Another Acquisition in London! Greenwich Millenium Village!





Above is an apartment that I recently bought at the Canary Wharf on Manchester Road.

 

I recently made another acquisition in London. It is in the area of Greenwich and is very near the River Thames. It is around 0.8 miles from the Greenwich Tube Station or around 15 minutes' walk. Although it does not have river views, it is on the top floor and over looks a very nice garden with a pond or lake. This flat is off-plan, slightly different from my first acquisition which is a resale apartment at Manchester Road. My first acquisition was within 15 minutes' walk to Canary Wharf and the living room looks out to River Thames. I bought it for around GBP426 psf (factoring 50% of the balcony area). The Greenwich project costs around GBP420 psf (factoring 30% of balcony area) and to me, that's a good deal for a new project with little maintenance and hangups.

 

 

 

A map of Greenwich (the project is near the label A)

 

The older blocks that face the river

 

Aerial view

I wrote earlier that London's property prices are near the peak in an earlier blog post. But I realised that there are two tiers in London. Zone 1 has shot through the roof in prices. Gross yields in Zone 1 has fallen to 3%, 4% if you're lucky. The recent spate of property exhibitions in Zone 1 has attracted a lot of foolish money from Asians, sadly and specifically from Hong Kong, Malaysia and Singapore. Battersea project from SP Setia was sold at GBP1500 psf - 1700 psf. Most of the projects are above GBP1500 psf.

Let me ask you. How are you going to exit from this costly investment? Who are you going to rent it to? If the locals are buying older flats nearby at GBP1000, why would they buy from you at GBP1500? Who would rent it? Would the locals rent it from you at GBP5.67 psf per month, and pay GBP5,667 of rent per month, or would they pay GBP3,000 for the same size in an older apartment nearby? I suspect a lot of Singaporeans and Asians will get burnt.

Now look at the second tier properties. That's right, those in Zone 2 and 3. In Canary Wharf, prices are at GBP400 psf without river view and GBP500 - 600 with river views. I got them for GBP450 psf. My gross yield is close to 6%! This is 50% higher in yields! It's also near work place so I believe it's called the "Tampines and Jurong effect"! The outlying properties rise in Singapore because of secondary industrial / commercial centres being set up.

Don't go for the obvious! Go for the undervalued areas with potential. Greenwich is very near Canary Wharf. It's only one tube stop away from Canary Wharf in fact. There's O2, shopping malls and cinema nearby, which makes this a very livable area. I personally drove past that area and saw the potential. I know there are negatives about that area, namely the contaminated land from the gas furnace but it has since been decontaminated. Also, there is a high proportion of affordable housing which means we may have civil servants on lower paid salaries as neighbours. But the bulk of people living in Greenwich Peninsular work at the Canary Wharf. There's another commercial site in Woolwich which is one tube stop away and has a Cross Rail station. Woolwich will be another commercial centre that will rejuvenate the area.

My advice is always, go for value. The cheaper PSF that you buy, the easier for you to offload to locals or sell at a big profit. Also, downside risk is much less than if you buy at GBP1700 psf! Go for something with amenities nearby so that it's attractive to tenants and potential buyers. Don't buy stuff that look at other people's backyard because although price is cheap, rent is high, it may be difficult to sell! Take care of cashflow. Your rental yields must be reasonable and be able to cover your mortgage. I don't believe one bit about empty promises of future capital gains! If your gross yield is < 2% spread above borrowing cost (UK mortgage is 3.2%), forget it.

There is a huge shortage of housing in London. The population is growing at 100,000 per year, and there are around 2.5 people per household. London needs 40,000 new builts per year but guess what? It's managing only 20,000 - 30,000 new builts per year! The majority of the new builts are in Zone 1, which means you'll have lots of competition renting out your flat and lots of competition selling your flat. Singapore will not have a shortage of housing. Our aim is to increase population by around 1.7m people. Divide by 3 it means we need around 650k new homes. Government announced that it will build 700k new apartments. Get the drift? No shortage.... of houses.

