Common Mistakes of Investing in Properties

I spoke to someone this evening about investing in London. I explain the various zones, the up and coming developments, the demand and supply situation, cashflow from various properties. I also drew up the future plans of London and point out opportunities. As an investor, we do not care very much about the emotional satisfaction of owning a "trophy apartment", or where we invest (although safety and the ability to collect rent are important factors). We only care about capital gains and cashflow (rental yield), so total returns are very important.

To my shock. At the end of our discussion, she said that she will invest in Knightsbridge. That's where rental yields are a shocking 2 - 3% (it was 8 - 9% 20 years ago!) and prices at record highs! There's a fundamental investment principle: "buy low and sell high". Never follow a well beaten path. Knightsbridge has no pretty views (unless you live near Hyde Park and can shell out over GBP2m!), no future developments (no new tube station, Cross Rail, shopping mall or major areas of employment). All it has are snooty, old-moneyed people, Russians, rich Asians as neighbours. It has wonderful shopping I must admit. But nothing more. If something costs GBP1 million and offers a rental of GBP70k per year in 2002, but today the value is GBP2 million and offers a rental of GBP80k, would you invest? It means that a bubble has formed.

One may argue that Knightsbridge may continue to rise by, say 3 - 5% per annum, because rental must eventually catch up with prices. However, if I carefully choose another location which has future potential, the capital gains could be 10 - 20% per annum, because rentals are 6 - 7%! That's how I'm going to catch up with the rest in terms of wealth! That's how I intend to double my networth in 3 years and thereafter double it every 4 years!

Another person whom I've not spoken to for a long time suddenly called me to ask if I was willing to take over a downpayment that he paid for a trophy home in Melbourne. He bought it through a property exhibition (something I've always warned against), never visited Melbourne, let alone seen the location of the place. He doesn't even know if the price he paid for is fair because he has no comparables! Worse, he doesn't know what cashflow he is likely to generate from his investment. He bought it at the spur of a moment because the agent was a sweet talker. Of course my answer was a "NO"! Thankfully, the loss of reception of my mobile while in a lift saved me from this awkward conversation.

Invest When It Can't Get Any Worse

Between 2003 - 2005, not many people believe that property investment can reap wonderful returns. But that was the start of a 7-year rally that took the URA Property Price Index Over 1996's high. Rental yield was 5% on average then and 3.3% now. People are still chasing after shiny new condominiums, landed properties etc. 

In 2003, stocks were at record low valuations. Dividend yields in S&P500 were above 10 year government bond yields. But few believed that a sustainable rally is possible. Stock markets rallied to a new high in 2007. By then, gullible investors were chasing after Chinese equities, just before the biggest crash of the century. This year, everybody is still bearish on equities, preferring to chase after ever-pitiful yields from bonds and perpetuals. But stocks turned out to be the better performer, up 14 - 15% for S&P500 vs 8 - 10% for high yield bonds and 4 - 6% for investment grade bonds.

My point is, you cannot thread the well-trodden path to make super returns in investments. You must think differently. Here are the steps:

1. If everybody hates it, check valuations. Are they cheap? 

2. If valuations are near the worst on record, then buy!

This is a simple rule. You cannot invest in the obvious. Rather, you have to invest in the despised, something the common person shun. Usually, investing in such assets comes with worries. There will be lots of "what-ifs". "What if the Eurozone fails". "What if China faces a hard landing?" "What if there are security issues in XX country?" It is precisely such worries that offer opportunities. If there aren't any worries, then the price will be much higher. "BUY ANYTHING CHEAP ENOUGH AND YOU'LL MAKE MONEY!" "IT'S NOT THE ABSENCE OF BAD NEWS THAT CAUSE INVESTMENTS TO RISE. IT'S THINGS GETTING LESS BAD."

Time to Sell Off Gold / Silver Futures and Equities

Gold and Silver have broke below their support levels. So have their mining sectors. It's time to sell. When I spoke of buying NUGT or Direxion 3x Gold Miners ETF, it was around USD12. It rose to 19.25 in Sep. I called a "take profit" on 13 Oct at around 16. Now it is around 14.3.

I think precious metals will make another move up but right now, the concerns are global growth, not inflation. Gold / silver rises when real interest rates are expected to be further negative. This means inflation expectation must rise. It is not right now.

