THE property bug is starting to bite and Singaporeans are itching to renew their love affair with real estate. For those who purchased any type of residential property a year ago, congratulations. From all accounts, private property prices in popular areas rose by 20 per cent or more in 2009 alone. Of course, only those who actually sold their property in the latter part of last year may have realised the short-term capital gains.
The situation today is much different from that in January 2009. Many investors in Singapore are in the process of deciding whether to take the plunge as the economic recovery story unfolds in 2010. If we exclude those who are in the market for public housing or others who are contemplating trading up their primary residence, we are left with serious investors and speculators. But before you traipse along to the next property launch, consider some alternative forms of exposure to property.
Direct shares
A good place to start is to share in the fortunes of a listed property company. Singapore and Hong Kong stock markets are anchored by successful blue-chip property players. Some are plain developers of residential and commercial real estate. Other listed companies own and manage real estate in Singapore and internationally. To illustrate how listed companies differ in their strategies, let's examine two of the leading property groups based in Singapore. (These are not stock recommendations)
CapitaLand, which owes its heritage to DBS Land and Pidemco Land, is a favourite with institutional and retail investors. With the financial backing of Temasek, CapitaLand represents exposure to a variety of businesses including owning shopping malls and office buildings, especially in China. The much-publicised initial public offering of CapitaMalls Asia in 2009 allows investors to have a stake in a more focused aspect of property investing in China's flourishing retail and office buildings.
Contrast CapitaLand with City Development, a respected property developer with significant ownership by the Kwek family. CityDev owns or manages hotels mainly in Europe, UK, New Zealand and Singapore under the Millennium & Copthorne brand, in addition to being a leading developer of residential properties in Singapore. As a component of the Straits Times Index like CapitaLand, CityDev has demonstrated steady earnings over the years without being too aggressive in its business strategy. Hypothetically, an investor in direct shares would be able to identify a few solid firms that collectively offer diversification and coverage of the various market sectors such as retail, office, residential, industrial and hotel operations both in the region and around the world. Exposure to property via direct shares does bring with it the added thrills and spills of investing in the stock market whereas direct ownership of bricks and mortar is an experience that is unique to a particular location or city.
Reits
Real estate investment trusts (Reits) have come a long way in Singapore since the 2002 IPO of CapitaMall Trust. In general, Reits minimise corporate level tax as long as they distribute substantially all of their taxable income to unit-holders in the form of dividends. This makes Reits a high-dividend yield play relative to other asset classes.
Investors who are seeking regular income as an investment objective should consider these securitised real estate vehicles. Currently, Reits may be adversely affected by the lack of capital access and investor perception of financial markets rather than operating fundamentals. Nevertheless, low yields in broader debt markets may be an indicator of higher real estate valuation in the future. Reits presently trading at a premium to net asset value may be reflecting the improved earnings potential of the underlying properties.
Property unit trusts
For investors who are seeking long-term capital gain and regular income distribution from quoted securities of property companies, unit trusts investing in the real estate sector are the third option. These unit trusts may also invest in Reits, physical real estate and in debt securities of real estate companies. In the local retail market, these products are global property funds with little concentration in Asia. Local investors will need to combine globally diversified property unit trusts with shares and Reits listed in Singapore to achieve the outcome of country bias as part of the individual's liquid investment portfolio. Global property funds have returned about 40 per cent in 2009 but the two-year average cumulative return was around -19 per cent as measured by the UBS Global Investors Index in USD. (For context, the STI was -20 per cent, CapitaLand -30 per cent and CityDev -20 per cent over the last two years). The sub-prime mess and the ensuing credit crisis resulted in the poor near-term performance of global property funds. If the global economic recovery is sustainable in the near term, one possible conclusion is that beaten down properties in the developed economies are likely to appreciate in value in tandem with equities. For a moderate-risk long-term investor, about 10-15 per cent of the total liquid investment portfolio must surely include property unit trusts, Reits and direct shares.
Singapore residential property
Bricks and mortar investing includes local and overseas residential, commercial and retail properties. For local readers, the fourth way of investing in property will focus on owning private residential property in Singapore. When people talk about property investing, this is the default option. The fact that resale HDB apartments today are changing hands at prices above 1996 is definitely a red flag for potential buyers of private residential properties across the island. No doubt the government imposed cooling measures in 2009 but the demand for new low and mid-priced private property this year will further attract the attention of policymakers if the trend continues.
So why do Singaporeans chase after private property when the market is hot? Ego, overconfidence and sheer greed are the usual suspects. There is little regard for reasonable pricing when citizens and foreigners participate in a feeding frenzy in a compact market. If the aim is to make a tidy sum in a matter of months, this is a dangerous game to play. Holding power must be assured for at least five years in the event the market tanks by 20 per cent or more in a scenario of bland economic recovery in the months ahead.
The accompanying chart is a subjective assessment of each method of property investing based on five criteria. The aim is to decide intuitively if there is a case for bricks and mortar real estate to be in the top two preferred approaches. Unless you have a million dollars in the bank, the typical property buyer will have to carry a mortgage. Debt is a horrible thing when the leveraged asset's value takes a dive. Also, if interest rates creep up, the rental income may not be adequate to service the debt repayment. Finally, there is the small matter of finding tenants in a limited market and managing the property as landlord. Here is a tip to set a benchmark for you on whether the planned investment in bricks and mortar will be worth the risk and trouble. If you are confident that you can earn two or three times your combined annual income from the capital gain (on a cash-flow basis, not the difference between buying and selling prices) within five years of owning the investment property, then you have done well. If the idea is to acquire an asset as a hedge against inflation with a passive income stream, then don't expect double-digit total returns (capital gain and net rental income) in the long term. Most investors underestimate the risk and overstate the returns from real estate. In conclusion, we can agree that real estate is an essential ingredient to a portfolio's asset allocation.
The historical low correlation of property with equities and bonds will come in handy as part of risk management. Investing in bricks and mortar requires excellent timing and sensible valuation both to buy and sell. The lack of liquidity is a serious handicap for investors who may need to raise cash. There is no denying that the realisation of a windfall from the appreciation of bricks and mortar gives owners an emotional high. For peace of mind, however, do consider the merits of alternate exposure to property over and above the home you live in.
The writer is Foundation Adviser at ipac Singapore. The opinions expressed are personal and do not represent the corporate policy or opinion of ipac financial planning Singapore private limited. Before making an investment decision, you should speak to a financial adviser to consider whether this information is appropriate to your needs, objectives and circumstances
Source: Business Times, 11 Jan 2010
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