Asians' Obsession With "NEW" Houses Is Illogical!

Here's an article about an off plan purchase in JB that went awry. Two years ago, I bought a hotel strata titled room in London for what I thought was a very cheap price. I bought it in a property investment club. The completion was supposed to be Dec 2012 but the developer went bankrupt. Thankfully, my deposit was insured. A new developer has taken over but the delay continues. The agent has not updated me regularly on the status. I had to Google for information about the hotel. All this while, my money is stuck, earning no interest.

In Britain, deposits for off plan properties are insured by a third party. Further, all new builds have a 10-year warranty for defects. This gives buyers a peace of mind. Yet in periods of doldrums, off plan in UK actually trades at a slight discount to newly completed properties. This is because of the opportunity cost of not getting rental income, and the risk of the house not built up to expectations.

In Singapore, developers do not provide deposit insurance. The money is in escrow account, secured by the bank. But all you need is the architect's signature to certify that a stage of construction is completed for money to be released. I know that for a fact because I used to be a corporate banker. Also, the new builds have only 1 year of warranty. Yet in Singapore, off plan properties sell at 5 - 20% premium to resale.

In Malaysia, the risk is even greater. In the article below, amenities can be changed. TOP can be stretched. My family bought a condo in Desaru many decades ago and got badly burnt when the developer went bankrupt before the condo was completed. Today, the skeleton is still there.

Everybody is talking about how much prices in Iskandar has skyrocketed. But what has skyrocketed is the developers' sale price. There is no talk of the resale market skyrocketing. But you should be very concerned because YOUR EXIT PRICE DEPENDS ON THE RESALE MARKET, not the developer price. My relative bought a KL condo in 1994 for RM200k. Today, nearby off plan condos are selling for RM1.2m. But he only has offers for between RM300k - 400k for the same size!! That's a huge 60 - 70% discount to the off plan price.

This is extremely illogical and I believe only Asians have this strange behaviour. They want everything to be "NEW". But this NEWNESS has a huge price tag. Just because nobody stepped into the new house doesn't mean it will bring you luck for goodness sake. Completed properties have lower risk. You can actually see the size of the unit, the workmanship, the amenities within the condo (is the swimming pool working, is the gym in good condition, is the block well maintained). With off plan, what you have is a drawing, some brochures of a nice block with unencumbered views. Be careful that when your house is completed, the view is not blocked by a taller building just 10m away!

I guess in the west, buyers are far more savvy and logical than in the east. Off plan properties traditionally have a small discount to newly completed properties. It is only recently that off plan properties in London start to sell above completed properties and this phenomena is driven by Asian buyers! The level of transparency is far higher than Singapore's. They give you photos of the view you are expected to have from your unit (I guess they take photos from a crane). They give you cashflow projections, all expenses calculated in excel form.

JB condo delay irks S'porean buyers

Property Guru – 11 hours ago

A group of Singaporeans who bought condo units at the 602-unit KSL D'Esplanade Residence in Johor Bahru, have complained about plan changes, repeated construction delays and confusing information on when the project will be completed.

According to media reports, the buyers said they inquired about the completion date five times and at each instance they have been told that it has been put back.
One Singaporean revealed that when he purchased his RM750,000 (S$298,800) unit two years ago, the developer told him that the condominium was already 80 percent complete.
However, buyers were told in April 2013 that the project was still only 80 percent complete and will likely be ready by July.
Responding, a spokeswoman for the developer explained that the completion rate mentioned in 2011 only referred to the lower levels, and "every floor has a different completion date." She also added that the unit completion/delivery period is three years, but this only commences when the sales & purchase agreement is inked.
Moreover, some of the buyers also claimed they were being short-changed because the condominium does not reflect amenities advertised during the time of purchase. According to brochures, the hotel will feature an 18-hole mini-golf course, but buyers found out last October that it was replaced by a water theme park.
Commenting on the issue, the spokeswoman noted: "That area is not part of the residential area; it belongs to the hotel, and the hotel management has the right to change anything."

