I Found Half of "Limitless" Pill

https://www.youtube.com/watch?v=jOLqNOfzus4

The movie "Limitless" which premiered in 2011, contributed to the change in my life. I was mentally tired, bordered on being depressed. I was stuck in a career rut, fearing to venture into another career that I was much better suited for. But after watching the movie, my perspective change. I was inspired to look for a pill that will give me mental clarity, be more efficient, energetic and relaxed. Thus I started my three year search for supplements and pills that could contribute to my well being. Don't get me wrong, I definitely am not into recreational drugs, nor alcohol. I just wanted to be clear headed, not high; in a good mood and creative.

I researched many sites and found pills and supplements that gave me a bit of what the wonder drug in Limitless could bring. It relaxed me, made me think clearer, gave me a better mood.

However, my IQ did not increase. It remained at 152, better than 98% of the population. But I was certainly better able to harness my mental capabilities. More importantly, I was in a better mood most of the time, which was priceless. It removed a lot of my social shyness.

I urge any one who felt that their potential is not fully unleashed to search for answers. It could be in prayers, in God, in meditation, or in a chemical substance to boost your brain activity. Any edge you can help you find greater happiness, and financial well being.

 

Why I Seldom Venture Into Real Estate in Developing Countries (KL, Manila, Iskandar). Must Read!

USD350k for a Manila luxury apartment, only USD150k for a Phnom Penh condo, USD400k for a KL apartment! I avoided them all! 

http://ifonlysingaporeans.blogspot.sg/2014/06/mega-reclamation-project-off-johor.html

I have been raising concerns since beginning of 2013 about the lack of proper planning by Iskandar authorities and the flood of supply coming on stream. Iskandar has currently around 1.7m inhabitants, and require just 350k of housing units. Currently there are around 400k of homes, with another 180k coming on stream in the next 5 years. There is enough homes for 2.61m. Yet the population growth in Iskandar has been below the expected 3.3% per year, more like 1.5%. I expect residential vacancy rate to shoot up to 30 - 40% in the next 5 years. This is similar to Iskandar's office space, which has a similar vacancy rate.

Refer to the hyperlink above, they are even building on reclaimed land that has not been allowed to settle for 10 years. This is a danger to the structures being built! Yet the developers have the cheek to start selling units to foreigners. Ask any local and they will tell you that they will never buy in Iskandar, other than the existing JB old town.

Building Already Has Begun in Newly Reclaimed Land!!

 

If you read the blog below, crime is increasing in Bt Indah. This is exactly what I thought would happen once more foreigners settle there. The situation has not improved unfortunately.

http://horizonhills.wordpress.com/

A YouTube Video of a Dramatic Car Break In

https://www.youtube.com/watch?v=0H8cMX_Iysg
 

I also understand that several projects in Danga Bay are being sold without permits. I guess it is quite a cowboy town.

There is no scarcity of land in Iskandar, and with the massive oversupply, I expect rental return to be non-existent. When Bank Negara hikes rates, and Singapore enters into another recession within 3 years, we should see firesales occurring. I think only people who own residential land before mid 2013, or who bought landed properties before 2011 will stand to make money.

KL is another bubble, but to a smaller extent than Iskandar because the city is mature. Still, there is no shortage of housing in KL. Just look at Mont Kiara, half the tower blocks are dark at night.

Investing in third world countries is very tricky, especially when you buy off-plan properties. The money goes straight to the developers. If the developers abandon the projects, you get nothing in return. In developed countries like Australia, UK, your deposits are insured by the government and you only pay 10% downpayment, with interest deferral schemes. If you wish to venture in to third world countries' real estate my suggestion is to go for existing properties where you see the final product. Get a good lawyer to act for you and make sure the title is yours. Better still, get financing from a local bank so that they will do even more due diligence than you. Remember, property without leverage is never as good as stocks / bonds. Global Stocks appreciate 10% per annum for the last two decades. In Singapore, it's 8% per annum for properties without leverage. In KL, only 8% as well. But if you leverage at 80% LTV, your IRR rises to around 28% SO the return dynamics change dramatically. I can't understand why one would take cross-border risks, developer risks, and liquidity risks to invest in real estate without leverage involved.

We could see a hefty correction in Asian real estate in the next 3 - 5 years. This is just my personal opinion. But I've called several turning points correct; the bottom of the US property cycle in 2012, the bottom of the London prime market in 2009, Greater London recovery in 2013, peak of Singapore and Iskandar in 2013.

Finally remember in finance we have risk premium. In a third world country, I'd require a much higher risk premium to compensate for the risk, meaning I require double the return. If I project New York real estate to appreciate 6% per year excluding leverage, and 25% IRR post taxes and costs, I would expect a Manila project to give me 12% per year ex leverage and 50% IRR! Without that, I'd never buy. Remember, 25% IRR or cash on cash return out of a 1% risk is much better than a 49% IRR on a 25% risk!

