Finance in Singapore, buy in Oz

[Ralph]

Does anyone have experience with financing their Oz IP with an overseas loan? Bear with me, there is a question at the very end

I live and work in Singapore and probably will stay until mid 09. I earn in Euros and am paid in Sing dollars (x rate adjusted quarterly).

Rates here are in the order 0f 4-5% for Sing dollar loans to buy a property in Oz (through ANZ / NAB). Assuming my wage is exposed only to the Sing dollar, while there's a clear advantage in servicability due to the lower interest rate/cost, there is ofcourse the risk that the AUD weakens and if at some point I wish to convert the loan to AUD - I could end up paying more for the property (in the loan conversion) than originally planned.

As an example, since 1991 to end 06 the AUD has been worth an average of 1.10 Sing dollars with a low of 0.88 in 2001 and high of around 1.30 (and we're back in that region now). That's quite a big swing. If I bought a 1mln Aussie property it at the average rate it would cost me (converted at 1.10): 1.1mln Sing. If I converted the loan back to AUD at some point (host of possible reasons), or sold, to pay out the Sing loan it would either cost me 1.25 AUD (@0.88) or 850k (at 1.3).

Ave Aussie Cash rates same period have been: 5.9%, high 12, low 4.25
Ave Sing Cash rates same period have been: 1.9%, high 5.5, low 0!

While the interest savings take a while to accrue (5.9% of AUD 1mln vs 1.9% on Sing 1.1mln pa = ~ 40kpa saving in AUD), and are in fact somewhat diluted by tax effect (the savings increase net income but the ATO gets 1/2), if you had to convert the loan back for some reason, you could make a windfall or a quick and painful loss. By the way it's a double hit I think as when you go back to AUD financing you go onto the AUD interest rate!

On the face of it, a 40kpa interest saving is great, but the Xrate risk concerns me. I had a chat to ANZ in Sing and they had no view on any hedging.......

So, while I'm talking myself out if it, was wondering if anyone has any hedge/other strategies to protect the Xrate risk, but pocket the interest rate benefit?

Cheers,

 

[Spectre]

Ralph
think some time ago we had a nab deal where they lent the money out in JPY against aussie security...
but they did do a face to face with the client

dont know if you can acheive the same there... you need to speak to the guy in australia I think

 

[alexlee]

The lending isn't the problem. The problem is how you would hedge the exposure without giving away all your interest differential in hedging costs. You'd need to hedge the principal as well.
Alex

 

[Rolf Latham]

Hiya

Margin calls on property are pretty icky unless u have spare cash on the side.

Cant really sell off a bedroom

ta
rolf

 

[Yowster]

Hi Ralph,

I actually did exactly that 2.5 years ago when I bought 2 properties in Melbourne after arriving here end 2004. I borrowed against my properties in Singapore. Basically, it was a calculated risk. I worked out my worst case assumptions for interest rates and exchange rates to work out the feasbility of doing so. There isnt much you can do to hedge against the exchange rates and thats the risk that you have to determine for yourself whether to proceed or not. My view was that I was very bullish on the property market here back in 2005 and felt that I could quickly leverage to buy as many properties as I could. I was really nervous during the early part of 2006 when the AUD was losing ground against the SGD. It was actually approaching my worst case scenario.

But Fast forward today -- I have bought my own PPOR after doing a subdivison and selling it and just sold another for a 60% gain. Basically, taking advantage of the strong AUD against SGD to repay the loan in Singapore.

 

[Kennethkohsg]

But Fast forward today -- I have bought my own PPOR after doing a subdivison and selling it and just sold another for a 60% gain. Basically, taking advantage of the strong AUD against SGD to repay the loan in Singapore.

***********************
Dear Yowster,

Well-Done!

Congratulations!



Cheers,
Kenneth KOH

 

[Ralph]

Thanks all, I'll keep looking into and post if I find anything.

Cheers,

 

[asdf]

Why are you buying in Oz? Sing properties are going off!! Ride the SE Asian boom while it lasts.

 

[Ralph]

asdf,

Am giving it some thought, but entry level here (for an apartment I'd be comfortable on long term prospects) is in the order of 1-2mln. The government also just removed an incentive for foreign investors. Am looking into it though as it would be a perfect xrate hedge to a loan in Sing $ on an oz property.

 

[agent007]

Does anyone have experience with financing their Oz IP with an overseas loan? Bear with me, there is a question at the very end

I live and work in Singapore and probably will stay until mid 09. I earn in Euros and am paid in Sing dollars (x rate adjusted quarterly).