Why I Focus More On Cashflow Than Capital Gains

http://www.youtube.com/watch?v=nn-bd20zoU4

Listen to this interview with Robert Kiyosaki. "Capital Gains is a Ponzi Scheme." "It's a greater fool theory". When you buy a house in the hope that someone else will buy from you at a higher price, it's called a Ponzi Scheme. You're hoping that someone comes to take it off you at a much higher price.

Back in the Credit Crisis, the ones who got hit were the ones who went for pure capital gains without rental income. I can see it coming in the next three years. When interest rates rise, those who bought houses / shops at 2.5% yield will get hammered. Those who bought pricey houses at zero yields in Iskandar will get hammered when interest rates rise to 6 - 7%.

I am extremely cautious in everything I do. I cannot afford to lose what I've gained. Even for stocks, I go for high dividend plays. For properties, I definitely go for a good balance of yield and capital gains. If a house produces negative cashflow against my mortgage, I would avoid it. Cashflow is my defence in case I am stuck with it for a long time.

I hope readers take heed.

Singapore: A Vulnerable City State.... What Will It Be Like In 2023?

Vulnerability of Singapore

The recent haze from Sumatra has reminded us of the vulnerability of a city state. The government has done an amazing job running the country, although there were several major policy errors. Overall, on a scale of one to ten, I'd rate our current government a seven for the last fifty years of ruling. One only has to travel around the region to realise what could easily have gone wrong.

But no matter how strong or clean the government is, we are still a vulnerable city state, with no natural food supply or energy resource. While we may be self sufficient in water in future, we rely entirely on friendly countries to supply us with food and energy. What happens if global warming raises sea level by one to two metres? How would that affect our geography? More importantly, how would the changing weather patterns affect the countries that traditionally supply us with food? If they are unable to feed their own citizens, will they then ban exports? I think this is highly probable.

Imagine Singapore suddenly running low on food supply. The first people to leave the country are the "new citizens" who are here for the low tax rates. If they are rich, they can go anywhere. Those with Malaysian roots would have returned to their home countries. There will be food rationing. Home prices will plunge overnight, another lesson to everyone not to have 100% of their portfolio in real estate. Stocks, bonds, unit trusts can be transferred elsewhere and not dependent on where you live. The so-called HDB heartlanders will be the worst affected.

That is why I feel that it is important to be financially free fast and to spread your roots worldwide with houses in at least three different countries. In this haze, my wife and I wanted to leave Singapore to have a long holiday abroad. But because of work we both are rooted here and are forced to forage for N95 masks, buy air purifiers.

Beautiful Sea Side Homes in Singapore, Malaysia and Lake Garda in Italy

On the topic of living overseas, I recently saw some terraces in Sembawang, 99-year leasehold, with sea view and Malaysia's Pasir Gudang opposite. For 5,000 sf of land and 8,000 of GFA, it costs around SGD7.2m. I naturally wondered if it indeed would make more sense to buy a bungalow for SGD1.2m in Iskandar in a gated development. Naturally, I began to think that if I wanted a place to retire, Iskandar would be the better choice. However, on the topic of safety of a gated development, I believe it is an illusion. If robbers were to come in a truck, armed with parangs, would the poorly armed and poorly paid security guards be willing to lay down their lives to protect us? At most, I think they will call the police for help but let the robbers pass. How long will the police take to reach the helpless residents? I'd be surprise if the patrol car turns up in 30 minutes.

In luxury houses in Gold Coast, every home has several security buttons and armed guards on patrol. These private security firms mean business because once my friend accidentally pressed the security button and within 10 minutes, an armed guard turned up. The police turned up 15 minutes later. Needless to say, my friend and I were impressed.