Stay safe, and remember Warren Buffett's advice, "rule number 1, don't lose money. rule number 2, remember rule number 1" :-)

The Problem With Left Leaning Welfare States

In many countries where property prices are in a bubble: Cities of China, Singapore, KL and Iskandar Malaysia, most cities in Indonesia, New York, London, Sydney and Melbourne, there is greater need for social housing.

Recently, in a property convention in west London, there were many protestors against the greed of developers. They demanded affordable housing instead of luxury homes for foreigners and investors.

However, many welfare states in the west are practically bankrupt. The generous welfare payouts have left governments with insufficient funds to build affordable homes. In Asia, the governments couldn't care less and are too corrupted to build affordable homes, with the exception of maybe Singapore and Japan.

Income and corporate taxes cannot rise further, otherwise it will remove incentives to work hard and chase away businesses. Where will the funds come from?

When people in the west want affordable homes, they will have to be prepared for much less welfare payouts, less dependence on the state for pension. In fact pension funds should be privately run and not underwritten by the government.

Another mistake made by western governments is to rent out the affordable homes. People who own homes tend to work harder to pay off mortgages than people who rent. There is truth in the saying that a "home is a man's castle". once you own a home, you will work hard to make sure the mortgages are paid. Gradually when property prices appreciate, they will upgrade their homes, buy multiple investment homes. This is how people are rooted to the country and have a stake in the economic pie.

The malaise in Europe and increasingly in the US is an entitlement attitude. Most feel that it's the job of the government to make sure basic needs are taken care of. This is liken to a communist system that will never work.

Correction of Stock Markets...

Finally, we see a meaningful correction. I was hoping the S&P500 could drop over 10%, bringing the PE below 17x. It look as if this correction could last longer because:

1. The VIX Index rose to over 26. This is the highest since Sep 2011, when S&P500 corrected 15% and Asia ex Japan over 20%.

2. The macro picture is not good: the US Treasury 10 year yield dropped below 2%, indicating deflation ahead. German 10 year bunds fell below 1%. Oil prices dip below USD85 bbl. The yield curve for most large economies are largely flat.

3. Eurozone is entering into its third recession in six years.

4. China has a huge property bubble threatening to blow over. The evidence of China's slowdown can be seen in iron ore prices which dipped below USD85 mt.

We are in a slow growth environment. The PE ratios for most markets should not be at 17x, it should be closer to 14x. But the artificially low interest rates made money too cheap for speculation. It could be very challenging wen rates finally rise.

In my model, it shows several countries sectors as BUYS:

1. H Shares.
2. Russia (I'd wait for the charts to show a true turnaround. If you use the 3 month central bank rate, the yield curve is inverted).
3. US, European and Asian banks.

Several sectors are ready for dollar cost averaging:
1. Global equities (this is why I'm still positive on global equities, not getting out of my balanced funds).
2. Mining equities (I would not buy now, in fact cut loss on a rebound because China's building is bound to slow and Australia's mining output is still increasing).
3. Global tech
4. Energy stocks were battered recently. We could look selectively at those with natural gas exposure.
5. American home builders.

Now there is a huge list of countries / sectors that are a SELL:
1. Asia x Japan (this is due to the negative earnings recently. I'd wait a while before being concerned.)
2. Emerging markets (same as for 1).
3. Latin America. Rich valuations. Inversion of yield curve.
4. Thailand. Rich valuations.
5. Indonesia, Vietnam, Philippines, Korea.
6. Global real estate. It's a bad time for Asia's real estate especially, with govt clampdowns and bubbles deflating.
7. African and Middle Eastern markets.

On the whole I believe this is a very disjointed market, much like the 1990s..

1. For the developed countries that are not mining dependent, the bull run ran unabated from 2009 to now.
2. For Eurozone, it was pretty much choppy after 2011, the Euro crisis.
3. For North Asia, our fortunes followed China's and the resource countries, which saw the bull run end in 2011, before falling over 40%. They have just bottomed.

For many Asia centric investors and those who believed in the resource and Super Cycle bull shit, I believe their performances would have paled in comparison to those who simply bought US stocks.

What to make of the future

The rally will not run for over 24 months. Here are the scenarios:

30% probability
1. Economy recovers, inflation is benign, oil hovers around USD80 bbl. We should see the bull rally continue for another 24 months. Interest rates in the US will rise as expected in mid 2015. After several hikes, real estate in Asia will creak and drop sharply in 2016.


50% probability
2. Economy sputters. Inflation overs between 0 - 1% in Europe and the US. Oil falls to between 50 - 80. Iron ore falls between 50 - 80 mt. Under such a circumstance, which I believe is highly likely. Can you imagine what will happen to the corrupt middle eastern countries that run such a huge budget deficit that they rely on oil to be over 80 to balance their budgets? They will need to invest in other industries that create jobs. There will be less focus on idealism and religion. The fuel that feeds ISIS may slowly dry up. Shale gas output will slowly reduce our dependency on crude oil.