Gold and Silver: Sideways To Down For A Long While More

I just attended a coaching session with my investment guru. He said that gold is not correlated with inflation. It is correlated with fear. Right now, most investors are shifting from bonds to equities, so it is unlikely for gold to rise anytime soon.

I checked the technicals and must conquer. The monthly chart showed that it is still in a downtrend. The rally that ended in Sep 2012 has still not bottomed out yet. 2014 might be a better time to go into gold, because inflation will outstrip 10 year US Treaury yields.

The US 10 year Treasury yields just rose above 2%. Watch out because it's a Canary in a Mine Shaft. It indicates inflation. 2014 could be a year of inflation and over heating. All the money printing will finally rear its ugly head. Anything related to inflation will do well, e.g. hard assets like real estate (except in countries where governments are trying to curb it) in the US, Europe (especially Spain, Italy, Greece, the UK and Australia), commodities and mining stocks.

Pitfalls of Investing in Malaysian Properties

I recently paid a 2% deposit in a freehold condominium in Gelang Petah, called Nusa Heights. As a foreigner, according to developer MahaBuilders, I am obliged to pay a further 10% downpayment. Of course I was reluctant to do so because my IRR would fall below 30%! Although the condo is around S$160 psf, and Singaporeans who flock to luxury condos are paying double of that, I was not sure about the quality of the finishing (see picture 1)

Picture 1: Nusa Heights. Looks nice on picture. But when TOP in 2015, what will it actually look like?

 

Also, I visited another condominium nearby called Nusa Perdana (Pictures 2, 3 and 4). Although the swimming pool was ok, the common areas were badly maintained. It was only around 5 to 7 years old. The building facade looked badly in need of a paint job. The interior looked extremely bad. Furniture was spartan. Mattresses were used as beds, without any frames. The bathrooms' ceilings were damp, indicating that it was leaking from upstairs. I was told that it is common that neighbours above will refuse to pay for the repairs for the leakage to the ceilings of those who lived below them. The MCST usually does not care and you do not know where your conservancy fees go to. Let's just say that accountability is not a strong point in Malaysia.

Picture 2: Looks like a HDB with a nice frontage!


Picture 3: Nice looking HDB


Picture 4: What's the concrete in the middle of the condo??



The unit that I viewed in the Nusa Perdana was on a corporate lease to people working on a hotel project nearby. It smelled of stale cigarettes. The overall condition of the flat was worse than our HDB. But at S$80 psf, or S$80,000 per unit, and with a rental of S$600 per month (gross 9%), who's complaining? In the common area, I could see grafitti liken to loan sharks demanding debt repayment. It felt like the worst HDB estates in the 80s. It's a very good investment for citizens of Malaysia because the owner bought it at around S$35,000 just 5 years ago and the rental he was collecting was S$400 per month, which works out to over 13% gross yield! I worked out his IRR, which turned out to be 27.7% per annum unleveraged! With a 5x leverage, and at 5% interest rate, I believe it will be over 100% per annum!

Picture 6: Nusa Perdana. Typical condos in JB. Doesn't come with furniture because tenants are not expected to maintain them. They may even disappear so the deposit is something you might wish to hold on to tightly!

Picture 5: Hmmmm.... Although no view, but still better than our closely packed HDB!

My Malaysian friend, who bought over the unit, knew the risks, but is going to collect 9% gross yield (assuming he can collect rent). But at S$80 psf, he is buying at local prices. Singaporeans are buying freehold condos in Iskandar at S$200 - 300 psf which I think was a greater fool theory. My friend will make good returns I'm sure. But for Singaporeans like me, such condos are off-limits. I have to buy above RM500k and I believe no Malaysian will buy from me at above RM500k! My gross yield at Nusa Heights is only 5 or 6% from my calculation and I doubt it will increase very much even in 2017 because of the massive supply coming on stream!