Advice for Singaporeans Wanting to Buy Properties Abroad, and Who Pay to Attend Courses

Advice for Singaporeans Who Attend Property Exhibitions Abroad

1. It's better to fly to the location to observe before you buy anything. Agents can tell you that the area is "regenerating", or it's in Zone 1, but two things can happen: either the area is in slums (there are many slums in US and UK cities and they are not safe!), or you are over paying for it.

2. Go to the internet and search for similar properties around the area. Chances are they are 10- 30% cheaper. Whatever new property that you buy will eventually turn old so even if your house is spanking new, eventually it will be one of the many old resale houses that you will be putting up for sale. Never buy a property that is based on "future prices", or at a premium over the surrounding area. Instead, try buy something that is cheaper than the surrounding.

3. Beware of hidden commissions by agents. I've attended many property courses and exhibitions. People who conduct the courses buy projects directly from developers, who give them bulk discounts. I've spoken to some of the developers directly by calling them and meeting them in person. They readily offer 10 - 20% discounts if you buy over 10 properties or underwrite them. The agent's commissions could be as high as 10 - 20%! You could negotiate to have some of the discounts passed on to you. It pays to investigate this and you should use the internet to check. Make a call to the developer's marketing agencies. They'll be happy to tell the truth as they could deal directly with you.

Advice for Singaporeans Who Pay Good Money to Attend Property Courses

1. Many of these courses have attractive headlines like, "Buy Properties With No Money Up Front". They merely ask you to refinance your house, jointly invest with others in the course.

2. Guess what? If you're there to learn how to find good properties, you'll usually be disappointed. Instead of teaching you the fundamentals, many of these courses merely persuade you to invest in their projects. The trainers in turn make fat commissions of 10 - 20% on the projects that they sell.

3. Whatever the trainers profess you can learn from these courses, you can easily learn from buying property investment books. Which is cheaper? $1800 for a course or $50 for a book?

4. There are some very good trainers around. I am not saying that all programs are not worth going. Go for courses that teach you specifically some area of knowledge. If you can, take up a Master of Real Estate. It may cost $15 - 25k, but remember, with the skill you could invest far better. Imagine if you followed the trainer and invested in his project, you may have a lock-in period of 3 years and doubled your money. If you had invested $100k, you could have made a profit of $200k after 3 years. The trainer would have earned his management fees, profit sharing fees etc, far more than you! Your return over 3 years is 100%, or around 25 - 30% per year! But for me, I read lots of books, took up proper certifications and invested well. For my own property, I invested 100k of cash in July 2010 and it is now $350k in profit. On top of that, I collected $100k of rental! My total return is $450k for 100k of investment. That's 450% over 2 years or 220 - 240% per annum!

5. There is no substitute for hard work, lots of reading, lots of detailed analysis. Never trust someone who proclaims himself/herself an expert. Trust is gained over many years and many tests! Have a successful investment career.

Hotels in Asia are Far Better Than Those in Europe

I just went to a couple of trips to Indonesia. The hotels like Ritz Carlton, Four Seasons and Shangrila are incredibly grand. For USD150 per night, you get a room that is around 400 – 500 sq ft. The bathroom is around 100 sq ft alone. For the price, I get free Wifi at very high speeds (comparable to Singapore’s). I get to use the executive suite which offers wine, beer, snacks, the TV and sometimes even a snooker table. The breakfast is usually multi-continental, offering Korea, Japanese, Western, Chinese and local breakfast. The service is exceptional.

I went to the Ritz in Paris. It was terrible. The room was no bigger than 200 sq ft. The Wifi was intermittent and slow (note that Internet is slow throughout France!). The bed was not even as big as a Queen size. The cost? USD500 per night!

Hotels around Asia, with the exception of Hong Kong, are generally very large. Even Tokyo and Singapore has larger rooms than in Europe. Talk about not comparing developing vs developed countries.

Indonesia, China, Malaysia, Thailand, Vietnam etc are like the “Geylang” residential properties in Singapore. It is not easy to live in these countries, but the upside is tremendous. When you go out on the streets of South East Asian countries, you see pollution, chaotic traffic, lack of public transport, very bad traffic jams, sometimes lack of hygiene, poor infrastructure. When you walk the streets of Singapore, Shanghai, Beijing, Guangzhou, Hong Kong, London, Barcelona, Rome and Milan, you see very good infrastructure. The subway lines are usually very comprehensive. The streets are clean. The cities are very liveable, although I would not want to live in places where taxes are high.