Of course the mining countries will continue to be in the doldrums. Australia, Indonesia, China's mines will be in trouble as they will find it uneconomical to run.

US Fed may keep rate at zero until end of 2015. Bonds will rally. Stocks will be volatile, with little returns. Only China's stock markets will recover as valuation recover slowly from rock bottom. The housing bubble worldwide will run out of control. When the Fed finally hikes, all will come tumbling. Stock markets should tumble within 18 months.

20%
3. Deflation worldwide. Europe cannot get its act together and it will be a lost decade for them. The US' growth is curtailed. China's property bubble unravels as their export market slowdown is not offset by domestic consumption increase.

we could see the end of the market rally within 12 months.

Equities Weekly: Risk Aversion Continues to Grip Equity Markets [13 Oct 14]

Equities Weekly: Risk Aversion Continues to Grip Equity Markets [13 Oct 14]

iFAST Research Team October 13, 2014

Equity markets around the world continued their decline over the week ended 10 October 2014, with the MSCI AC World index incurring a -3.26% loss. With risk aversion gripping the markets, developed markets generally led the losses – all of them were in the red when the week ended. Headline US equity indexes like the S&P 500 index and the Nasdaq 100 index fell by -3.73% and -4.47% respectively, while the European equity market (represented by the Stoxx 600 index) fell by -3.67% over the week. Over across in Japan, Japanese equities (as represented by the Nikkei 225 index) declined -1.47%.

Emerging and Asian markets as a whole held up slightly better than their developed counterparts, with the MSCI Emerging Markets index and the MSCI Asia ex Japan index falling by -1.35% and -1.48% respectively over the week. In East Asia, the Korean equity market (represented by the Kospi index) incurred a -2.65% loss, while Taiwanese equities fell by -1.84% over the week. Meanwhile, Hong Kong’s Hang Seng index declined slightly by -0.51%, while China’s HSML 100 index declined by -0.74%. Continuing its recent resilience over the past few weeks, the local Chinese equity market held up amidst the decline in global equity markets worldwide, with the CSI 300 index and the Shanghai Composite index inching up by 0.64% and 0.45% respectively. In Southeast Asia, Malaysian, Thai and Indonesian equities incurred losses of -1.77%, -1.07% and -0.56% respectively, while the Lion City’s STI index incurred a -0.90% loss.

Brazil was the top performing equity market under our coverage over the week, with the Bovespa index rallying by 3.54% over the week. Gold prices inched up by USD 32 per ounce, posting a gain of 2.04% in SGD terms over the week.
[All returns in SGD terms unless otherwise stated]

Investors may refer to Market Valuations as of 10 October 2014 for more details.

Europe: German Industrial Production Contracted in August
Following an upward revised increase of 2.7% on a year-on-year basis in July, German industrial production posted a contraction in August, contracting -2.8% for the month, missing consensus estimates of a -0.5% decline. On a month-on-month basis, industrial production fell sharply, falling -4.0% in August following a downward revised growth rate of 1.6% in July with consensus forecasting a -1.5% contraction. The month-on-month reading of industrial production marked the sharpest contraction since January 2009. With PMI manufacturing in contraction territory for the first time since June 2013 indicating business activity contracted, and factory orders posting negative growth figures in August, industrial production in Germany is expected to remain weak.
 Japan: Machine Orders in August better than expected   Core machine orders fell -3.3% year-on-year in August, down from a prior 1.1% increase and came in better than expected – falling less than the consensus estimate of a -4.9% year-on-year decline. On a month-on-month basis, machine orders in August unexpectedly increased by 4.7%, increasing for the third consecutive month and beating consensus estimates of a 0.5% month-on-month increase. Following the official release of the data, the Japanese government’s assessment of machine orders has been raised to a “moderate recovery” from the prior statement of “fluctuating trend.”

Greater China: Chinese HSBC PMI decline slightly in September, Taiwan’s exports weaker than expected
China’s HSBC purchasing managers index came in at a reading of 52.3 in September, falling by 0.5 points from a prior reading of 52.8. The latest data reflects that China’s economic activity expanded for a fifth consecutive month, but the growth rate of manufacturing output fell to a four-month low. However, companies are still optimistic on the business outlook, with 31% of interviewed companies expecting an expansion in business activities over the next one year. In the near term, with downside risks in the economy, monetary and fiscal policies are expected to be kept accommodative, which may help to support the 7.5% growth target.

Over across the Straits of Taiwan, Taiwan’s exports rose by 4.7% year-on-year in September, down from a prior 9.6% year-on-year increase and missing consensus estimates of a 8.5% year-on-year increase. September’s data also marks the slowest exports growth rate in 3 months. While growth continues to be supported by electronic products (which makes up the majority of exports), lower than expected exports for other products affected overall data. As expectations run high for the US economy to recover steadily, should China’s economy follow suit, commodities exports may see an uplift, although an uncertain outlook for Europe may negatively impact the country’s exports.

