gray, Director Supervision, DFSA, told Emirates Business. No REITs have yet been listed on Nasdaq Dubai, but Gray believes it is just a matter of time. "Islamic Reits have done well in Malaysia and we see a tremendous potential for those here," Gray added.
“Emirates REIT is a move by Dubai Islamic Bank to help fuel growth in the UAE's real estate market by allowing investors to pool income-producing real estate assets under a common management and receive tradable shares in the REIT” said Dr. Adnan Chilwan, Chief of Retail & Business Banking, DIB and Board Member, Emirates REIT. “The new REIT looks to attract Shariah-compliant properties such as commercial and residential buildings, warehouses, schools, hospitals and car parks and convert its rental income into dividends for investors” added Dr. Chilwan.
There are REIT markets in seven Asian countries, including Japan, Singapore and Hong Kong, with significant and high quality real estate portfolios. Asian REITs offer attractive investment features including liquidity and high yields, as well as unique features such as Islamic REITs in Malaysia and including investment-grade real estate from China and India, which currently do not have REIT markets.
The Asian REIT market has recovered strongly from the global financial crisis, with strong recent added-value performance, particularly in comparison to their respective stock markets and the lesser performance of the mature REIT markets in the US and UK.
REITs in Asia now account for USD100 billion in market cap, representing 12% of the global REIT market. The market has recovered well since the peak of the financial crisis when it stood at USD66 billion in March 2009, according to the Asia Pacific Real Estate Association (APREA), which promotes and represents the real estate sector on a regional basis.
APREA, in its May 2011 Asian REITs report, said that the upturn is due partly to the recovery in Singapore where the market cap increased from USD7.8 billion in March 2009 to USD31.8 billion over this period, an increase of 307.7%. It is also due to new listings, including the recently listed Mapletree Commercial Trust in Singapore and Hui Xian REIT in Hong Kong, the 15th largest REIT in the region.
Peter Mitchell, CEO of APREA, noted: "With announced acquisitions and other rumoured IPOs in Japan, Singapore and Malaysia, the continued strong growth in the overall size of the Asian REIT market looks set to continue.”
“In addition”, he said, “in the space of less than 10 years Asian REITs have become a significant product in the global real estate universe and the market is now significantly larger than the Australian REIT market”.
Looking at the Asia Pacific REIT market overall, including Australia, the A-REIT (45.5%), J-REIT (24.5%) and S-REIT (17.3%) markets account for 87.3% of the market on a capitalization basis, which at USD187.9 billion was still 8.3% below the peak attained in October 2007, due to a continued lag in Australia. In addition to Singapore, strong growth was seen in Japan and Hong Kong. From March 2009 to April 29, 2011, the market cap of Hong Kong REITS increased by 156.4% and J-REITs by 96.3%.
Japan and Singapore together account for 75.3% of the Asia ex-Australia REIT market, by market cap. With Hong Kong, they account for 90.9%. According to the report, the 20 largest REITs (by market capitalization) in the region continue to be dominated by Australia (9), Japan (4) and Singapore (4).
On a year-on-year basis, the Japan and Hong Kong REIT markets continued to outperform their respective local general equity indices. J-REITs outperformed general equities by a significant 21.1%, followed by Hong Kong REITs at 15.2%. The 20 best performing Asian REITs (by 12-month total return) comprise eight J-REITs, six Hong Kong REITs, one S-REIT, two Taiwan REITs and three Thailand REITs. By contrast, the worst performing Asian REITs (by 12-month total return), all with negative returns, include eight Thailand REITs, five J-REITs, four S-REITs and one Korean REIT.
Japan REITs continue to make up the majority of the worst performing Asian REITs, by 3-year total return. Over a longer period (of three years), stocks from some of the smaller markets have outperformed with REITs from Malaysia (5), Thailand (3) and one Taiwan REIT featuring in the top 20, alongside Japan, Singapore and Hong Kong.
In April 2011, Hong Kong’s Securities and Futures Commission (SFC) published an investor education article explaining key features and risks related to latest REIT products, particularly to those denominated and trading in renminbi (RMB).
The article, entitled “Understanding the latest REITs in Hong Kong” highlights, among other issues, important risks and features of REITs investing in real estate located in mainland China. As for REITs traded and settled in RMB, investors, it says, should also take into account the additional risk factors associated with RMB fluctuation and convertibility.
In Hong Kong, a REIT, a collective investment scheme in a portfolio of income-generating real estate, may borrow up to 45% of its gross asset value and has to distribute at least 90% of its after tax net income in the form of dividends. Investors are urged to study offering documents and consult, where appropriate, professional advisers before making any investment decision in relation to REITs.
