While most of us think that there is nothing more stable in international investment than U.S. Real Estate, let’s put the disparities in perspective by focusing on the three gorillas in this space.
I would like to focus on three key differences for investing in New York City real estate when compared to cities such as Hong Kong and London. By looking at transfer taxes, type of ownership, and currency risk, we begin to see discrepancies. In addition, it is important to consider that New York City, London and Hong Kong all have slightly different legal systems and transaction processes.
- Transfer taxes
It is very important to be aware of the transfer taxes and other costs of doing business in each market. In London, the transfer taxes for properties are especially high. For example, they can exceed 17% for properties over £1,500,000. Additionally, in Hong Kong, there is 15% transfer taxes for properties plus an additional 15% for foreigners. Hong Kong is one of the worst markets for foreigners to invest in due to the high foreign transfer tax surcharge. Alternatively, New York City has quite low transfer taxes compared to London and Hong Kong.
- Type of ownership
Always be aware if you are purchasing fee simple (full ownership) interest or just the leasehold (property only not land) interest. There are many differences when it comes to these two types of ownership. For a leasehold interest in a property, you must pay a fee every year, even if it is a minimal amount, to lease the land from the leaseholder. In London, some of the leaseholders are private individuals along with the government.In Hong Kong, on the other hand, all of the land is leased from the government, and the leases all expire in 2047. This leads to a big risk of purchasing in Hong Kong because there is a possibility, albeit small, that the government will not renew the leases. A majority of the residential property in New York City is owned in a fee simple structure, rather than in leasehold interest.
- Currency risk
Purchasing real estate internationally can expose you to significant currency risk. Owning an asset that is denominated in foreign currency exposes you to fluctuations in the local currency. For example, if you purchase real estate in Hong Kong, you will have large exposure to HKG dollar. This is in contrast to the USD, which is considered the most stable currency in the world by many. To mitigate risk when buying internationally you should look to markets with very stable currencies.A knowledgeable lawyer is important to have to help execute your transaction efficiently and will assist in navigating the markets due to the differences outlined above. An experienced lawyer will ensure that all of your documents are filed properly. Additionally, a lawyer is responsible in drafting and reviewing contracts from an international perspective, keeping in mind immigration, tax and estate issues. This is not where a person would ever look to save money. Having done this job for 25 years, oh the war stories I can tell of local attorneys that have never dealt with an international buyer.
When navigating different international markets, you should try to use expert brokers in the respective markets to help you find a suitable property. Well-connected brokers are experts who have access to off-market properties and have expert insight into the true value of the properties. Additionally, the leading brokers often have special connections to top lawyers, tax professionals and other service professionals with experience assisting international clientele.
It is crucial to make sure you are buying property from a reputable seller, especially if it is a new construction. If you buy a project built by a questionable developer, you run the risk of not only losing money, but also putting additional funds to fix their mistakes. There is the possibility of subpar construction and other problems, such as delayed delivery of the project. In addition, the developer may not deliver a product that is equivalent to what was promised at the time of purchase. A top broker can help guide you toward projects, which are built by quality developers in the respective city, and an experienced attorney should catch most of the other due diligence items that are connected to the seller.
As society becomes more globalized, high-net-worth families are expanding their international real estate portfolios. In addition, with political instability in many developing nations, many of these families are expanding their international holdings by buying real estate in London, Hong Kong, and NYC. Investing in real estate in these markets is much safer than keeping their investments in their home country.
Real estate investments in New York City, London, and Hong Kong all have benefits and drawbacks. When investing across the globe, the most important differences to keep in mind are transfer taxes and other closing costs, type of ownership, and currency risk. Based on these differences, New York City is likely to be the most stable investment out of the three cities. The lower transfer taxes, stricter building regulations, and higher prevalence of fee simple ownership are all crucial aspects of the New York City market, which bolster the value of the city’s real estate and point to a resurging market.
Written by Edward Alexander Mermelstein.
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