Overseas Real Estate Fund
Rather than buying overseas properties directly, investors can also gain exposure through real estate funds, or Collective Investment Scheme (“CIS”). Financial institutions operating these funds must be investment managers authorized by the Hong Kong Securities and Futures Commission with proper asset management license.
Real Estate Collective Investment Scheme
Instead of buying overseas properties with independent property rights, investors can also invest overseas property funds, or some collective investment schemes (“CIS”) whose names in some cases do not contain “fund” for overseas property investment. Property funds appoint investment managers to make overall allocation and decision-making. Investors do not need to manage their investment on a daily basis. In Hong Kong, financial institutions that legally operate this type of CIS must be recognized by the Securities and Futures Commission (SFC) and hold an SFC license to be the asset manager.
Overseas property CIS are usually investment schemes designated for Professional Investors. There is a strict definition for “Professional Investor”. A Professional Investor must own an investment portfolio of not less than HKD $8 million or equivalent.
Wealth accumulation through property investment is very common in Hong Kong society. In recent years, buying properties overseas is getting popular. On the one hand, overseas investments can meet family needs such as immigration and children’s education. On the other hand, property prices in Hong Kong are too expensive, therefore investors should seek more reasonable investment returns elsewhere.
Real estate is a hyper-localized investment. It requires investors to have local knowledge. To avoid “information asymmetry”, reliable investment analysis is absolutely critical before acquiring a property.
The headache for landlord is vacancy of the property. Even worse than vacancy is rent arrears, when tenants are not paying rent deliberately.
There are only two ways: Either you manage it yourself, or hand it over to a professional realtor to manage it.
Buying a property for living vs. buying a property for investment are completely different matters. When you buy a property for investment, you are not just buying the flat, you are buying a business that has to be run properly.
A property fund portfolio has a larger amount of capital, allowing investors to enjoy scale benefits.
Compared to individual owners who rely on overseas realtors, fund investors are care-free in terms of marketing and operating expenses.
Real Estate Fund Advantage
1. Hassle-free investment management,
2. Controllable risk,
3. Higher and more stable income.
Buying a property for investment is never an easy decision. Not to mention if the property is far away overseas.
The risk of “buying a house across the mountain” is self-evident, and it is also quite tedious to manage. We believe investors have faced the following frustration:
1. Unfamiliar with overseas market.
2. Difficult to transact and manage.
3. Fall victim to dubious property investments.
Fund investment is hassle-free for the following reasons:
1. Low investment threshold.
2. Professional research support.
3. Collective financing.
4. Easy to transact.
5. Onsite professional property leasing and maintenance.
Fund investing in overseas real estate can mitigate various risks:
1. Leasing risk: At the time of acquisition, each multifamily apartment property is already hosting hundreds of tenants, with occupancy rate well around 95%. Individual tenants moving in-and-out has limited impact on the overall rental income of investors.
2. Tenancy risk: Due to the large number of existing tenants, the credit risk of individual renters is dispersed, despite occasional rent arrears.
Fund investing in overseas real estate can yield more stable returns for investors:
1. Managers can actively increase property value through value-added strategies.
2. Eliminate unnecessary expenses such as agency commissions.
3. Optimized tax structure suitable for international investors, effectively reducing the effective tax rate. Investors do not need to worry about tax declaration and other statutory issues.
Professional Real Estate Investment Strategies
Fund managers’ decision to acquire residential property projects is substantiated by institutional resources and service support that retail investors cannot match against. Due diligence is not just investment research, but also relies on a great deal of acumen and experience.
While fund managers have knowledge on overseas markets, they are supported by a reliable investment team to conduct local due diligence.
Before an investment decision is made, it is crucial to evaluate the property and the neighborhood.
At the property level, the manager analyzes historical and current performance by obtaining documents relating to financial performance, operations, marketing materials and plans, occupancy levels and demographics, staffing, and budgets. An extensive physical inspection of the property is undertaken to determine current condition and identify either deferred maintenance issues or areas requiring capital improvements.
From a neighborhood perspective, the local and regional area demographics, including census and industry data are evaluated. Comparables for competing properties are drawn from public documents and site visits for occupancy, property valuations, mystery shopping rates charged and amenities/services offered.
Multifamily apartment properties invested by a fund are large in scale, usually with more than 200 units. On acquisition, the occupancy rate is usually about 95%, close to full rent. The relocation of individual tenants has limited impact on the overall rental income of investors. Real estate funds can smooth rental income profile and mitigate the risk of unstable income due to vacant properties.
Prior to acquisition, the fund manager conducts a lease audit on the property. The audit shows financial background of tenants in the entire multifamily apartment, including their income profile and credit score. The fund manager can fairly assess the potential credit risk the tenancy.
During the operation, the property management company has sufficient legal means to forcibly evict defaulting tenants.