I decided to forego my purchase because first, I wasn't sure if I could find a tenant who was willing to pay S$1,200 per month for my 1005 sq ft unit once it's completed. I mean there will be over 300 units competing for tenants once TOP. Second, I wasn't sure that I could find good tenants that will take care of the apartment, let alone pay on time. I used to have a Malaysian businessman as a tenant, who refused to pay by GIRO. He would often be over 20 days late. It is the norm in Malaysia to delay payment as long as possible. This is just not Singapore, mind you.

Third, I was afraid that the condo would not be well taken care of. I only trust Capitaland projects, or even UEM Land. But MahaBuilder was a private company. My parents invested in JB condominiums in the 70s. After paying over S$30k, the developer went bankrupt. They could retrieve nothing after 10 years!

I was told that the full sum of my 2% deposit would be refunded if I decided to cancel my purchase. Only RM 1,000 will be retained. It has been over a month and I have not seen a cheque from them. Everytime they will say, "ok", but no response.

I believe it is a problem with the rule of law in Malaysia. Enforcement is just lacking. Nobody cares about doing the right thing. If they can avoid payment, they will do so.

I urge all Singaporeans to be careful when investing in Iskandar. There are many issues when it comes to buying-to-let.

My Suspicions Are Confirmed. There Are Few Sincere Sellers in Singapore

A few days ago, just before the 8th cooling measures was implemented, I made a bid for a property which I think has about 50% upside at least in the next 5 years. In fact I thought it would double in price over 5 years. The seller told the agent he was sincere. The agent in turn told me that if I matched the seller's asking price, I would 100% get it.

Now I never, as a matter of principle, start bidding at what the seller's asking price is. Nobody does that. I always bid around 5 to 10% lower than asking and slowly move up. The agent however, assured me that the unit is definitely mine if I bid 0.5% below the seller's asking price! I was highly suspicious that the seller was merely playing with me, wanting to test how much his house is worth. If I meet the asking price I could probably end up paying higher than that! However, I decided to give it a try to bid 0.5% below the asking. After all, even at the asking price, I knew my returns would still be around 100% over 5 years.

True enough, the seller sat on the cheque until the new measures kicked in! Then he gave the excuse that the measures meant he could not buy another house! What rubbish.

If Singapore's residential properties fall 5 - 10% in the next 3 years, I will be the last one laughing. The seller could have cash out on me, keep his cash and buy back in 2014!

I now have decided to give up looking for residential properties for the time being. I will focus on overseas properties, or even commercial units. I don't like offices in Singapore due to oversupply. Industrial doesn't have supply issues but the prices have risen so much that rental yields are now at record lows.

The other option is to go for overseas properties like the UK, US or Australia! I can get 6% gross yield in London easily, and 4% net. In Australia, probably 7 or 8% gross yields. My borrowing cost for Australian properties are in SGD or USD at much lower interest rates!

How Do You Value Balconies, Bay Windows and Patios?

Read the article below. Often times when I ask my friends how much they paid for their condos, they gave me a lump sum, e.g. S$2m. If they are more sophisticated, they will tell me the per square foot price, e.g. S$1,200 psf. However, when I ask them what is the actual living space, not including aircon ledges, bay windows etc, I draw a blank. Many agents at show flats could not give me the info as well.

I would treat all bay windows and aircon ledges as unlivable spaces. At most, I'll treat bay windows as worth 50% of actual space. Therefore if a property has 1,200 sf of space, including 100 sf of bay windows and 100sf aircon ledge, at most I will say the actual living space is 1,050 sf.

How do we account for balconies and patios? Now this is very important. If the balcony and patio has a view to the sea, or to the swimming pool, i.e. unblocked, then it is probably worth 50% of the actual square footage. Nothing more.

A balcony with unblocked view and worth 50% of the enclosed square foot (livable area)

Balcony with a swimming pool view

I would in fact value a balcony with a swimming pool view as no more than 30% of the livable area. This is because unless you are on the ground floor, the swimming pool is not in sight until you come out to the balcony and look down. More often in Singapore's condos, your balcony will overlook your neighbour's living room!

But if the balcony and patio have unblocked view but is not very nice, then perhaps they are worth 25% of actual area. If they are facing a neighbour's washing area, then it's worthless.

