The demand for Australian residential properties sees no signs of abating despite the record high prices. Nevertheless, prospective buyers should weigh the rewards against the risks.

SEEING the growing interest in foreign properties, Malaysia-based lenders have been offering investors overseas property financing schemes that are denominated in the ringgit. These schemes are offered in the local currency to protect investors from fluctuating foreign exchange rates, which could otherwise pose a risk to their loan repayments. For example, CIMB Bank Bhd offers a margin of finance of up to 70% for properties in Sydney and Melbourne, with a minimum loan of RM300,000. 

Investors will have to read the fine print in the agreements as these financing schemes differ from bank to bank. For example, Maybank’s Overseas Mortgage Loan Scheme is only limited to properties within a 15km radius of Melbourne’s CBD. Other banks are less specific about such information on their websites, however.

But this has not stopped Malaysians from buying Australian properties, S P Setia’s Melbourne-based CEO Choong Kai Wai says, adding that Malaysians have historically been “strong buyers” of Australian properties, particularly in Melbourne but also in Brisbane and Canberra.

While more buyers have emerged and the market has matured in the last five years, the number of Malaysian purchasers has not decreased, he says. However, the overall proportion of Malaysian buyers has taken a hit as demand from China and Indonesia has gone through the roof.

“A stable economy, historically low interest rates and attractive bank lending policies appeal to Malaysian buyers investing in Australian property,” he says.

It also helps that some of the Australian cities have been repeatedly named some of the world’s most liveable cities, with Melbourne topping the international index produced by the Economist Intelligence Unit for the fourth consecutive year in 2014. 

“The ranking has consistently attracted Malaysians to learn, live and invest in the city. Malaysian developers undertaking apartment projects in Melbourne return to Malaysia to market their projects so that Malaysian investors can capitalise on the attractive apartment market conditions,” Chong says.

“Tenant demand for quality CBD apartments continues to be met by a variety of tenants, including young professionals, students and young families, all of whom want to experience a city lifestyle.”

From his observation, most of the overseas purchasers, Malaysians included, are drawn to buying high-rise residential units while most Australians are keen on city homes located outside the city.

Being an early bird, Lee was offered a 3% discount for the unit he purchased off plan from a Malaysian developer. “The developer also provided the option of issuing a bank guarantee as payment of deposit, which is quite rare, but it displayed the strength of the developer's financial capabilities,” he adds. 

The bank guarantee also allowed the purchaser to hold the sum in an interest-earning fixed deposit account and keep the net interest proceeds upon settlement, Lee says. 

The going rent for a high-rise unit in the major cities is A$600 to A$650 a week. “To put it simply, if I took out an 80% loan-to-value ratio (LVR) for a 30-year tenure loan of around A$602,000, at 4.78% interest rate, I would be maintaining a weekly repayment of A$726 per week for a principal-plus-interest loan type. 

“This would generate a negatively geared type investment, with a holding cost of A$76 per week [A$726 - A$650 = A$76),” explains Lee, who expects to take out a home loan upon receiving the keys to his apartment unit in 2016.

According to Mortgage Choice, a home loan provider in Australia, LVR is the proportion of money one intends to borrow compared with the value of the property. 

“Alternatively, if I took on an interest-only mortgage, my repayments would be A$553 per week. Therefore, this would be a positively geared type of investment in today's rental market,” Lee says. Under this loan scheme, a borrower is only required to pay off the interest that arises from the principal that is borrowed. 

Another draw is the fact that every expense in relation to the property is tax deductible, says Alka. “Say I have rental income, but my income has to deduct all my expenses, including property management expenses.

“You will have an agent who will manage your property. Most people in Australia do. The agent will make sure the tenant looks after the property and collect the rent. You will have to pay the agent’s fees and council rates. 

“Another thing Australia allows you to do is claim for depreciation, which is a non-cash expense to the investor. So, that is a tax rebate for depreciation of the building and for everything inside the building. 

“The tax office has a comprehensive schedule of claims you can make for depreciation. So, the kitchen cabinets can depreciate, your oven or bathroom fittings can depreciate, the air conditioning system can depreciate ... you can claim for all of them.” 

The highest depreciation claims are usually made for brand new properties, she says. “For the [landed] building structure, one can claim for 40 years, and 2.5% every year.”

Alka says that while the Malaysian market allows for a lot of speculative activity, in Australia, there are no incentives for such moves as one can be liable for high capital gains tax. 

“People are not incentivised to speculate because capital gains tax will most definitely hit you. So, if the property is used for investment purposes, on average you can claim for depreciation — depending on the value of the property — between A$5,000 and A$8,000.”

The interest portions of the mortgage repayments are tax deductible as well, she adds. Minus the various deductions, there is normally very little income left that is taxable. 

The influx of foreign property purchases, however, has riled up the Australians, who say the soaring investments are artificially inflating house prices. The Australian government is currently reviewing a proposal to charge foreign nationals buying property worth less than A$1 million a A$5,000 application fee, payable to the country’s Foreign Investment Review Board.

To purchase residential investments of more than A$1 million, foreigners would have to fork out a A$10,000 fee for every additional million dollars in the purchase price. Those found to be in breach of the rules would be liable to a fine of up to 25% of the value of the investment and could be forced to sell the property.

The fee, however, is not expected to deter foreign buyers, says Dominic Heaton-Watson, Knight Frank’s senior manager of international project marketing, as buyers are expected to consider the “overall end price” and the sum, if ever imposed, will strengthen investor confidence.

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 4 - 10, 2015.

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