Now if you want a really beautiful home at an affordable price, you need to look at Lake Garda in Italy. Houses with direct lake views cost between EUR500k - 1 million! The climate is Mediterranean. Winters are mild (0  - 8 degrees). Summers are pleasant (15 - 25 degrees Celsius). Of course, up keeping the house will be expensive because you need someone to cut the grass, maintain the plants, the pool. All the cleaning involved. It will take maybe several servants to maintain it. Don't forget the power bill, which could reach EUR500 - 1k per month. Your monthly cost could reach EUR2 - 10k per month. But if are financially free, collecting dividends from your stocks and bonds portfolio, plus rental income from your many homes, this is just a small price to pay for a life that many people can only dream of.

Think about it. In Singapore, you can work all your life for that SGD2.5m property which you will spend your lifetime servicing the mortgage. But if you spend just 1/3 of the price, you can have a better climate, a view to die for, and the higher maintenance can be spread over many years.

See you in Lake Garda someday!

Asian and Emerging Market Stocks Look Bad.... My Revised Projections for Global Properties

Long Period of Consolidation for Asian / Emerging Markets But Downside Limited

The latest selldown of financial markets is rather severe. If you look at the monthly charts, MSCI Asia x Japan and Emerging Markets have turned south. It indicates that this correction could last between one to six months! The mining sector is also quite bad. Chinese stocks are still in a doldrums.

But if you ask me how severe the correction will be, I believe it will not be more than 20% because valuations are extremely cheap now. MSCI is trading at around 11.5x PE compared to 13.5x median. If you mistrust PE numbers because earnings can fall a lot in a recession, then use the Price to Book data. It's also around 20% below median. Emerging Markets' Price to Book is around 15% below median. The mining sector is slightly above median, which means there may be more to fall. Chinese stocks are 40% below median.

You may wish to start bottom fishing soon by buying in tranches.

Price to income ratio and net rental yield spread over mortgage rates are important indicators of value for real estate. But mortgage costs to earnings is an even better indicator. This is because mortgage costs are dependent on LTV, which can be very high in boom times (90% in Singapore in 2007, over 100% in the US and UK in 2007), to very low in periods of busts (zero in the US in 2009 / 2010). If mortgage costs are low, or earnings rise, property prices can continue to rise. Conversely, if mortgage burden is high and earnings shrink, property prices are likely to tumble.

Potentially 30 - 35% upside for UK from 2013 - 2016

In the UK, it is now around 28%.  If I assume that mortgage costs will rise 10% over three years, income rise 10% too, and affordability will hit 40% before the cycle ends, we have around 30 - 35% upside! I believe mortgage costs will rise around 10% only because even though BOE overnight rates are 0.5%, mortgage rates are between 3.5 - 4%. Historically, spreads are around 0.5 - 1% due to competition from banks and other lenders. Today, banks care abou repairing their balance sheets more than lending, that's why spreads are so high. But by 2016, even if BOE rates rise to 3%, lending rates will still be around 4 - 4.5%, which isn't much higher than current levels.

I am not hopeful that this housing recovery for the UK will last very long or produce the same upside as the 1996 - 2007 period because of the high level of affordability and slow recovery in wages.

Potentially 40 - 50% upside for the US / Ireland

The US property cycle has taken off for over a year now. Prices are now 10 - 15% higher than the same period last year. In terms of affordability, I believe they are at around 20% level, almost half of the UK's and at the same level as what UK was at in 1996.  I am extremely bullish about single family homes in the US, as well as commercial real estate. That's why I invested in the Colony Homes Fund, which should IPO in the next one to two years. The UK had a 12 year rally which lasted from 1996 - 2008 when it's affordability dropped in 20%.

In most of Europe, real estate prices have just bottomed. Mortgages are almost non existent. If it existed, affordability would be at around 15 - 20%. Another problem with Europe is that wages are still falling so the upside may not be as much as in the US. Politics is a problem in Europe and the governments may slap on more capital gains and transaction taxes on foreign buyers to replenish their coffers.