A balcony with no view! Totally worthless! 

I recently completed the purchase of an apartment in London overlooking River Thames. The balcony is 200 square feet and worth every penny of it because it has unblocked view towards O2! I tend to avoid balconies with swimming pool views or fully discount it as nil.

Know what you're paying for and be savvy!

 

Khaw addresses issue of pricey ECs

Jan 7, 2013 - PropertyGuru.com.sg

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By Romesh Navaratnarajah:
In his latest blog post, National Development Minister Khaw Boon Wan has spoken out on the recent controversy over the sale of expensive executive condominium (EC) units, like the 4,349 sq ft presidential suite at CityLife EC in Tampines that was sold for over S$2 million.

Below is Mr Khaw's full statement, published on his blog on 7 January.

In some recent EC launches, super-sized ECs units were offered and snapped up by buyers who did not appear to be from the “sandwiched” households. Understandably, there was public indignation at such deviations (both by some developers and some buyers) from what we had intended ECs to serve.

The developers explained that such super EC units were a minority and that they had priced them low (that was why they were snapped up by buyers who could actually afford private properties). The media reported that one such developer priced its super penthouse at $470psf, while selling the other smaller typical EC units at $770psf.

I was initially baffled by this. Why would the developer short-change itself? Why not sell more normal-sized EC units at a higher $psf, and make more profit? The space for one super penthouse, for example, can be used to build 2 or 3 normal-sized EC units.

As I probed, I discovered that the developer had not short-changed itself.

Let me illustrate: a super EC unit of 3,500 sqft may comprise 2,500 sqft of built-in space and 1,000 sqft of private roof terrace. Now, outdoor roof terraces are actually free space, space that developers do not have to pay development charges. URA allows this to encourage developers to build more outdoor space open to the sky, for the enjoyment of the residents. Developers can use this free space to develop private OR communal roof terraces, and they are NOT counted as GFA (gross floor area).

Communal sky terraces have been effective in promoting greenery and providing useful common amenities for residents in our residential developments. However, the creation and sale of super-sized private roof terraces (at the expense of communal sky terraces), is increasingly prevalent. What is happening at the roof top in the form of private roof terrace is also happening on the ground floor where it is referred to as “private enclosed space (PES)” for the buyer.

Developers’ selling off free spaces to make additional profit for themselves is not improper under current URA rules. But as more developers do so, with larger private roof terraces and PES, communal space in the development that benefits all residents will correspondingly shrink. There is a further downstream problem as some buyers may be disappointed later on, when they find out that these outdoor spaces that they have paid for are not allowed to be covered up or enclosed.

I have directed URA to review this policy and have it fixed.

Source: https://mndsingapore.wordpress.com/

2013 Is A Year Of the Halfway Mark... On To The Finishing Line!

While in New York just a couple of weeks back, I had been doing much soul searching. Life seems to be at a cross roads. I thought about the choice between climbing the corporate ladder and choosing another path that is more consistent with my nature, that is to live freely and invest full time.

Succeeding in the Corporate World

Climbing the corporate ladder is not an appealing path for me. I have seen many people at the top, who had to make difficult choices of cutting costs, yet rousing the troops below to work harder for less money. The troops that brought in revenue were sometimes less recognised than the ones who flit from one meeting to another, making grand plans. At a higher level, increasingly it becomes a matter of perception and subjectivity often decides your fate. How does one prove to be a good leader? Is it good EQ? What if one has good EQ but low IQ? Is it good for an organisation to promote such people? I've seen plenty of people that can sweet talk their way into bosses' hearts, with very little to show for. Anybody below them who emails them for help is ignored. But sharing a gossip with the boss or with peers is par for the course! There are also people who are fighting to increase their sphere of influence. They crave for short term gains in revenue at the expense of society, and claim credit for the damage they have done!

Of course, not everybody is like that. There are those in the organisation who truly deserve to rise to the top. Those who find a balance between profit and conscience. Those who are truly helpful and kind to everyone, whether to those above, on par or below them. It is the luck of the draw in my opinion, whether you rise or fall in an organisation. You may have certain values that you think is right but is not recognised by your superiors.