Rates here are in the order 0f 4-5% for Sing dollar loans to buy a property in Oz (through ANZ / NAB). Assuming my wage is exposed only to the Sing dollar, while there's a clear advantage in servicability due to the lower interest rate/cost, there is ofcourse the risk that the AUD weakens and if at some point I wish to convert the loan to AUD - I could end up paying more for the property (in the loan conversion) than originally planned.

As an example, since 1991 to end 06 the AUD has been worth an average of 1.10 Sing dollars with a low of 0.88 in 2001 and high of around 1.30 (and we're back in that region now). That's quite a big swing. If I bought a 1mln Aussie property it at the average rate it would cost me (converted at 1.10): 1.1mln Sing. If I converted the loan back to AUD at some point (host of possible reasons), or sold, to pay out the Sing loan it would either cost me 1.25 AUD (@0.88) or 850k (at 1.3).

Ave Aussie Cash rates same period have been: 5.9%, high 12, low 4.25
Ave Sing Cash rates same period have been: 1.9%, high 5.5, low 0!

While the interest savings take a while to accrue (5.9% of AUD 1mln vs 1.9% on Sing 1.1mln pa = ~ 40kpa saving in AUD), and are in fact somewhat diluted by tax effect (the savings increase net income but the ATO gets 1/2), if you had to convert the loan back for some reason, you could make a windfall or a quick and painful loss. By the way it's a double hit I think as when you go back to AUD financing you go onto the AUD interest rate!

On the face of it, a 40kpa interest saving is great, but the Xrate risk concerns me. I had a chat to ANZ in Sing and they had no view on any hedging.......

So, while I'm talking myself out if it, was wondering if anyone has any hedge/other strategies to protect the Xrate risk, but pocket the interest rate benefit?

Cheers,

Hi Ralph,

My 2 cents here:

I guess that another issue to consider is the LVR. My understanding is that a SIN loan for Oz IPs won't be higher than LVR 80%.

I don't really think that hedging is possible in this case however, taking in account the low SIN interest rates you could take it and closely monitor currency fluctuations and trends. If required, you could refinance and change it back to AU$. Any singnifican fluctuation won't happen over night.

When doing your scenarios, work with real figures instead of %. I bet that you won't lose to much money for the month or so that would take you to change loan back to AU$ if required. That potential lost would be much than offset by the previous gain. Make sure you can take care of the down side in any case.

All this is my opinion though, I have never done it

All the best,
James

 

[mortgageman]

Hi Ralph,

I think you will find that as foreign exchange risk is related to equity in property, the only hedging strategy that can be used in this case is the strategy that will be used by the banks - maximum LVR. If the currency your loan is in strengthens to the point that your LVR is higher than the max set out in the loan contract you will need to revert it to $A anyway, so probably the best hedging strategy is borrowing relatively close to the maximum LVR. Hope that helps.

Kind Regards,

Cameron Perry
Perry Financial Strategies

 

[asdf]

Buying in places like HK and Sing is crazy isn't it? You just think for what I am paying, I can get a massive block of dirt with a mansion for free and be only 30mins from CBD. Property in SE Asia can be as volatile as RIO in the last 2 weeks. I really don't understand how prices work over there but one thing is for sure, the brain drain to Asia continues from Aussies and Kiwis with no signs of slowing down. Rents are going through the roof in ex-pat villes over there, my mate had his rent increased 80% after a 2 year fixed lease. How good would it be to increase my measely $300 a week to $540 a week for my IP in just over 2 years? BTW, his place was snapped up on the 1st week of inspections. Can't compete really when a company pays your rent. he had to move a lot further out of town. Wish I was smart enough to have picked up a couple of condos in his block during the bird flu crisis. Should've seen the writing on the wall. Oh well, another lesson from the classroom.

 

[Ralph]

Thanks all for the comments, still getting my mind around it. One thought is to transfer my managed funds to Sing dollar basis, and take out Sing dollar loan for the same amount. Assuming performance of the fund similar/same as what I have in Oz, then barring a market crash I have the same capital invested in Sing $ as I have debt, and so am protected from currency fluctuations. Am now having a look into that as the interest saving is attractive.

On rents in Singapore, I estimate the place we rent to have gone up by about 50% since taking the lease one and a half years ago - not looking forward to the negotiation in July. The yield is still only in the order of 3-4% though given the property price increases. A place we have in Perth has gone fro $400pw to (we're still negotiating, but..) $600+ over the last year and a half also, similar yield. Only difference is that Singapore uses one more zero that we do!

cheers