● 潘树盛 By Roy Phua
Asia's all enduring preoccupation with real estate is
undergoing a reality check as a conse-quence of the economic
crisis. Private residen-tial property prices in Singapore,
have collapsed by over 45% from its peak in for example,
1996. The shock and dismay of die-hard real estate believers
is not surprising. For many, however, the rationale that
underpinned that real estate investment is showing
surprising flaws. Arguments such as "land is finite"
persuade in boom years, but are now denounced by some as
intellectual garbage. The long-term prospects of real estate
investment, while not entirely mis-placed, are subject to
investment cycles, interest rates and changes in government
policies, like all other forms of investments. Putting all
of one's investment eggs in the property basket, as many
Asians have been inclined to do in recent years, is
unlikely to hatch a balanced invest-ment strategy. This
article examines the possi-bilities.
Real estate investments are very long term in nature and
possess two important characte-ristics that are often less
than understood: leverage and illiquidity. These factors
accen-tuate the capital gains on real estate in boom times
and magnify the loss on the downturn. If one were to invest
$200,000 (borrowing $500,000) to purchase a $700,000
property for example, a simple 10% rise in property price a
year would translate into about a 21% return on the original
investment, net of interest expense assumed at 5.5% p.a..
With that same interest assumption, a 10% fall in property
price how-ever would translate into a loss of about 48% on
that same $200,000 investment, the tragic con-sequence of
leverage working in reverse. The illiquidity of real estate
is another important factor for consideration. Exiting a
real estate in-vestment often requires time and patience,
par-ticularly so in a less favourable environment. The
average investor needs to consider the sheer amount of the
financial investment and the uni-queness of each property
asset. The illiquidity limits the flexibility investors have
when they need to realign their investments in accordance
with changing market conditions or changes in investment
needs.
The long-term nature of real estate in-vesting requires
it to be matched with stable, long-term cash flows.
Assumptions on income growth, interest rate trend and rental
yields are important, and when they do not materialise as
planned (or hoped for), the investment goes awry. In
addition, the size of the upfront capital commitment in real
estate investing makes di-versification within the asset
class difficult to achieve. The real estate investor has
the bulk of his investments locked into a few properties.
Seen from this perspective, real estate investing can be a
high risk venture. The risk does di-minish with a long-term
time horizon, but the rate at which Singaporeans turn over
their real estate investments suggests a shorter term,
high-risk attitude prevails.
Asia's love affair with real estate has been fuelled by
easy money and accommodative government policies. These
conditions are not present today. The era of supernormal
returns from real estate investing is over. Bankers are
licking their wounds from loans gone sour and have turned
wary about lending for real estate investment (as opposed
to home ownership). Having experienced the effects of an
over-zealous appetite for real estate, it is probable that
both of these factors are unlikely to be as potent in the
future. The new Asia requires that the bold assumptions of
old be tempered- stable interest rates, "guaranteed"
employment, "guranteed tenants", etc. Price appreciation
will be more gradual hereon and more in keeping with
inflation. Other investment options need to be considered
and matched with one's age, obli-gations and financial
aspirations.
(The author is Equity Manager of Rothschild Asset
Management.)