Not all is bad being in an organisation. Sometimes, you encounter genuine friends at work, who care for you and care about doing the right things. The emotional support that you get at work can be invaluable.

Being a Full-Time Investor

Being a full time investor is a much better option. More things are in my control. I just need to analyse, communicate with stakeholders, make offers to sellers and digest my acquisitions. I can find pleasure in 1) giving back to society by helping the less fortunate, 2) going for short getaways with my loved ones frequently, 3) spend more quality time with my loved ones.

I have often wanted to spend some time helping the disadvantaged children, those who come from broken homes. Some of these kids can be very intelligent and talented, but are born in unstable families. If they can be rescued, they could grow up to be the next Obama, Nelson Mendela or Margaret Tatcher!

The Problem of Home Bias

There are however, challenges when you are investing in real estate. Many investors suffer from the "home bias" effect. They choose to invest in Singapore no matter how little opportunities there are. Let's say that Singapore's industrial, office and residential market is already at its peak. Between now and 2015, the odds are between a 10% gain over three years and a loss of 20%. The average expected return is -5%. If you are a very good investor, you could achieve the upper bound of the expected return, which is 10%, or even 15% over three years. But it takes a lot more effort to find undervalued assets at a time where sellers are unrealistic in their demands and few are under pressure to sell.

However, in cities like in Las Vegas or Houston, the residential market is just beginning to turn after six years of downturn. The expected return of single family homes could range between 30% to 60% over the same period. After all, a typical single family home is worth only US$100,000 now when it was US$250,000 in 2006! Even after a 60% rise, prices are still incredibly cheap at US$160,000! An average investor could achieve 45% over the next three years, without much effort. But if you are really good, you could achieve 60% or even 120% over the same period!

Note that the skill of a very good investor in Singapore and in the US may be the same, but because of home bias effect, the Singaporean investor achieved just a fraction of the US investor's return.

Ways to Overcome Home Bias

If you have a full time job, or if for some reason you cannot leave Singapore, you can aim to diversify overseas by buying from exhibitions in Singapore! This is not a good idea because they tend to be priced 10 - 20% above what the locals are paying. So if the average return in London Zone 2 properties is 30% over three years, you will probably achieve only 10 - 15% over the same period. This is a similar return if you work very hard in Singapore to achieve big Alphas. However, if you fly over to the investment locations during your vacations, you might increase your returns to 15 - 20% during the same period. You can be an average investor in London, but never be on par with the best investors in London!

Hence due to physical constraints one can never truly be the top dog in every country when it comes to real estate! However, you can choose a market like US, which is trading at 60% discount from 2006's peak and aim to achieve average returns even without residing there. How do you do that? By travelling there to walk the ground, doing plenty of research via the internet. 45% return for an average investor in the US is still much better than 15% return for a top investor in Singapore!

Taking Advantage of Different Market Cycles

I've often discussed with my loved ones my intention to live three months at a time in a city that is at the bottom of the cycle. This is to take advantage of investment opportunities that may come our way. For example, if I were a full time investor, it is a waste of time to live in Singapore now, because there are very few opportunities. I would choose to station myself in cities like Barcelona, Madrid, Milan, Houston, or Las Vegas. I would familiarise myself with the market there, make friends with trustworthy advisers who would recommend me good deals! Perhaps in 2013, I would head towards Australia to live in Melbourne, Perth, and Sydney. In 2014, I will return to my home base Singapore to scoop up whatever is at a discount. Imagine sipping champaign while seated at your balcony over looking River Thames or the Hudson River, looking at the O2, Manhattan skyline or Central Park. All you have to worry at the start of each month is the incoming rentals and outgoing taxes and expenses.


Below is a good article from Business Times, which discuss the age where we are at our investment acumen!