Currently, for example, the article points out that, while foreign interests in property located in mainland China are generally held via a joint venture with a finite term, the value of the REIT's investment in such real estate will decrease over time and there will be no residual value at the end of the term. Therefore, any suggestion that any single interest in real estate held to the end of the term would still provide value, because of the expectation that the real estate would appreciate in value over time, may be unsupportable.
In addition, the dividend income of a foreign corporate investor received from an entity established in mainland China is subject to 10% withholding tax on the Mainland. Depending on the availability of any tax treaty between the foreign corporate investor's jurisdiction and mainland China, such withholding tax may be subject to a preferential treatment where the taxation rate may be reduced.
In any event, it is said, such taxation charge could reduce the profit available for distribution of a REIT holding real estate in mainland China. The offering document of a REIT should be checked to understand the impact of the withholding tax, and, furthermore, it should be remembered that the tax rate and policy are also subject to change.
The units of an RMB REIT are denominated, traded and settled on the Stock Exchange of Hong Kong in RMB. In general, distributions from an RMB REIT will be made in RMB rather than HKD, and non RMB-based investors will be maintaining a currency conversion risk.
It was also stressed that an investment in an RMB REIT should not be used to bet on the appreciation of the RMB. In addition, as the RMB is not freely convertible and is subject to foreign exchange controls and restrictions, the liquidity and trading price of the units of an RMB REIT may be adversely affected given the limited availability of RMB outside of China.
The Philippines has also been trying to introduce a REITS regime, and in July 2011, the Bureau of Internal Revenue (BIR) issued its much-delayed revenue regulation governing the tax incentives to be granted to REITs in the Philippines.
The Finance Secretary, Cesar V. Purisima, had said, earlier in the month, that he had signed off on the REITS regulations, which had been delayed by his stipulation that the government would not be able to consider their approval unless it was agreed to increase the minimum percentage listing on the stock exchange.
When the law to introduce REITs was enacted in 2009, investors were able to take shares in a REIT, established as a company with a minimum share capital of PHP300m (USD7.1m), which would have, at all times after listing, a public float of at least 33% of its outstanding shares. However, it has now been agreed that, to continue to receive tax incentives, a REIT will be required to maintain a 40% minimum public float on the stock exchange for the first two years from its initial listing, rising to at least 67% by the end of the third year.
It has been confirmed that the new vehicles will be subject to a 30% company income tax rate on their net taxable income, but only after the distribution of a minimum 90% dividend to their shareholders, subject to a stipulation that, for its first two tax years, each REIT will have to place in escrow the corporate income tax that would have been payable on the amounts declared and paid as dividends, in case the minimum 67% listing threshold is not attained thereafter.
The funds will be released from escrow only after a REIT has shown proof that it has attained the 67% listing threshold by the end of its third tax year, or the money will be forfeited to the BIR.
In addition, all property transferred to the REIT will be subject to a favourable documentary stamp tax (DST) of 0.75%, while transfers of shares in property companies will pay a DST of only 0.375%. However, income tax, capital gains tax, and value added tax (VAT), will be payable on the transfer of properties to a REIT.
It has been reported that several companies have made plans previously to float REITs on the Philippines Stock Exchange, but, now that the published tax benefits are less favourable than had been expected, particularly on the minimum float and payment of VAT, it will remain to be seen how many plans actually reach fruition.
A Basic Guide To International Property Investment
If you are in the right place at the right time, investing in real estate can be one of the most profitable and enjoyable forms of medium to long term investment there is. Depending on your circumstances, international real estate investment may prove preferable, for a number of reasons, despite the additional challenges it can sometimes pose. Diversifying your investment portfolio by buying property in several different countries, for example, can help to cushion you against downturns in any one particular market. Even if you cannot afford to do this, you may find that you will be able to snap up an incomparable bargain in an up-and-coming country which would never have been available in your country of residence. (Unless you happen to have the good fortune to be resident in a newly popular emerging market country, of course!)
Now, if you decide that international property investment is for you, there are several different ways of going about it. Those with neither the time nor the inclination to become landlords, or who simply want to diversify a top-heavy portfolio, might choose to invest indirectly, using one of the many real estate related funds available. Ground rent funds, for example, are proving increasingly popular with investors, and offer a relatively low risk and secure investment with the possibility of high returns. As with all mutual fund investments, there are specific advantages and disadvantages, but if you are interested in the growth possibilities in this market and would prefer a less 'hands on' approach, then this may be for you.
On the other hand, you may not even have an investment portfolio - you may just be looking for somewhere nice and sunny to retire to. Or you may be an expat looking to supplement your income. Or you might have been relocated by your employer, and need somewhere to live. Or… well, the list goes on. There could be any number of circumstances, both personal and financial, driving you to consider investing in property overseas. In this part of the article we will deal with the issues raised by international property investment, and the possible taxation implications raised by such purchases.