-30% to +30% For Iskandar

If you bought a condo from developers at over RM1000 psf, chances are there will be no resale market and if you do put it up for sale after it TOP, you cannot find a buyer willing to match your cost price. http://fisheyer.com/2013/06/16/iskandar-property-data-hard-to-come-by/

There are whispers in the market that some secondary transactions were at around RM400 psf. This is why I think most of the transactions done after 2012 will face a loss even until 2016. It is ok if you live in them, but if you expect to rent them out, you will probably be disappointed that no Malaysian will rent it from you at respectable yields and those who can afford to pay a high rent would have bought it themselves.

For those who bought houses before 2012, the psf was between RM250 - 350 psf. I do not think they will lose money by 2016.

If you use the affordability index of mortgage against Malaysians' income, it will be over 150% and indicates a humongous bubble. If you use the same index against Singaporean's income, it will be around 37% of the income. Still extremely high because Malaysia's mortgage rates are 4.2% and that's at a historically low level already!! Wait till interest rates revert to 6.5% and you will see forced selling by foreigners. So there's no way that the luxury condos in Iskandar can find Malaysian buyers in the resale market.

-20% to 10% Upside for Singapore

I've argued about Singapore's bleak prospects for real estate since 2011 and I believe I will be vindicated in the next three years. I'll leave it at that.

Soft Landing of Singapore Residential is Occuring

I've been expecting this for the last one year. 2013 is the inflexion point. There will be enough supply for 113k more people in 2013 at a time when population growth is below that.  Already we are seeing rental rates fall, especially in the OCR. The over supply in OCR is the most severe and will last until 2016. It will fall by 10-30% in price.

With rental yields falling, the perfect storm will start in 2014 until 2016 when rates start to creep up.

Some Singaporeans have been prudent in their investments, going for resale homes overseas, especially those that fetch very high net rents. But others blew it on shiny new, over priced off plan overseas properties in in OCR / RCR. They may not have enough ammunition to take advantage when prices finally trough in 2016. "A fool and his money will soon be parted".

PUBLISHED JUNE 04, 2013

Construction sector crucial in co-piloting 'soft-landing': Khaw

BY

NG ZHUO YANG

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THE engineering of a "soft-landing" in Singapore's housing market requires the construction sector to play its part as well, wrote National Development Minister Khaw Boon Wan yesterday on his blog, Housing Matters.

Earlier yesterday, the minister witnessed the handover of a completed block at Treegrove @ Woodlands, a new Built-To-Order (BTO) project, from its appointed building contractor to the Housing & Development Board (HDB).

In his blog post, Mr Khaw wrote that ramping up the supply of HDB flats and private residential units is a key strategy in achieving a "soft-landing".

He went on to say that he watches the progress of the local construction programme closely because it is an "important element in our soft-landing mission".

The minister also said HDB's building contractors had completed 6,000 units as at the end of last month, and despite the tightening of foreign labour policy, remain confident of delivering the remaining 7,600 units by the end of the year.

As for private residential units, 3,500 were completed as at end-April this year. Going by latest construction progress, the Urban Redevelopment Authority estimates that the remaining 14,900 private residential units can also be completed within this year, said Mr Khaw.

All in all, 13,600 HDB flats and 18,400 private residential units are scheduled to be completed this year.

The minister wrote: "We will begin to feel the effect of the ramped-up supply this year; but the full effect will be felt next year and the year after that."

Aside from boosting supply, Mr Khaw said HDB has also arranged for BTO projects such as Treegrove @ Woodlands to be completed in phases, so as to "help residents move into their flats earlier" by allowing for buyers to receive their keys as and when the blocks are completed.

"For this particular block at Treegrove @ Woodlands, flat buyers can receive the keys within a couple of weeks," he added.

