Hong Kong is Booming, While Singapore is Withering

http://www.scmp.com/news/hong-kong/economy/article/2094139/hong-kong-economy-smashes-forecasts-first-quarter-2017-grow



If you have recently visited Hong Kong, you will find that in the CBD, around 30 - 40% of people speak Mandarin, not Cantonese. This was not the case say four years back. Five star hotels like Four Seasons are filled with PRC tourists and business people. Expensive restaurants like Joel Robuchon are patronised 90% by PRC. Expensive fashion boutiques are filled with tourists.

In contrast, Singapore's shopping malls are empty in the central. Singapore's economy grew at a measly 2% per year the last three years whereas Hong Kong's grew by 4%.

100 billionaires are produced in China every year. They are also the youngest ever billionaires, on average in the late 30s and early 40s. Often once rich, they endeavour to send their families overseas, kids to the best overseas universities. It also means that they will set up businesses in Hong Kong. There is a lot of money awaiting talent to manage. Family offices are set up in Hong Kong, run by Hong Kongers. They decide what percentage to allocate to each region.

Singapore probably receives 10% of the funds that Hong Kong receives. Our finance professionals are jobless as western MNCs consolidate and move to cheaper locations. In the 80s and 90s, Singapore saw high net worth individuals from Southeast Asia flocking to Singapore. Its economy boomed. This wave has slowed to a trickle. Hong Kong is seeing the same inflow from China, but 10x more than Singapore ever saw in the 80s and 90s.

The next decade belongs to Hong Kong. Singaporeans who are highly trained professionals should consider uprooting themselves to live in Hong Kong / China. It is a chance of a lifetime to tap on this wealth. One should situate at the source of the river Ganges, which is in the Himalayas. By the time it flows to south India, water is muddied and undrinkable. 

It's Now A Better Time To BUY Stocks Than Properties.... If You Know How to Invest

Acquiring a property with 15% ROE is a good thing. But property is illiquid. There's a lot of effort involved for financing. If you have capital gains of 5% per year, 7% NOI, you can achieve 31.8% IRR for sure. But it's not easy to sell when things go wrong, and the time and effort required to maintain it suggests that I'll be happy with 25 - 30% IRR for stocks.

That's what I believe can be done for stocks, ETF and unit trusts. 25 - 30% IRR. It's liquid. Eventually when the market crashes, I will have enough liquidity to pick up properties at 10 - 30% discounts. But timing is extremely important for stocks. One cannot miss the major down turn and must get out before it. 

Rally to Continue

I've been looking at Gilead and Talked recently. Gilead turned around after declining by over 40% from USD120 in 2015. It is now USD72 and definitely worth a buy. The company is in the process of producing HIV, Hep C drugs. ROE 74%.

Talked gapped down recently due to a scandal involving a oncologist. Once it gapped from 0.74 to 0.66, a window has opened.

EWZ is Brazil ETF. It fell from 40 to 32. If you buy at 33, it would have been over 10% up at 37 now. Brazil's expected return is over 10% per year, 3rd cheapest ETF in the world behind Russia and Turkey.

The rally is incredible. It is unlikely to pause until 2018. I am prepared for whatever happens but we shall be brave for now! 

Going for Cashflow Instead of Capital Appreciation

Stocks and unit trusts are for liquidity. Generating 5% of dividends, 20% of capital gains is well and good for financial instruments.

I realise also that investments should be run like a business. My net profit margin for real estate is currently around 20%. I should improve it to around 35%. That means my EBITDA to Interest Expense should be above 1.5x. I should lower my gearing or go for high cashflow properties that yield above 15% in future. Eventually I should get there.

After holding on to my properties for above 7 years, it is also time to harvest or sell those that are well in profit or have not much upside left.

I don't intend to increase my exposure to Singapore properties. Below is a list that I draw up. It is very much like the PE to Growth Ratio by Peter Lynch, the legendary stock investor. Cap rate + projected rent increase - borrowing cost gives me the "differential". The bigger the differential, the more underpriced a city is.

Singapore is in the "SELL" zone. This means that I should either lighten up my exposure or sell before I buy. Singapore is let down by negative rent increases due to oversupply, and a very low Net Operating Income or Cap Rate.

Cities like London is still a "HOLD" as chronic shortage cause rents to continue to rise. Yields may be low, but the speed of the rent rise makes up for it. Australian cities like Melbourne and Brisbane are "SELLs", hampered by very high borrowing costs and low rent rises (due to elastic supply).