International mortgages - Do I need one?
One of the primary considerations, when purchasing property either domestically, or on an international level, is raising the necessary amount of money. Unless you happen to have enough ready cash just lying around (down the back of the sofa, for instance…), chances are you will need to take out a mortgage. There are several options:
1) Taking out a mortgage with a local bank. You may, however, find yourself constrained by exchange control rules (where they still exist). Even in jurisdictions where exchange controls have been lifted, such as Spain, you may find that domestic banks and building societies will charge non-resident foreign nationals higher rates of interest.
2) Taking out a mortgage or loan from a bank or building society in your country of origin.
3) Taking out the mortgage offered by the developer. Sometimes, with new complexes, developers will offer their own mortgages in order to increase sales
4) Taking out a mortgage with an international institution. Even if you are confident in your understanding of the processes involved in purchasing property in your country of choice, this is probably the most sensible option, for the simple reason there are likely to be issues involved in dealing with an expatriate client which a local provider may not have the expertise to cope with.
There are a growing number of international mortgage brokers and relocation specialists offering international products tailored to meet the needs of expatriate property investors, and although it is possible to go it alone, you may find that enlisting the services of a professional company experienced in dealing with international markets eases a purchase considerably, as they are likely to be well versed in the processes and legislation applicable to non-resident purchasers, and can often mediate between yourself and the local entities involved.
What sort of mortgage?
There are several different sorts of mortgages available, so you should really shop around to make sure that the international mortgage broker or IFA you choose to handle your affairs offers a wide range of products, from a varied group of international providers. Below is a basic rundown of the different types of mortgage available, although not necessarily all for your country of choice, so you need to check:
1) Repayment mortgages. With this type of mortgage, you pay a little of the interest and a little of the capital off each month, so that at the end of the term, the debt has been repaid completely, and the property is yours. Although in the early years, very little of the capital is repaid, as the amount of capital owed decreases, so does the amount of interest which accrues, so towards the end of the term there is a kind of 'snowballing effect' in terms of the amount of capital which can be paid off at a time. This is generally considered the safest bet in terms of mortgage loans, although it is usually more expensive than an interest only mortgage.
2) Interest only mortgages. With one of these, your payments to the lender simply pay off the interest on the loan, and the capital is paid off at the end of the term. Monthly payments are (obviously) lower than they would be for a repayment mortgage, and the idea is that you put the money you save on repayments each month into an investment fund, so that by the time the term ends, you will have accumulated enough to pay off the mortgage. Or that's the theory. If your investments do well, you could be in a position to repay the mortgage early, or have some money left over at the end of the term. However, in order for that to happen, your investment fund needs to bring you returns which are higher than the interest you are paying on your mortgage, otherwise there will be a shortfall at the end of the term.
3) Endowment mortgages. These used to be used quite a lot in conjunction with interest only mortgages. They are designed to guarantee that if you die before the end of the term, the mortgage will be repaid, and to provide a means of paying off the capital owed at the end of the term. However, there is no guarantee that an endowment will repay the loan in full at the end of the term, and as with many pensions and life assurance products, there are high 'front-end' costs. Where there is preferential tax treatment for life assurance premiums they may still be of some use, but as the majority of expatriates are excluded from the benefits of domestic pensions investment, they are rarely suitable.
Usually, international mortgage providers will offer both repayment and interest only mortgages at fixed, variable, capped and sometimes discounted interest rates, all of which are fairly self explanatory, and have specific benefits and disadvantages.
International home-owning - The logistics…
Several of the problems you may encounter if you decide to purchase property in a country other than that in which you are resident are likely to be logistical. Okay, so you can afford to take time off to find a property in your country of choice, and maybe even visit a few times a year, but that is likely to be all. This is where designated international organisations come into their own.
For example, in Spain, the completion of a mortgage must take place in front of an appointed notary, and all parties to the purchase including the vendor, lawyers, the buyer, and a representative of the lender. However, if you are unable to be there due to previous commitments (or simply geography!) an international broker should be able to help you obtain a power of attorney, allowing someone else to sign on your behalf.
Renting your property out when you are constantly on the move can be a bit of a headache, but hiring a letting agent qualified in dealing with international clients could take the pressure off. They can help you find suitable tenants, prepare a letting agreement, take the security deposit, deal with utilities bills, collect the rent (the important bit!), visit the property on a regular basis, check empty properties, and undertake property maintenance during a tenancy.
Ignoring taxation (which we will deal with in more detail later), and quite apart from the cost of the mortgage itself, there are other expenses to bear in mind when arranging a mortgage for your investment property, and these vary considerably from country to country. For example, in France, the fee level can be affected by the age of the property (as newer properties attract lower charges), the number of people involved, and how many outside agencies (e.g. estate agents, lawyers, brokers, letting agencies) are involved.