Southeast Asia: Malaysia’s exports improved in August
Over in Southeast Asia, Malaysia’s exports improved in August, posting a 1.7% year-on-year gain, higher than the upward revised 0.8% year-on-year gain in the preceding month. The export data also came in significantly better than the -1.4% year-on-year decline forecasted by consensus. Exports were boosted mainly due to the expansion of the exports growth for liquefied natural gas and electrical and electronic products, with the former posting a 3.8% year-on-year growth in August after a hefty -22.9% contraction in the previous month. Exports growth for electrical and electronic products (which accounted for 33.7% of total exports) also posted a 3.7% year-on-year gain, after a -1.0% slump in the preceding month. Moving forward, while exports growth is unlikely to register results as seen in 1H 2014, exports growth is expected to remain sustainable and supported with the gradual recovery of global economy.

Australia: RBA leaves benchmark interest rate unchanged
The Reserve Bank of Australia (RBA) left its benchmark interest rate unchanged at 2.50%, a move which was largely in line with market consensus. The central bank also confirmed its current guidance that “on present indications, the most prudent course is likely to be a period of stability in interest rates.” In its statement, the central bank commented that the decline in the exchange rate (the AUD) partly reflects the strengthening US Dollar, but reiterated that the currency “remains high by historical standard, particularly given the further declines in key commodity prices in recent months.” Australian policy-makers continue to call for a period of stable interest rates, and this could bode well for investors using AUD-hedged share classes to harvest interest rate differentials between the SGD and the AUD. But investors are reminded that they would be exposing themselves to currency risks of the AUD, which has been under pressure of late (see Idea of the Week: 3 Things To Know About Currency Hedged Funds [10 Oct 14]).

Singaporean Developers Face Earnings Drop and Refinancing Difficulties

I've said many times before that Singapore's future is bleak. It's not because PAP is losing its dominance and the government is moving to populist policies. It's typical of most small nation states:

1. Singapore has reached developed status. At a GDP per capital of USD56k, we are paid lower than residents of London, but higher post tax. We earn less than New Yorkers. But we earn more than 99% of global cities, save for maybe Monaco and a few rich cities like Lichtenstein...

2. Our population growth is slowing down to around 100k per year. That's slightly below 2% but we ARE suffering from overcrowding. Even if the PAP achieved 80% of the votes, and the GINI coefficient rises to 10x, we cannot grow by 200k per year indefinitely, bring in thousands of lowly paid blue collared workers who replace our citizens, and at the PMET level, unfairly displace citizens with undeserving western and Indian expats. I'm not xenophobic. I believe we need foreign talent. But we need a body with teeth to ensure the citizens have a fair shot, and in fact more opportunities to excel!

3. Being a small city, Singapore is very vulnerable to external influences. It will not be long before ISIS attacks our neighbouring countries, attacking churches and temples, non-Muslims. Singapore is a primary target as it is a secular country that is majority non Muslim. The environmental degradation, like global warming, food scarcity and the haze is taking a toll on the citizens. We have no where to run, unlike New Yorkers, where they could drive to another city to escape hurricane Sandy.

4. The government has planned for enough housing for seven million people, without increasing plot ratios by much! The bulk of the supply in the next 5 years is in the OCR, with the rest in RCR. If I were to buy, I'd stick to the CCR. nothing else!

5. That's the reason I'm exploring migration... I'm very sceptical that Singapore can pull through in the next 10 years. The government policies are not helping citizens because they don't ensure fairplay and equal opportunities for citizens. We are geographic constraints, and a small hinterland, which does not allow our SMEs to flourish. We can never produce as many billionaires as the Chinese, Russians, Indians, Americans and even the Brits!


Conclusions:


Singaporeans should start to explore migration, if you're near financial freedom. If you don't need to work any more, there's little reason to live in Singapore. You can choose Singapore residency, but can spend 180 days in Melbourne / Sydney, or New York / London. The future is not very bright for Singapore, especially for real estate. I'm expecting a further 30% drop for OCR, 20% for RCR and 10% for CCR until 2016, before settling to a 5% per year return from 2017 - 2026.


If you still need to work, you better start investing, with some of your properties abroad. I'd go for London, maybe Auckland and New York. Steer clear of developing countries if you don't want the problems associated with legal rights, developer risks, tenants not paying...

Listed developers face hefty short-term debt

The 80 property firms on SGX have to pay S$23.5b within a year, amid record vacancies

Advantage Reits are in better shape than listed developers because they started refinancing with longer tenor debt ahead of rising interest rates.

FILE PHOTO

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11 Oct5:50 AM

Singapore


SINGAPORE'S listed developers and real-estate investment trusts (Reits) face their heaviest burden of near-term maturities on record just as home prices drop.


In their latest filings with Singapore Exchange (SGX), the 80 property companies on the bourse reported a combined S$23.5 billion of borrowings that have to be repaid within a year, Bloomberg-compiled data show.


The looming debt wall comes as the vacancy rate for condominiums has soared to the highest since 2006, pushing prices to the lowest in almost two years, according to data from the Urban Redevelopment Authority (URA).