But in these chaotic cities in South of Asia, I see opportunities. I see upside. Often when things are already very chaotic, the only way is up. Houses are so cheap in cities like Jakarta, or Hanoi, or Johor Bahru that the only way is up. Investing property is like investing in stocks. It is not the absence of bad news that will make stocks or property prices rise. It’s the decrease in bad news. 

Do The Best People Really Become Leaders? Organisational Behavior 101

Major Problems of an Organisation

When you work in a large company, you often find those people who are gregarious, who have strong social skills, rise to the top. But whether they are of average intelligence of not is in doubt. The best politician who rises to the top may not be a good leader. He may be all talk and little knowledge. Europe has been ruined by a succession of leaders who promise voters the moon that the voters could work less, earn more, and have entitlement to everything for free. The politicians are often suave, eloquent, and network very well. But the big question is, should such people be trusted to lead the country? Do they have a strong economic plan?

I trust technocrats more than politicians. They are often academics or are strong in economics or financial matters. However, they may not be good politicians and often fall by the wayside because they cannot garnet support for their ideas. They have a vision that cannot be implemented. It’s such a pity.

Similarly, in an organisation, it is often the glibbest tongued people who rise to the top. Do they deserve to be at the top? Will the organisation benefit? Are these people intelligent enough to have a grand vision and to do the right thing? I am not sure. Sometimes, we are lucky and get a leader who is eloquent and at the same time very intelligent. Often, we just get someone who’s a salesman or saleswoman.

I do not have an answer to these questions. All I can say is these are flaws that are very difficult to correct. Humans are social creatures. They are emotional. They often support people who are likeable, and whom they perceive can benefit them. We have to make the talent selection program as transparent as possible. We cannot leave talent development to chance, or to shallow analysis, or to emotional or selfish choices.

The Project Is Almost Half Done...

I am about to cross over a major milestone. Within the next few months, I believe I would be able to create about S$110k of rental / dividend income and another S$110k of capital gains per annum. I am only slightly half way into my project but I believe it is within my grasp for the next 5 years. Within 3 years, things will be very different. My lifestyle will slowly change. I can focus more on charity and helping the unfortunate. After 5 years, I will be almost free of obligations. The plan that took me 2 years to formulate is beginning to bear fruit.

Watch Out for a Pull Back

I've been watching several indicators recently and I believe that the latest rally that began in June 2012 has now ended. We should start to take profit from the equity markets. Stock markets are very interesting. In the rally that began from March 2009 until now, not every market moves in tandem. The mining sector bull run ended in around Aug 2011, briefly broke into a bull run again for 3 months in 2012 before ending in Mar 2012. The Hang Seng China Enterprise bull rally ended in Aug 2011, around the same time as the mining sector. Notice how highly correlated the Chinese market and mining sector is. The European equity index moved in lock step with China and Mining, but not because of the slowdown of the Chinese economy, but the implosion of the Eurozone.

The US, and Southeast Asian indices like Singapore, Indonesia, Thailand and Malaysia have been in a bull rally without a break since March 2009. 

The precious metal sector like gold and silver have been moving in its own world. It reached the peak in Sep 2011 before collapsing by 20 - 30%. It recently made a rebound back into the bull region. The precious metal sector looks strong and any pull back is a good entry point.

For equity markets in general, I expect a pull back, especially for the markets that have rallied since Mar 2009 without breaks. For China and mining, they are still in a bear zone trying to break up but I believe consolidation will take a while. For Europe, I believe they have already broken above their bear trends and may surprise investors with their performance.

Now I will always go for the cheapest markets and in my books China and Europe are the cheapest markets. I think a pull back will occur for now, so I've taken some profit off the table but will dollar cost slowly in when the dips occur. For the mining sector, I believe it is also time to take profit. But I will look to dollar cost slowly.

There is no rush to get into the stock markets now, unless you want to buy gold or silver. A correction of the S&P500 by 5 - 10% is possible for the next 1 - 3 months. Hang on tight.

Singapore is Fifth Richest in the World. Taxes Will Break the Western Countries

This is an excerpt from Business Times today. From my interpretation, the secret to Singapore's wealth is "forced savings" in the form of the Central Provident Fund (CPF), and high home ownership. These are master strokes of Singapore's highly competent and uncorrupt government (I do give credit where it's due).