Separately, HDB said yesterday that it will launch another 25,000 flats this year and deliver between 26,000 and 29,000 flats each in the next two years.

An Evolution of a Property Investor

After buying and selling residential units for a while, I realised that I should naturally evolve towards investing in commercial units. Residential tenants tend to disturb landlords very often. A leaky tap, broken boiler, no ironing board. All these costs add up.

Commercial tenants put in money to renovate the shops / offices and will tend to try harder to make it work. For the landlord, it's hassle free.

I suppose after investing in a few commercial units, I'll venture into property development, purchase of entire office plates, and eventually buying and selling commercial buildings, eventually offloading them into REITs. This is the evolution of a real estate investor.

The profits can be astronomical.

Risk Off Again! This Time It's Bigger Than in Feb 2013

If you noticed, I've been quiet lately. US corporate high yield spreads have shot up again. Risk aversion is back and this time the rate of widening is far more than in Feb 2013. We are in for a bigger correction this time.

I'm not too hot about the mining sector and would recommend getting out of mining stocks into something safer, e.g. balanced funds like JPMorgan Global Income, JPMorgan Asia Pacific Income and Schroder Global Multi Asset Income.

I'm also getting out of investment grade bonds and bond funds like AllianceBernstein American Income Portfolio, moving into balanced funds. It scores the worst in terms of return/risk ratio for next 2 years.

I'll hold on to high yield bond funds for six more months.

For the energy sector, things are surprisingly bullish. I'll probably hold on to my Blackrock World Energy and some energy stocks.

But for China, I'm still quite skittish. It's not a SELL, but it's not a BUY either. I guess I'll wait around but not be overly exposed.

On the longer term, equities are still likely to rise further. I dare say for most markets, it should be around 20 - 30% upside. The rally could take us into 2014. But for the next two to three months, it looks volatile.

Making Sense of the US and Japan Stock Rallies

In my last four years of investing in stocks and forex, two major market rallies eluded me. The massive S&P500 rally that began in March 2009 until now was partially missed. I could not understand why a country that struggles to grow at 2% per year in GDP can see such inflated valuations. With corporate earnings growth of around 15%, the S&P500 is at around 16x PE now. It has risen by almost 140% since March 2009.

The Nikkei rally that started in around Nov 2012 was spotted by me. But I underweighted it. Since then, the index rallied almost 70%, although USDJPY rose by 25%. I had it both ways by going long USDJPY and long Nikkei. But just like a fisherman's tale about "the big one that got away", I just put less than 10% into it.

On hindsight, both rallies made sense to me. When Obama announced a massive QE1 in Nov 2008, Bernanke QE2 in Jackson Hole in July 2010, and QE3 in Nov 2011, cheap funding was readily available to hedge fund managers. They borrowed USD and punted US stocks, or switched to AUD bonds for that positive carry. As long as the USD depreciated, they will make money both ways. It was a party that lasted as long as inflation remained low and unemployment rate above 6.5%.

But now, there is talk of gradual tapering of QE. We saw USD appreciate in the last three months. I caught this rally big time going long USDSGD. Hedge fund managers unwound their carry trade and switched to borrowing JPY.

Abenomics convinced money managers that JPY is the next currency to borrow and short. The same drill is being repeated in Nikkei now.

But something else is happening. I've shorted AUDUSD since March 2013 and made quite a bit. It was a totally technical trade. the fundamental reason is that the Australian economy is sputtering. Inflation is expected to hit 2% by end 2013. The RBA lowered rates repeatedly until it hit around 2.75%. The positive carry between USD and AUD shrank. Lots of carry trades were unwound in the last three months. Since the USD was repaid, and a lot more JPY was drawn down, one wonders where the funds are flowing to. I think Nikkei will have another move upwards. But some of it will be used to chase up the cheapest stock markets in the world. The HSCEI is still at rock bottom valuations. Russia as well, with PE at only 5x. Money is still not flowing to mining though because of poor profitability.