Savills plc predicts that refinancing for homebuilders and Reits will be more challenging as Singapore's economy slows, with expansion cooling to 2.4 per cent in the second quarter, from 4.8 per cent in the previous three months.


Population growth on the island is at a 10-year low and Standard & Poor's expects home prices to fall further.


"We're at that point in the cycle when every quarter you're seeing selling prices come down a little bit and secondary market transactions aren't very active," Kah Ling Chan, a property analyst at S&P in Singapore said. "I suspect we haven't seen the bottom yet."


Developers of residential homes are suffering not so much from lower selling prices than "collapsed" sales volumes, said Alan Cheong, a senior director of real-estate research at Savills in Singapore. Secondary home sales have plunged to the lowest since 2003 in the first quarter, according to URA data, and as business slows, builders with less pre-sales money to finish projects have to rely on loans, boosting short-term borrowings, he said on Oct 2.


Despite the weaker demand, the number of new residential dwellings being built remains high. Units under construction reached a record in the second quarter of 2013 and some 65,270 apartments were in the pipeline as at June 30, URA data shows.


Regulatory measures have been introduced to damp the market. Between 2009 and mid-2013, the Monetary Authority of Singapore implemented eight rounds of property cooling measures to address its concern that the low interest rate environment would lead to a property price bubble, Moody's Investors Service said in an Oct 6 report.


"Appetite to buy is already curbed" and rents could fall further, S&P's Ms Chan said. "We haven't seen the full impact yet."


The 42 listed developers on SGX reported S$13.4 billion of short-term borrowings in their latest filings, 42.5 per cent more than a year earlier, data compiled by Bloomberg show. City Developments Ltd (CDL) posted debt of S$1.66 billion in the second quarter, 48.6 per cent more than at the end of 2013. Second-quarter net income fell 33 per cent, it said in August, and the company is looking to expand overseas to offset declining demand in Singapore.


CDL's S$500 million of bonds due next September and sold to investors at par in August 2010 are trading at 101.2 per cent of face value, down from 101.25 at the end of last year, DBS Bank prices show. It sold S$100 million of 10-year 3.78 per cent notes earlier this week.


A spokeswoman for CDL said that the company has a strong financial position, noting its cash of S$3.4 billion and 33 per cent net gearing ratio.


The three-month swap offer rate, a measure of borrowing costs in Singapore, touched 0.2561 per cent on Sept 16, the highest since June 2013.


Reits are in better shape than listed developers because they started refinancing with longer tenor debt ahead of rising interest rates, according to S&P. "For the Reits, I don't see a major problem yet," Ms Chan said. "The bigger players are still getting good rates and valuations haven't fallen dramatically."
Starhill Global Reit, which has S$124 million of notes that mature in July, reported S$129.1 million of short-term borrowings as at June 30, more than double the amount it had in December 2013. Retail occupancy rates at the trust's flagship Wisma Atria mall along Orchard Road slipped to 98.5 per cent in June from 99.5 per cent at the end of 2012, company data show. Office occupancy rates are 100 per cent.


Jonathan Kuah, a Singapore-based spokesman for Starhill, said that the company has refinanced its debt due within the coming 12 months. The "leverage situation hasn't worsened", he said on Oct 7.
Retail sales, which affect revenue at some Reits, decreased for four of the past five months, the worst performance in two years, data from the Department of Statistics show. Excluding motor vehicles, sales dropped 0.4 per cent in July versus the previous corresponding period.


"Singaporeans don't shop here anymore," said Savills's Mr Cheong. "Travelling has become so cheap and they buy more stuff on the Internet. The Chinese have also been avoiding Singapore, Malaysia and Thailand since the MH370 tragedy," he said, referring to the Malaysia Airlines flight that has been missing since March.


Arrivals of tourists from North Asia, which typically make up more than a quarter of visitors, slumped almost 13 per cent in the first seven months of 2014 from a year earlier, Singapore Tourism Board data shows.


"In 2008, when the refinancing situation was quite bad, the Reits still managed to pull through," said Danny Tan, a Singapore-based fund manager at Eastspring Investments Ltd, which managed US$115 billion of assets as at June 30. "There's a high probability these Reits will be able to refinance especially because the loan market is also open to them."


While the Singapore dollar has weakened 1.9 per cent against the US dollar this half, that's not as much as the Philippine peso, which is down 2.5 per cent and Indonesia's rupiah, down 2.7 per cent.
Hiap Hoe Ltd, which recently started selling apartments in its prestigious Skyline 360 building, reported short-term borrowings of S$287.6 million for the quarter ended June 30, 94 per cent more than the S$147.9 million for the three months ended December. It raised S$115 million, selling three-year 4.75 per cent notes at par in September 2013, which now trade at 100.317. A spokesman for Hiap Hoe declined to comment.


Developers on the island are changing their business models and reducing exposure to the local market, according to Singapore-based Tim Gibson, who helps run Henderson Global Investors Ltd's global property equities fund.