Published January 05, 2013

Where you stand in the arc of skill

Luck may play a big part, but success is determined more by skill

By

Teh Hooi Ling

Senior Correspondent

        

TRYING TO FIGURE IT OUT
People lose skill with age but so do organisations. Like ageing individuals, companies rely on methods and rules of thumb that worked well in the past rather than embrace novelty. - PHOTO: REUTERS

IT IS the new year. We are all a year older. There is no escaping the inexorable march of time.
With age, our physical bodies go into a slow and steady decline. We have more aches and pains. We are not as strong and as fast as before. So old age is not your friend in sports.
How about in areas that require cognitive skills? How about organisations? Well, it seems old age is not your friend either in these two arenas.
I'm reading the book The Success Equation - Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin. The thesis is that, in some aspects of our lives, luck plays a big part. In others, skill is the main determinant of success.
For example, in chess, the better player will almost always win. In baseball, the better team may not always win because there are many interacting elements in a baseball game. Luck plays a bigger role.
Similarly, in the investment world, with so many interacting elements, a certain amount of luck is required. In the short term, the role of luck overwhelms skill. But in the long term, it is skill which determines whether someone comes out ahead.
But there is an arc that skill takes. This was the topic tackled in one of the chapters in the book. In most sports, the peak performance of an athlete is in the 20s.
What about cognitive skills? When it comes to cognitive tasks, skill is closely related to being competent in making decisions. Psychologists Melissa Finucane and Christina Gullion say that the keys to competence include "understanding information, integrating information in an internally consistent manner, identifying the relevance of information in a decision process and inhibiting impulsive responding".

Types of intelligence
Two types of intelligence are involved when we make decisions.
Fluid intelligence refers to the ability to solve problems that you've never seen before.
Crystallised intelligence is the ability to use the knowledge accumulated through learning.
The bad news is, research on fluid and crystallised intelligence shows that fluid intelligence peaks around the age of 20 and declines consistently and steadily throughout life. The ability to reason with numbers also tends to erode with age.
The good news is crystallised intelligence tends to improve with age. Growing knowledge compensates for a reduction in fluidity up to a certain age.
Fluid and crystallised intelligence also manifests in the creative field.
David Galenson, a professor of economics at the University of Chicago, has studied artistic creativity in detail. He argues that there are two types of artistic innovators and that each one peaks at a different time.
The first type, the conceptual innovator, produces work that is novel and different from that of other artists. Prof Galenson considers Pablo Picasso a classic conceptual innovator. His peak productivity came when he was 26.
Experimental innovators, on the other hand, do a lot of research, accumulate knowledge, and rely on slow and incremental progress. Paul Cezanne is the prototypical experimental innovator. His peak of productivity came at age 67.
So as we age, we lose our creativity in solving problems, but we replace it with experience, rules of thumb.
We also become "cognitive misers". We rely on cognitive mechanisms that are fast, low in computational power and require little concentration.
Another characteristic of a cognitive miser is the tendency to reason from an egocentric point of view. Most times, that leads us to less-than-rational decisions.
Such quick decision-making which draws on experience works when the environment is stable. Trouble arises when individuals rely too heavily on their experience in making automatic decisions, says Mr Mauboussin. "This means that we make poorer choices in environments that are complex and unstable."
Business and investing are examples of realms where intuition often fails. Mr Mauboussin said that researchers who studied people making investments found that decisions about those investments grew less wise as they got older.
So what is the peak performance period for an investor? Supposedly, it is 42, with a sharp drop coming at age 70.

Organisational rigidities
Is there a way to slow down the deterioration? I'm guessing constantly exposing oneself to new ideas, new experiences, keeping an open mind and meditating would help?
So people lose skill with age. But guess what, so do organisations.
Mr Mauboussin said the best explanation for why companies decline is that they fall prey to organisational rigidities.
Companies must balance exploiting profitable markets with exploring new ones. Exploiting known markets requires optimising processes and executing these effectively, resulting in reliable, near-term success.
Exploring unknown markets requires search and experimentation and offers none of the immediate benefits of exploitation.
Mr Mauboussin said finding the best balance between exploration and exploitation depends on the rate of change in the environment. When change comes slowly, the balance can tilt towards exploitation. When it comes quickly, an organisation must dedicate more resources to exploration, since profits are quickly exhausted. In general, companies tend to lean more on exploitation, which increases efficiency and profits in the short run but makes the company rigid - and rigidity is a quality that only worsens with age.
Like ageing individuals, companies rely on methods and rules of thumb that worked well in the past rather than embrace novelty.
Companies, too, follow an arc of skill.
Skill rises and falls as a function of age. It is just how nature works. Being aware of where one is in terms of that arc and the associated mental and cognitive habits at that point in time can put us in good stead when it comes to making decisions.
The key thing, for me, is to avoid being too rigid.