The cities I would focus on are Birmingham, Manchester, Dublin and Belfast. The most interesting city is Dublin, which is set to draw investments out of London due to the Brexit. It has a low tax rate vs the EU, and its economic growth is a phenomena 7 - 10% per year, faster than Singapore's.

City	Rent increase	Cap rate	Borrowing cost	Differential	Decision	Rank
Singapore	-2.50%	2.50%	1.80%	-1.800%	SELL	13
London	4.00%	3.00%	3.50%	3.500%	HOLD	5
Birmingham	3.00%	5.50%	3.50%	5.000%	BUY	3
Manchester	2.50%	6.00%	3.50%	5.000%	BUY	3
Hong Kong	5.50%	0.75%	3.50%	2.750%	HOLD	9
Melbourne	2.00%	3.00%	4.25%	0.750%	SELL	11
Brisbane	1.00%	4.00%	4.25%	0.750%	SELL	11
Auckland	5.00%	2.90%	4.85%	3.050%	HOLD	7
Christchurch	3.00%	4.00%	4.85%	2.150%	SELL	10
Lisbon	2.00%	4.30%	3.50%	2.800%	HOLD	8
Dublin	4.00%	5.90%	3.50%	6.400%	BUY	1
Belfast	2.00%	6.50%	3.50%	5.000%	BUY	2
Edinburgh	3.50%	3.50%	3.50%	3.500%	HOLD	5

Time to Scale Up!

We are in the midst of acquiring a freehold house in Birmingham. The cash on cash return with 70% leverage is around 15% per year. If I assume capital appreciation of 4% per year, the IRR rises to 30% per year. Of course it is good income but not exactly passive!

First, the acquisition is time consuming. If you are getting a mortgage, you require lots of documentation with banks. Even if you are not, you still need to engage the solicitor. It takes about 10 to 20 man powers to acquire a property and if you are drawing an income of SGD15k per year, that's SGD750 per hour of work!

Second, value adding to the property, such as extensions, loft conversions, fixing the bathroom etc requires another 10 man hours to monitor even if you outsource to a project manager. The value add of such a strategy through improved rentability or cashflow can be anywhere from 20 - 30% IRR.

Third, even if you outsource the management of the lease you still have bills to pay, such as council rates, monitoring the agent's performance. It could cost you any where from 2 - 4 hours a month!

It's not exactly stress-free unlike stocks.

There is also a lack of liquidity so to sell a property takes anywhere from one month to one year!

I would do both, invest in stocks and buy properties. Stocks can achieve around 15 - 30% IRR but have great liquidity if you invest in heavily traded stocks. But in a bear market you can be down by 50 - 70% if you forgot to cut loss and if you leverage on stocks, you can get wiped out and lose your pants! Property is forgiving. Even if you buy a lemon, you could recover and make a positive return over a longer term like 10 years.

The lesson we've learned is that we need to scale up for properties. It is less efficient to acquire small properties but better to acquire an entire block of apartments, serviced apartments, private rented sector housing, or commercial property. you make the same effort whether you acquire a GBP130k property in Birmingham or GBP13m of commercial property outside of London! I'd rather be drawing an income of SGD1.5m per year of salary from one transaction than SGD15k per year! 

Sell Down of Tech ETF

I made a call to sell off the tech sector, including Apple, Alibaba last week. The valuations were extremely high and I rode on a 40% upside over 1 year.

I also noticed that European Equity ETF is beginning to sell off.

I doubt if this is the start of a huge bear market like those seen in 1998 (EM Markets), 2001 (9-11), 2003 (SARS, Enron), 2008 (GFC). I doubt that even a medium rated correction like those seen in 2011 (European Crisis), 2015 (EM sell down) will occur. Perhaps a 10 - 20% correction but no more.

Perhaps the medium or big one will come in 2018. I don't know.

The property market seems to have stirred to live in Singapore. I believe it is a flash in a pan.

1. supply is still abundant while population growth is slowing down.
2. Singapore's GDP growth is still less than 3%. Jobs growth is strongly correlated with demand for housing.

3. rents are still falling. If prices rise, it mean that yields are compressing. Not good in an environment of rising interest rates.

It is however, a good time for investors of en bloc properties, which are usually over 30 - 40 years. Developers from abroad are hungry for land bank. Chinese developers do not care if profit margins are less than 10%. They just wish to "roll their money" in Singapore.

I am about to acquire a freehold house in Birmingham for GBP130k, 8% nett yield and 15% return on equity. It is a great piece of investment as far as yields are concerned.