"By buying Singapore developers now, you're really buying exposure outside of Singapore and into markets like China," he said on Oct 8. It "doesn't give you a huge amount of confidence that a turnaround in the residential market is coming anytime soon". Bloomberg

An Appeal To Singapore Agencies: Stop Spruiking Australian CBD Apartments To Unsuspecting Locals!

Why CBD apartments make terrible investments | George Raptis

• George Raptis
• Michael Yardney's Commentary, Property Investment, Property investment buying, Where to buy investment property
• October 12, 2014

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Are inner city apartments in Sydney, Brisbane or Melbourne on your investment radar?
If so, you should proceed with caution, as I’m predicting some potentially profit-crunching changes to the apartment market moving forward.

It’s all about Supply & Demand

As with many property related troubles, it boils down to one of the basic fundamentals of investing: supply and demand.
I’ve already written about the fact that in some Sydney suburbs we’re building too many apartments.
You see…
When the supply of any product or service – whether it’s bananas or buildings – is low, there is less to go around.
And when demand for that particular item is also high, it can cost a pretty penny to get your hands on your slice of the pie.
In real estate, low supply and high demand puts pressure on the housing market, often leading to value growth, while high supply and low demand can have the opposite impact, stripping value from the market.
As so it is that the latter situation is unfolding in many capital cities around Australia.

Overseas buyers will get a shock.

It seems that developers are taking advantage of the growing Chinese appetite for Australian property, by selling a glut of brand new apartments to unsuspecting international buyers.
Developers are enticing foreign buyers to invest in off-the-plan high-rise developments in the inner cities of Melbourne and Sydney, and my concern it that it could be leading to a massive over-supply of this type of property – and a subsequent ‘boom and bust’ scenario.
However, there’s a second issue at play here, which is just as concerning – if not more so – than the supply and demand imbalance.
It seems that some of these developments have been very poorly designed and constructed, with some dodgy developers knowingly targeting foreign buyers (many of whom buy sight-unseen) so they can cut corners with construction, installations and finishes.
I know of one complex in Mascot, Sydney that is only four years old, but it’s completely riddled with problems.
The building is structurally unsound, with issues including unsound waterproofing, cracking render and potentially dangerous electrical work.
Did I mention this was a high-end apartment complex – one which promised high quality fixtures and luxury finishes to attract A-list tenants?
Luxury is definitely not what buyers ended up with – unless you count ceilings that collapse in as being an art installation, rather than a dangerous structural fault!
The tenant who had the misfortune of having his bathroom rooftop collapse on him quickly reported the problem to his property manager – but nothing was done about it.
Reportedly, he didn’t even pass the information on to the owner.
It wasn’t until a new property manager took over the apartment for an overseas investor that all of these issues came to light.

A conflict of interest?

Why did the initial Property Manager fail to act in his client’s best interests?
Maybe because he was involved in a classic conflict of interest, as the property management company runs out of the same office as the developer.
According to construction law, if a building defect is picked up on quickly and passed onto the developer, it is their responsibility to rectify the damage.

If a reasonable amount of time passes, however, then it simply becomes ‘wear and tear’, making the investor liable to cover the repair expenses.
Do you think there was much incentive for the property manager to hurry up and inform their landlord client of damage, when doing so could potentially cost their employee thousands of dollars?
I don’t think so either.
Now, I’m not saying that all capital city apartments are poorly built.
There are plenty of reputable, professional builders who do a fantastic job of delivering high quality properties to the market.
I’m not even saying that you should avoid investing in these types of properties altogether.
What I am saying is that there are many expensive traps you can fall into as an investor, if you’re not doing enough research – and investing in CBD apartments in the current market could be one of them.
If you’re considering buying an off-the-plan CBD deal, you need to make sure this type of investment suits your strategy, keeping in mind that you may need to think long-term if a supply and demand imbalance puts a lid on price growth in the short term.
You also need to make sure you have a rock-solid understanding of the the track record of your developer, in particular, understanding the relationships between the developers, sales agents and strata managers.
Once you become an owner, it’s essential that you make sure that you appoint an independent and qualified property manager – someone who has nothing to do with the sale of the complex – to manage your best interests.

Investor owned dwellings are heavily concentrated within the inner city apartment markets | Tim Lawless

• Tim Lawless
• Michael Yardney's Commentary, Property Investment, Where to buy investment property
• October 12, 2014

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A large proportion of housing demand is currently being driven by investment.
Unfortunately in Australia we only receive information on owner occupier and investment ownership of properties every five years with the Census.
Because of this RP Data’s Analytics team have built a set of rules to determine the probability that a home is owned by either an investor, owner occupier or the Government.
The Reserve Bank has specifically noted that they have concerns with the high level of speculative investor activity, specifically in Sydney and Melbourne.
The following thematic maps show the capital cities and measure the proportion of homes owned by investors across each region.
The geographic trends in investor activity are very clear from these maps; investors are heavily concentrated within the inner city apartment markets.
The below maps clearly highlight that investors overwhelmingly focus their attention on inner city unit markets.
When the Reserve Bank raised concerns that there is too much investor activity taking place, it is also clear that the concentration risk is very much centred geographically within these inner city unit markets.
If we did see investors pulling out the market ‘en masse’ or investor demand dry up for one reason or another over a short frame of time, then there is a heightened risk of declines in market value.