If buying a property in France, (over and above the broker or IFA's fee) you should be prepared to pay:
As previously stated, costs will vary depending on the location of your property. As you can see the issue of additional expenses needs to be taken into account when deciding whether international property investment is for you- although the returns can sometimes be spectacular, it ain't cheap!
The tax implications of international property investment
Capital acquisitions tax, capital gains tax, inheritance tax, gift tax, property transfer tax, VAT, stamp duty, tax on rental income, share transfer tax, land tax…no, wait a minute. Come back…sit down and take deep breaths - I didn't mean to frighten you. And see above for a description of REITs, which 'pass through' their profits untaxed to individual investors, although in certain countries there may be 'exit' or 'withholding' taxes even for REIT income.
Although the majority of countries impose some kind of taxation on international property investment by foreign nationals, it would be a rare (and unpopular!) country which levied all of the above. The tax implications of your foreign real estate investment will vary in complexity and impact according to where it is located, and to a certain extent, what you intend to do with the property when you have purchased it. As a general rule, in the majority of countries if the tax authorities believe that the purchase was made as a 'commercial' investment (i.e. if you habitually buy, renovate, and sell on, or if you have bought undeveloped land with a view to building a housing complex or leisure facility), they will view you as a property dealer, and tax your investment accordingly at a higher rate.
Where taxes are levied on international property investment, they will usually fall into the following categories:
1) Taxes on the purchase, acquisition or transfer of the property or land, such as capital acquisitions tax, inheritance tax, stamp duty and property transfer tax.
2) Taxes on the ownership of and/or residence in the property, such as local and national property taxes, and land tax.
3) Taxes on rental income. (If you choose not to live in the property, be aware that there may be additional taxes imposed on non-resident or foreign landlords. Not necessarily devastating, but still a factor to be considered if buying to let overseas.)
4) Taxes on disposal of the property, such as capital gains tax, gift taxes, and death duties
As previously stated, property taxation regimes vary widely from country to country, and you may feel that low, or no-tax jurisdictions are the ideal choice for you. However, in some (although not all), due to limited resources and space, property investment opportunities are limited only to the very wealthy, who must be willing to contribute substantially to the local economy, and purchase luxury real estate. Other jurisdictions limit the number of foreign nationals permitted residence or work permits in order to maintain the standards of living, and protect the employment chances of existing residents.
Governments in non-tax haven countries tend to impose fewer restrictions on property purchase for investment or residential purposes by foreign nationals. However, in such countries, the likelihood is that you will face more taxes on your investment. Some property investors choose to purchase international property via an offshore company or trust in order to bypass some of the taxes levied in high tax countries, and although this can be a valid option, it is not suitable in all circumstances.
Although double tax treaties are of more interest to corporate and commercial international property investors, they can sometimes have an effect on the amount of taxation that an individual's real estate investment income is subject to, especially if they are resident in a country which taxes world-wide income, or are planning to purchase property in a country which does this. Certain double tax treaties may enable you to claim tax paid on rental income from overseas against your domestic income taxes, or to receive dividends at a lower rate of withholding tax. However, the number of different tax treaty models, and the sheer volume of treaties in force on a global level make it impossible to give a comprehensive picture of the likely consequences of a double tax treaty in any given circumstances. We would therefore strongly recommend that you take advice as to the potential implications from a qualified professional before making a decision as to the location of your investment property.
Where you decide to purchase property is, in the final analysis, a personal choice, and will need to be based on your circumstances, resources, and eventual goals. If you have your heart set on retiring to a beachfront house in the Bahamas, you are unlikely to be satisfied with a one-bedroom apartment in Cyprus. If, however, you are looking to subsidise your income by providing affordable housing to expatriates and other professionals, the latter would be ideal. It all depends…
Although tax shouldn't necessarily be the most important consideration when choosing a property, there is no denying that it's certainly up there at the top of the list for most people.
So - Is it worth it?
The answer to this question will depend on your personal circumstances, what you hope to achieve by investing, and how much you can afford to spend. There is a vast spectrum of opportunities available within the property investment field, ranging from the ridiculously expensive to the nicely affordable, and with the help of an international broker or IFA, you should be able to find something suited to your tastes and pocket.
Investing in a 'real' asset, as opposed to an intangible one can sometimes provide more stability, and over the long term property has tended to hold its value better than some other commodities. However, as the last few years have shown only too forcibly, you do need to be aware that the overall liquidity and health of the property markets, and possible fluctuations in interest rates and inflation can affect the value of a real estate investment. If we say on the one hand that it is generally possible to achieve a very healthy return on a real-estate investment, on the other hand we also need to paraphrase that old realtor's saw: 'location, location, location' by saying that for a real estate buyer 'timing, timing, timing' is everything.