CPF forces people to save. 20% of an employee's salary is deposited into this fund, while the employer contributes between 12 - 16%. The employee cannot touch the fund until she retires at 65. Even then, CPF will retain a minimum amount which will be paid out as pension. The balance can be withdrawn by the retiree. This measure reduces the disposable income drastically for Singaporeans, because it raises the savings rate to around 50% of income after tax. But if this were not done, the majority of people would have undersaved and squandered their money. A dependency on the government for welfare and support when they reach an old age will develop. Look at the US and UK. People don't save and depend on the government due to the high taxes. But when people don't save and contribute to the government's coffers instead, there will be a free rider effect because everybody will try to raid the coffers until it is empty. The CPF can be used for medical expenditure and more importantly, to pay for housing downpayment. This is important because it encourages citizens to be home owners.

Getting into the property ladder is very important because real estate rises steadily, by between 5 - 10% per annum. The leverage effect increases the return on equity to 15 - 25% per annum. This ingenious idea by the government raises the wealth of Singaporeans. Owners of public housing, or the Housing Development Board (HDB) saw their homes rise by over 100% in the last 10 years. If a 2 bedroom flat in the suburb previously cost S$100k in 2002, it is worth well over S$250k today. If the owner paid S$10k from her CPF as downpayment in 2002, her networth would have grown by S$160k - 250k depending on how aggressively she paid off her mortgage. The mentality of a home owner differs sharply from a renter. A home owner works hard to pay off her mortgage, pays her taxes promptly and is seldom on a dole. A renter works like a mouse on a treadmill, living from hand to mouth with no hope of gaining wealth.

The OECD countries should learn from the Singapore government. When I travel abroad, from Paris to London to Hong Kong to Shanghai to Tokyo to Sydney, I often marvelled how Singapore's government ranks among the top few in terms of strategic planning and execution. Tokyo, London and Sydney / Melbourne are very well designed, beautiful cities. But Singapore's wealth was by sheer brains and industry. We have no beautiful scenery to behold, no stunning mountains and coastline, climate is hot and humid, people duck from air conditioned tunnels and malls to offices. But the city has managed to grow the wealth of its citizens to one of the richest in the world.

In the next article, you will see how Europe has gotten it all wrong. It attempts to create equality by raising taxes on top earners, financial investments etc. It effectively deterred investments and discourages the wealthy to live there. Entrepreneurs and the wealthy usually create employment, either through the companies they chair or their conspicuous consumption. These people should pay their fair share of taxes, no less than the middle or lower income, in percentage terms. They should not be forced to pay 50 - 75% of their income in taxes. It will deter people to work harder and plunge the countries into a deeper recession. So if you head to Europe, do notice the large number of refugees, or people who are jobless. They do not pay taxes at all and strain the system. If the rich and successful workers leave, who will finance the government?

PUBLISHED OCTOBER 11, 2012

Wealth down, but S'poreans are the world's eighth richest

S'pore's total wealth at US$1t in 2012; 249k millionaires in 5 yrs: Credit Suisse

BY

SIOW LI SEN

PRINT |EMAIL THIS ARTICLE

China will add US$18 trillion in household wealth by 2017, taking its total to US$38 trillion, according to a Credit Suisse global wealth report yesterday. - PHOTO: AFP

Rich list

YET another report has appeared to say that Singaporeans are among the wealthiest people on the planet. And in five years' time, the number of millionaires here will surge some 60 per cent to 249,000.

But it's not all good news. It seems that Singapore's total wealth in 2012 fell by US$25 billion or 2.5 per cent to US$1 trillion, making it the third richest Asian country and eighth globally, according to the latest wealth report from Credit Suisse.

Last year, Singapore ranked second behind Australia and was fifth richest globally.

Singapore's total wealth declined by US$25 billion or 2.5 per cent to US$1 trillion from mid-2011 to mid-2012, mainly due to the reduction in household financial assets measured in US dollars.

The report, in its third year, defines household wealth as all assets - physical or property and financial minus debt. During the period under review, local stockmarket capitalisation was down 8.2 per cent and the Sing dollar fell 4.3 per cent against the US dollar but house prices rose 2 per cent.

Market volatility saw a 9 per cent fall in the number of millionaires here to 156,000 from 165,000.

But rest assured that the volatility is only a blip in Singapore's march to even greater wealth and Credit Suisse projects that in five years' time, Singapore will have 249,000 millionaires or 60 per cent more.