Australian Economic Outlook

1.       If you notice, those apartments being pitched here are 20 – 30% more expensive than existing. If you as a foreigner have to buy off plan and sell to locals, should you not then compare rigorously the new apartment you are to purchase against the slightly older one just across the street? If you’re buying 20 – 30% higher how many years will it take for you to sell at a profit?

2.       I can tell you that there is generally an oversupply of dwellings in Melbourne, Brisbane and Perth. E.g. melbourne’s population growth is around 85k annually. They require around 38k of new homes per year but they are building 45k per year. In Brisbane, population growth is around 45k and you only need 16.5k of new dwellings. But they have permits to build over 25k per year. I suspect rental will fall and yields drop below AUD borrowing costs in the next 3 – 5 years.

3.       60% of the permits granted are for apartments for Melbourne and Brisbane. Majority of them are in CBD, the heart of the oversupply. Most locals DO NOT like to live in CBD but in the inner and outer suburbs around 5 – 15km away from CBD. There is an over supply of apartments and undersupply of houses.

4.       Most of the apartments marketed here are mega mega projects of over 300 units. They pitch it with nice swimming pools, gym, 24-hour concierge, like a hotel. All very nice but if you notice all the mega projects in Singapore, once TOP, will have a lot of competition for rental. In a project of 300 units, if 80% are investors, you will have 240 competitors for tenants. I don’t think you will get very good rents. If you were to flip and just 30% of the owners do the same, you’d have 90 similar units on the resale market.

5.       With the nice gym, swimming pools and 24-hour concierge, what happens when the maintenance shoot up? Will you be able to change the body corp manager? I’ve seen 5-year old “luxury apartments” where by the rent is 650 per week, but body corp 500 per week! How much will you get as rental?

6.       If you own a house, hold on to it. If you own an apartment near a university, or in a suburb with a nice sea view, hold on to it. Otherwise, I would not buy anything now.

7.       The population growth in Perth / WA correlates very closely with the fate of the mining industry. You will see vacancy rates of Perth dwellings slowly rise and population growth slow down in the next few years. And yes, there is also an oversupply of apartments in Perth.

 

 

 

Recall our comments some weeks ago when a shockingly positive jobs figure drove a sharp, one-day rebound in AUD/USD from 0.9089 to 0.9218? The Australian Bureau of Statistics reckoned the economy added 121,000 jobs, reversing the previous month’s loss of 3,000 jobs, and way above the consensus expectation of a gain of 15,000. Our take on the news was that it was an aberration at best or worse, a statistical error, and that the rebound in the AUD/USD could not sustain. Well, the rest is history. The market got wise to it pretty quickly and AUD/USD continued down the next day.

 

Well, the Aussie Treasurer Joe Hockey is now demanding answers, saying last month’s unemployment figures were “extraordinary”. The jobless rate inexplicably – in the face of news of retrenchments and a weakening economy – declined from 6.4 per cent to 6.1 per cent. How is that possible? Mr Hockey said yesterday: "I have asked the Secretary of the Treasury to look into it. I'm unhappy with the volatility of the series." Doesn’t matter. We paid no mind to the data anyway. It was noise to us. The bigger picture was and still is: 1) Australia’s terms of trade are declining; 2)  the economy is weakening; 3) joblessness is increasing.
Now, to what really matters to us – where the currency is headed. We are back to the Aussie’s dilemma: It remains caught between an economy that needs a lower interest rate/weaker currency and an overheated property market that needs a regulatory crackdown on debt and household leverage. We had been of the view the Reserve Bank of Australia was caught between a rock and a hard place: Of wanting to cut rates further to push the AUD/USD even lower but fearing that further rate cuts would spark even more borrowing/leverage and higher property prices. The answer is macro prudential controls – limitations on how much leverage banks can offer households. Up until a week ago, RBA had been resisting macro prudential controls, doubting its efficacy. But now, under growing pressure to cut rates without sending the already bubbly property market into maximum overdrive, the RBA now reckons it is open to macro prudential controls. And not a second too soon.

According to the Bank for International Settlements, Australian home prices are the world’s fourth most expensive relative to rentals. They are the second highest relative to incomes. The IMF said much the same a few months ago, placing Aussie house prices the third most expensive amongst OECD countries relative to household incomes. Australia has become a nation of landlords. There are nearly 2 million property investors (excluding owner occupiers) in Australia today – in a country with only 13 million taxpayers. The percentage of taxpayers claiming losses on rentals has doubled from around 5% 20 years ago to around 10% today. That is attributable in no small measure to so-called “negative gearing” – that is, the policy of successive governments in Australia to allow tax deductions on the losses suffered from leveraged investments in property against other taxable personal income. So, borrow to invest and in the process, lighten your tax load.

