NEW YEAR, NEW OPPORTUNITIES
by Lim Lay Ying
Property Times, New Straits Times
08th January 2005

While nervousness prevails about a recurrence of mega tsunamis that wrecked Southern Asia two weeks ago, the investment outlook for property for 2005 appears reasonably hopeful. But allow me to qualify this with a disclaimer: a continuation of record oil prices or another geopolitical disaster like the Twin Towers attack or major disease outbreaks like the SARS virus episode could easily derail the growth path.

Then again, even as the investment outlook seems solid, a definite call on the relative merits of various property product types is more challenging. By and large, despite the popular perception that people could be paying too much for an asset – especially property, time has repeatedly proven that property can produce solid long-term (10-year) growth results.

For instance, in spite of the numerous hiccups since the last spate of booming prices in the mid-1990s, house prices have not retreated. Current prices in certain locations in the Klang Valley have in fact upped pre-crisis levels and are still trending up. As always, uniquely located properties have done well.

Thus, if you buy today, the purchase price will look cheap in ten years time – it always does. But if you buy rubbish, then of course you’ll get burnt.

Key to becoming rich

Real estate tycoon Kwek Leng Beng is a firm believer in property being “the key to becoming rich”. Together with his family, they have amassed a total 117 hotels across thirteen countries. One of the land parcels he acquired at a price of S$980,000 (RM2.29 million) for a hotel in Singapore some time in 1968 is currently worth S$30 million (RM70.25 million). That works out to a double-digit appreciation of about 80 per cent each year!

When selecting a property investment, apply the same logic as you’d use to shares: identify where growth and demand will be in the future, based primarily on the structure of the population. Over the next 10 years, it’s not unreasonable to expect demand for locations where well-heeled Baby Boomers are likely to live. That can mean medium-density living closer to the city, or resort locations within an hour’s drive of the CBD.

Also, as this cohort will also have plenty of loot to splurge on themselves, they aren’t likely to spend the next thirty years tending the garden. They have to do something anyway, so leisure, entertainment, and travel will be a big part of their retirement dreams.

Interestingly, some investment experts have started tweaking the relative merits of commercial property also. Commercial properties can offer investors superior long-term yields but usually, a sizeable pool of capital will be needed to invest in commercial property. Very soon though, there will be a simpler and cheaper option to get commercial exposure when listed property trusts (REITs) are launched.

When you invest in a property trust, you effectively become a part-owner of the underlying asset held by the trust. These typically include shopping centres, office blocks, industrial properties, residential apartments, and hotels. Investment sums required are usually quite minimal and therefore significantly less risky than a direct real estate investment running into hundreds of thousands of dollars. Besides, while REITs offer a way for investors to get exposure to the property market, their funds are more liquid than owning physical property.

Attractive yields and good dividends

REITs or real estate investment trusts are special-purpose trusts that invest in property and in other property trusts, making their money from rents or the sale of the land. The trusts, whose shares trade on an exchange, tend to earn high yields and pay out good dividends to investors besides being less volatile in certain heavily traded markets, such as Singapore and Hong Kong.

REITs have been around in the US for 30 years and are well-established in Australia which has a US$40 billion (RM152 billion) market. They have also been popular in Japan and South Korea for the past three over years. When started in Singapore two years ago, investors from the island state snapped up the four REITs launched as their 5 to 6 per cent yields were more attractive than the then rock bottom bank deposit rates.

Singapore’s REIT market is worth around US$3 billion (RM11.4 billion), second in Asia only to Japan, where corporate restructuring has spawned a US$14 billion market in just four years. CapitaLand Ltd., which started CapitaMall Trust and CapitaCommercial Trust, is Southeast Asia’s biggest property developer and is 61 per cent government owned. The stock price of CapitaMall, the country’s first REIT, gained almost 71 per cent two years after it was formed in July 2002. Over the same period, the benchmark Straits Times Index was up 14 per cent. The other three REITs also offer yields (that is the dividend divided by the stock price) of 5 to 7 per cent.

Lock into a low interest rate

While leaving money in cash is often the safest strategy for those who have little appetite for risk, cash however still has its risks for if inflation goes up, the value of cash will fall. What a ringgit buys today may cost RM1.10 by the time you decide to re-invest. Thus putting money into lower-risk investments such as REITs or direct property investment (for those with more of an appetite for risk) could help to offset rising inflation.

For those of you who prefer to have your stakes in real property directly, there may still be value to be found – especially if you buy in cities where property is generally always in high demand regardless of market forces. Real estate in the country may likely be negatively hit by rising interest rates this year as the cost of borrowing increases, but if you buy an apartment in prime CBD locations for example, there’s always going to be high demand for that, so that really has no timing issue.

Therefore, it would be wise to lock into a low interest rate now and buy something that should rise in value at the same rate or better than inflation. And that surely has to be REAL ESTATE.