• The writer is a CFA charterholder

There Are Very Few Real Estate Investment Opportunities in Singapore Now

In my quest to invest in at least one real estate a year, I started my 2013 surveying Singapore again. After all, after six to seven anti speculative measures from the government, I was thinking that perhaps sellers would be more realistic. Also, I've heard from anecdotal evidence that rents have dropped by 10 - 20% in the last six months. The drop is due to a large number of new properties completed recently, and a smaller increase of foreign talent.

I was quite disappointed with my search. Sellers are still very unrealistic about their prices. They were also very fickle, choosing to withdraw their adverts after several offers. I felt that many were merely testing the market to discover the true value of their homes / shops.

After this fruitless exercise, I may have to venture abroad to look at properties which give better potential returns.

2013 is where a flood of completed residential properties hit the market. I remember there will be around 35,000 to 40,000 new residential dwellings completed in 2013. In 2014, it gets worse because there will be 45,000 to 50,000 new completions. In 2015, 55,000 to 60,000 new dwellings will be completed. This is the start of rents dropping and by the time we reach 2015, rentals may fall by 30% on average. With gross yields already at 3.2%, it may drop to 2.5% even if prices remain where they are. We are also expected interest rates to creep up. So those residents who are highly leveraged and holding on to more than three properties may be under pressure to drop their asking prices.

Europe and the US may be far better investment destinations for the next three years. I've also discovered several new destinations that have good rule of law and far better income to price ratios compared to Singapore.

Be Fearful When Others Are Greedy

This rally is too obvious. There are no more worries. The Fiscal Cliff has been settled for now. But this eerily reminded me of the start of 2011, when there is consensus among all (retail, institutional, TV anchors from CNBC and Bloomberg) that emerging market equities are the way to go.

When everybody turns bullish, it means that there is little additional money to pile into stocks to make it go higher. I believe for the next three months, asset allocators will still take time to shift from bonds to stocks. Beyond that, there will be very little to push stocks higher.

From 2009 to now, US and ASEAN equities have moved to higher highs. Valuations are not cheap any more. S&P500 is at around 16x PE. If it rises another 20% and even if earnings shoot up by 10%, PE would have reached around 18x. PE to growth ratio would be > 1. The Jakarta Composite Index is at 16x PE. Even if earnings rise by 15%, PEG would be > 1. It will take a very strong growth momentum to push PEG < 1.

On the other hand, Chinese equities peaked in late 2009 and has fallen by 30 - 40% to 8x PE. European (including Russia) and mining stocks peaked in 2011 and are now at around 10 and 15x PE respectively. If you wish to invest, and fear volatility due to profit taking later in 2013, go for the cheapest markets with the worst news factored in. I like Chinese equities the most now. Also, Russian stocks look like the cheapest in terms of exposure to cyclicals. Chinese equities, namely those listed in Hang Seng could rise by 50% and their PE is still at 13x with no earnings growth. If I factor in 15% earnings growth, HSCEI stocks could rise by 65 - 70% before hitting median valuations. Russian stocks have even higher upside than HSCEI because it is at around 5x PE and historically high dividend yields. Global mining stocks have rather muted upside. They are at around 14x PE on a median of 15x. I believe it can rise by around 10 - 30% before hitting the brakes. In fact, the mining sector is still finding the bottom and dollar cost averaging into this sector is a good idea now.

Usually, the first year of the US Presidential cycle is the worst for stocks. I believe it could ring true again, especially for US stocks.