Forecasts of the two key components of financial and non-financial wealth are made using gross domestic product and inflation forecasts from the International Monetary Fund's latest world economic database, she said.

Over the last 12 years, despite market downturns and the global financial crisis, average wealth per adult in Singapore has grown by 7.1 per cent per annum, outperforming the global and Asia Pacific average of 5.8 per cent and 6.9 per cent respectively, she noted.

In the last 12 years, household wealth per adult in Singapore more than doubled (rose 129 per cent) to US$258,117 from US$112,800 in 2000.

Household total assets in Singapore are divided roughly equally into financial assets (48 per cent) and non-financial assets or property (52 per cent), reflecting the government's strong encouragement for both savings and home ownership.

"Despite a drop of 4 per cent in the past year, its average wealth per adult places Singapore as the third wealthiest nation in Asia Pacific and eighth globally, alongside many smaller dynamic economies including Switzerland, Norway, Luxembourg and Sweden, as well as Australia and G7 members USA, Japan, France and the UK," said Credit Suisse.

The report said the average household debt is US$45,600. While this is moderate for a high income country, at 18 per cent of net wealth which is also the global average, it is much higher than the Asia Pacific average of 13 per cent.

Asian countries with less developed financial institutions and credit markets like Indonesia (2.4 per cent), the Philippines (2.6 per cent), China (3.1 per cent) and India (3.8 per cent) recorded very low household debt as a percentage of net wealth.

"Looking ahead, household debt is expected to see faster growth in these countries than in the more developed economies in Asia Pacific and the world as credit markets and financial institutions mature," it said.

The distribution of wealth in Singapore shows moderate inequality. More than 80 per cent of the population have assets above US$10,000 and 48 per cent of the population have assets above US$100,000.

EU advances on financial transaction tax

Eleven nations join plan but it is divisive as others have strong reservations

[LUXEMBOURG] Eleven eurozone countries agreed yesterday to push ahead with a tax on their financial transactions, an initiative that several other EU nations oppose but which has been pushed hard by Germany and France.

The breakthrough was a surprise to many EU diplomats who had thought that Germany might fail to convince sufficient countries to join the plan, which has been in the works for two years.

After heavy diplomatic pressure from Berlin overnight, Spain and Italy agreed at a meeting of EU finance ministers in Luxembourg that they would support the measure. Slovakia and Estonia said that they would throw their weight behind it too.

That raised to 11 the number of EU countries prepared to push ahead with the proposal, exceeding the threshold of nine required under EU law to move ahead with legislation using a process called "enhanced cooperation".

Once nine of the countries have formally notified the European Commission, the EU executive and the body charged with proposing legislation of their commitment in writing, the Commission will begin drafting the law.

"Four additional member states intend to join enhanced cooperation, so it means that we arrive to 11 member states," EU Tax Commissioner Algirdas Semeta said. "When we will receive nine or more formal letters, only then the process will start."

As well as Spain, Italy, Estonia and Slovakia, the proposal has already been formally backed by Greece, Portugal, Austria, Slovenia and Belgium as well as Germany and France.

Yet it remains deeply divisive. Within the eurozone, Finland, the Netherlands and Ireland have strong reservations, and outside of the single currency group, Sweden is a vocal opponent of a tax it attempted to impose in the 1980s, only to see much of its trading shift to London at heavy cost.

"We still think that the financial transaction tax is a very dangerous tax," Finance Minister Anders Borg said ahead of the meeting. "It will have a negative impact on growth."

Britain, home to the region's biggest trading centre, has a stamp duty of 0.5 per cent on share trades, raising almost £3 billion (S$5.9 billion) in the financial year to April 2011. It will not join the scheme and has lobbied Cyprus to stay out as well.

Mr Borg's scepticism was echoed by the Dutch finance minister. "The Netherlands is not in favour of a financial transaction tax," said Jan Kees de Jager. "We are even reluctant about introduction in other countries."

It is not clear how much money the tax will manage to raise or how any revenue generated will be deployed. Germany and France have hinted in recent weeks that it could be used to finance a single budget among eurozone countries, but that is not supported by many others that back financial transaction tax.

The Commission has said that a tax on stocks, bonds and derivatives trades from 2014 could raise up to 57 billion euros (S$90.7 billion) a year if applied across all countries. - Reuters