Why I'm Bearish on Asian Real Estate

I have just completed yet another acquisition. Altogether my profits from real estate in the last 5 years have amounted to well over a million! My strategy is halfway through and I need another 3 years before I reach a level of  freedom.

But there are stormy waters ahead. Bubbles are appearing everywhere; in the US stock markets, Asian real estate, China's real estate and infrastructure. The world cannot withstand too many rate hikes and if inflation starts to rise beyond 3%, the pin will start to prick most bubbles.

My next acquisition will be sometime next year, after a few rate hikes from the US.

Singapore is not going to do well. It's economy is rapidly slowing down. Blue chips are set to tumble further.

I have been rather bearish on Asian real estate since 2013. The reasons are:

1.       Asia emerged from the Global Financial Crisis relatively unscathed. Unlike in the US, Europe, where almost 20 – 30% of developers went bankrupt, Asia just kept on building. For Asia, the bottom of the real estate cycle was in 2005 and the 2009 drop was merely a blip. After 8 years into the bull cycle there is bound to be overcapacity.

2.       I am very cautious on buying overseas properties that are off plan and cannot obtain financing from local banks. Places like Cambodia condos for SGD150k appear to be cheap to you, a rich Singaporean, but to a Cambodian, with an average income of only USD5k per year, it represents 30x of their annual income!

3.       Which comes to this point: never buy overseas properties that the locals don’t buy. Those who buy Iskandar will know now that there isn’t a resale value at all.

4.       There is talk that landed residential properties are “rare” and will continue to appreciate. However, I also predicted that it will also fall for several reasons.

a.       A terrace costs S$2.4m and above. Only the 71^st percentile of residents can afford to buy. This means only 30% of 5.3m can afford to buy it from you at your cost, nevermind a profit (see table by SRX below)

b.      The rental yield of houses / landed in Singapore is less than 1%. It is even lower than the mortgage rate. This means that if you rent your house, it can’t even cover your interest, let alone principle. When borrowing costs rise, some owners may be forced to sell at distressed prices especially if their jobs are not secure.

c.       If you buy to live in it, the monthly obligation for a S$2m mortgage is almost 8k. If the household has a disposable income of less than 16k, it can be rather taxing to live on a disposable residual income of 8k. more importantly, due to the TDSR ruling it could also mean that the household has no more capacity to buy more properties! In conclusion, landed properties are indeed rare, but due to affordability issues, are unlikely to appreciate as fast in the long term. Income of residents have to catch up.

5.       There’s also a large supply coming on stream for retail space, particularly in Outer Central Region. Expect rents to fall in the next few years. Internet retailing may slowly chip away the sales of brick and mortar businesses.

6.       Large supply for Grade A offices coming on stream for offices, particularly from Marina Bay. Rents have peaked and may fall in future. Offices are the most sensitive to the economic cycle.

7.       Even larger supply for muti-user factory spaces.

If you want to know where the opportunities are, do let’s have a discussion. It is getting harder and harder to find good value now. I expect to see real estate prices in Asia start to decline at a faster pace when the US starts to hike rates.