Property Investment. Why Invest in Property?

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1 Property Investment Why Invest in Property? In every person s life, there will come a point where he has to make choices, and one of which is an investment choice. Where should his hard earned money be invested in? What type of investments will give him the most returns with the least risk? A common investment that people make is property investment, reason being that property investment is seen as one of the safest and easiest option. This may also be because property would be more familiar, as almost everyone would have gone through the process of purchasing a home, thus people think that they understand property as an investment better. Many people think that a purchase of a property is just a home purchase. However, the home becomes part of a person s overall investment portfolio. Property investments are usually considered alternative investments, supplementing a primary portfolio of stocks and bonds. One main difference about property investments is the factor of tangibility, often creating a substantial pride of ownership. Property investments have both bond and share characteristics, thus functioning like a hybrid investment. The rental income received serves as a coupon payment of bonds. It also has stock like components, where the value of the property can appreciate and there is no fixed maturity date. What are the perks of property investment? The value of property in general tends to increase, and if a property is chosen wisely, the returns can be enormous. In property investment, the investor is in full control of the investment; all decisions are made by the owner of the property, for example when to sell the property or the amount of rent that the owner will accept. Property is also a rather safe investment. This is because property market is the only investment market that is not dominated by investors; hence there is a natural buffer in the market. Furthermore, there will always be a value to the property, unlike other investments that can reach a 0 value. Even if property values decrease, if you are able to hold it over a period of time, the value of the property will eventually increase. This is because, the property market moves in cycles.

2 As can be seen in the diagram above, property values fluctuate overtime depending on the stage of cycle. However, ultimately, the value of property increases over time. Investments in property serves as a diversification tool, in statistical studies, it has been found that real estate has relatively low correlations with other asset classes. Furthermore, real estate provides yield enhancement, allowing higher returns for a given level of portfolio risk or even better higher returns while reducing portfolio risk. Some rental fees are indexed to inflation and hence serve as a hedge against inflation. More often than not, real estate income increases more quickly than inflation does, thus allowing the investor to maintain real returns. Lastly, if your property is negatively geared, it may provide tax benefits. Thus in general, property, relative to other investments brings about a regular return with lower risk.

3 Factors to consider when investing in property Liquidity Although you can choose to sell or rent your property at any time, the process is not as quick and usually requires a whole lot more administration as compared to other investments such as shares. Furthermore, properties are extremely large investments, even if you are willing to sell; it may not be easy to find a ready buyer quickly. On-going cost Many investors conveniently forget about the on-going cost of their investments, such as maintenance, repairs, insurance and land tax. Property investments also cause investors to incur high transaction cost such as fees to the real estate agent and lawyers. Constant management is also required to ensure that the investment remains a positive one. Uncertainty of tenants It may be difficult to find a tenant that is willing to rent your property at your preferred price, or any price at all, thus there is a risk there your property may not generate rental income for periods of time. Moreover, you may encounter problematic tenants that causes you stress. The performance of property investments is hard to measure as there is no standard benchmark to compare your property portfolio results, unlike the stock markets where indexes are high quality and reliable benchmarks. The biggest problem with property is that it requires huge capital; however, there is a solution, which is discussed below. Making the correct property investment decision There are several factors to consider when making the decision. Firstly, ensure that you are at the right stage of the property cycle; this will ensure that you secure the property at the most optimal price. Secondly, the location of the property is very crucial. A good location would lead to higher probability of gaining higher returns, both in terms of rental and also appreciation of the property value. Some factors to consider when considering the location are proximity to amenities like schools, public transportation and other public facilities. For commercial property, it is important that the area you are investing in is not dependent on a

4 sole industry, as this would expose you to the risk of different industry market cycles. Your property value would be highly correlated with the performance of the industry. Lastly, research is imperative. Research should be done on the demographics of the people in the property area. For example, property prices tend to increase in areas with increasing population. Also, The property that you invest in should be appropriate according to the average age of residents in the area. For example, for an area with an older community, a property with a complicated layout or with many staircases will tend to not perform well. Real Estate Investment Trust Property investment requires huge amounts of capital and can only be done by a very small affluent group of individuals. REITS is a solution for the common man. REITs perform the same functions as funds, by pooling money from many investors to make property related investments. Thus, any one person can easily enjoy the returns of the property market and be able to decide how much of his capital he wants to park inside at each time. REITs are like exchange traded funds and are priced like normal shares. Investors can purchase or sell REITs in the stock market. Thus, REITs as compared to investing in the physical property itself, are relatively much more liquid. REITs are also required to pay out at least 90% of their revenue to investors. REITs are a good way for an investor to get exposure to a diversified portfolio of properties (commercial, residential etc.), while having the choice of outlay and to enjoy a good dividend yield. In general REITs provide very healthy yields, ranging from 4% to 9%. Office and retail REITs have more stable and less volatile rental income streams and thus tend to trade at lower yields as compared to industrial and logistic REITs. However, REITs bring about higher risk then investing in a physical property. Firstly because, the investor has little control over decisions made. Secondly, REITs are permitted to borrow up to 35% of their total assets without a credit rating from a major credit rating agency. Hence REITs may be heavily geared, and this creates a risk that the REIT may run into serious problems if financing becomes an issue.

5 Singapore REITs In an article in Bloomberg, it has been mentioned that Singapore s REITs are the best performing in 2012, luring investors from all across Asia. The $38 billion REIT market in Singapore had and average return of 37%, twice the gains of the REIT markets in the UK, US and Japan. There were several new REITs that were introduced into Singapore this year, such as the Ascenda s Hospitality Trust and, Far East Hospitality trust and the Dynasty REIT. The growth of REIT s in Singapore was led by asset acquisition and rental appreciation. Furthermore, the Singapore property market was booming in 2012, with property value appreciation and rental growth. Singapore REITs have a liquid secondary market, low transaction cost and low leverage as compared to other REIT markets. Also, Singapore REITs have outperformed stocks in 2012, beating the STI. According to data compiled by Bloomberg, Singapore REITs have an average dividend yield of 6.47%. Although there are many uncertainties on the outlook of the economy, rating companies stated that Singapore REITs are well placed to weather tight operating conditions as Singapore REITs have increased their financial flexibility and diversified their funding sources. Ang Wei Ming This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. This report is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice NUS Invest