 

OECD data shows Australia’s household leverage as a percentage of gross domestic income has picked up while the same figure for the US eased after the global financial crisis. The Aussie figure is now much higher than where the US ratio was at its peak in 2007. Australia’s household debt to GDP is among the highest in the OECD. Sure, there are higher ratios. Ya, in Scandinavia and Iceland.

 

But at the same time, the economy is suffering declining terms of trade that aren’t about to reverse anytime soon.  A few months ago, mining industry people were saying iron ore should hold up around $100 per metric tonne. That was then - it is now doing $81 with the prospect of worse to come. It’s not just about China’s diminished demand growth. There is also the supply growth of past years to digest. Industry estimates of the cash costs of producing iron ore range from US$40 per tonne to US$90. This suggests prices may have to come down a lot more before supply from higher cost producers is taken off the market. To put into perspective the significance of this, consider that iron ore accounts for 20 per cent of the value of Australia’s exports. Then, there is the almost halving of the price of Australian thermal coal from early 2011.

 

Little wonder then, RBA Governor Glenn Stevens wants the Aussie lower. The Australian Dollar was by “most measurements...overvalued”, he said. Well, he can take it lower by cutting the RBA’s cash rate below the current 2.5 per cent. But he has been reluctant to do that because that will further inflate the property bubble. Well, if he really does bite the bullet on macro-prudential controls, he will have more wriggle room on interest rates.

 

Bottom line: The silliness of recent statistics is just noise. Australia’s problems are mounting on multiple fronts – declining terms of trade, a weakening economy, rising joblessness, and a property bubble to boot. The AUD has to come down further to support the flagging economy. There will be a bounce after the sharp September decline. Just as we treated the January to April rebound from 0.88 to 0.94 as a (our exact words) “get out of jail card”, we again view the ongoing rebound with suspicion. It is unsustainable.

Buy H Shares Now!

Investing is a little like playing BlackJack. If you watched the movie, "21", about a bunch of math students who developed a system of card counting, you will understand. A group of players put minimal bets and count cards until the table is "hot". A table gets "hot" when the dealer throws out sufficient numbers of "small cards" or cards below a number, say 6 and below. The odds of the dealer drawing a "large card" subsequently increases and increases the odds of the dealer running over 21.

When the table is HOT, a signal will be given and several players on the table will throw up extremely large bets. The typical odds for a blackjack player is around 45%. But with card counting, the odds increases to > 60%. You still lose 4 out of 10 times but hey, over the long run, you make more money than you lose.

Investing is like card counting, only difference is that it's legal in investing. You can stack the odds in your favour by looking at valuation matrixes, other monetary indicators and charts.

 

This one is my favorite! “The best investment decisions are the ones that are initially the most uncomfortable because everybody will disagree with you! If everybody agrees with your decision, then you are merely part of the crowd and will NEVER buy anything cheap, nor make superior returns!”

 

1.       Look at Shanghai Composite Index. It has risen by over 20% this year and has not fallen due to the HK riots.

2.       SHCOMP used to have a much higher PE ratio than Hang Seng China Enterprise (China companies listed in HKEX). But now, the reverse is true. SHCOMP is now at 11.52x PE. Near the Jun 2014 bottom of 9.7x.  

 

 

 

Look at HSCEI, fell by 9.8% due to the riots. I’ve called many of you to buy some now.

 

 

HSCEI’s PE is now lower than SHCOMP! 7.3x PE vs historical low of 7.2x in Sep 2014! You are NOW at the historical LOW! Remember, take care of downside, the upside will take care of itself!

 

 

 

 

 

 

Div yield of HSCEI is now 4.2%. The highest was 6.6% in Dec 01. Lowest 1.13% in Sep 07. Median is 2.69%. Chinese H shares are paying halfway higher than the average div yield and higher than the Chinese govt 10y bond yield of

 

 

The rule of thumb is: buy the ETF 2828 if it’s superior to funds. Buy the funds if they are superior to ETF.

1.       Oct 2011 to now: UBS China Opp up 18.6% per year, or 66.6%.

2.       First State Regional China up 12.3% per year, or 41.6%.

3.       2828 HK up 6.3% per year, or 20%.

 

It’s obvious you should buy the funds not the ETF in this situation. The fund managers consistently add value. Request factsheets from me if you’re interested!

 

 

Lesson Learned

I've been helping some people manage their investment portfolios... After many years of doing things for free, I finally switched into doing it on a fee based model. A few of these people decided to jump ship to another adviser. I was given verbal promises that they will continue to use my services but I thought wrong.  I guess I have only myself to blame. Not everyone will reciprocate or appreciate what you have done. If I wish to help, I should not expect anything in return. Otherwise I should just reject helping the person. It's no use helping for years in the unspoken understanding that loyalty and reciprocity is earned.