Property investing – diversifying risks by investing overseas

by highfithome @http://www.flickr.com/photos/highfithome/3984012662/

17 Apr Property investing – diversifying risks by investing overseas

I believe many will agree with me that residential properties in Singapore have become quite pricey.

With residential property prices at an all-time high, many investors have started to look at non-residential properties (i.e. commercial and industrial) as investment alternatives. Apart from having fewer regulations, some investors are of the opinion that commercial and industrial properties allow them to diversify their property portfolio. In other words, if there was a price correction in the residential market, they believe that the commercial and industrial sector would not be as badly affected.

My company Ascendant Assets Pte Ltd recently did a study to see how correlated the different property sectors were. Our findings are shown in the chart below (see Figure 1). From the table, we can tell that all the different sectors have high correlation with each other. In other words, if the residential sector dropped (or increased), the office, shop and industrial sectors would likely follow suit. Therefore, investors who are serious about minimising their risks may not achieve it through buying non-residential properties and should consider investing abroad instead.

Figure 1: Correlation Analysis between the various URA indexes

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URA Indices

Source: URA and Ascendant Assets Pte Ltd

Other than diversifying risk, another reason why I think some investors can consider looking at overseas properties is because there are still worthwhile deals out there. In this article, I will share 2 of my recent overseas purchases to illustrate the type of alternatives that are available beyond Singapore.

Opportunities down under – Australia

Based on iProperty.com’s 2013 consumer survey (http://www.iproperty.com.sg/asia-property-market-sentiment-report/), respondents in Singapore have shown keen interests in Australian properties.  Not surprisingly, one of my purchases was in Melbourne, Australia.

Property market wise, foreigners can get mortgage loans from Australian banks of up to 70%.  Certain banks in Singapore also give Singaporeans loans to buy Australian assets.  In terms of rental, Melbourne (and the other key cities in Australia) have established rental markets and yields range between 5% and 6%.

The development that I bought is located in Southbank, which is walking distance to Melbourne’s Central Business District (CBD) and is a stone’s throw away from Crown Casino (Melbourne’s integrated resort).  Thus, in terms of location, it can be considered to be fairly upmarket.  However, in terms of price, there are units in the development that are being sold for as little as AUD$360,000 (about SGD$469,000).  In comparison, some 99-years resale HDB flats are asking for more than two times that amount.  And unlike Singapore, there is no additional stamp duty for foreign buyers, which makes investing in these locations even more attractive.

However, before you get overly excited, I must qualify that the Australia is a fairly mature real estate market and may not be suitable for investors who are looking for quick short-term gains.  This is because the selling of uncompleted properties (or flipping) is disallowed.  In addition, foreigners can only buy new launches, which means that they would not be able to sell their completed units to other foreigners, limiting speculation in the resale market. Hence, Australian properties are mainly suited for investors with long investment horizons, who are looking for somewhere stable that gives acceptable rental yields.

Opportunities in the land of smiles – Thailand

At the other end of the spectrum, investors who are looking for something more affordable may wish to consider investing in Thailand instead.  Thailand is the second largest economy in Southeast Asia (after Indonesia) and many Singaporeans often fly there for a quick weekend getaway.

One of my recent purchases in Thailand was a freehold condo-tel unit.  Condo-tels are condominiums that have facilities and services like a hotel.  Condo-tel owners can either stay or rent their unit out for income.  The cost of each unit is as affordable as THB4.3million (about SGD$175,510).  As mortgage loans of up to 70% are available, some investors would only have to come up with about $53,000 cash for a unit.  Putting things into perspective, $53,000 may not even be enough to pay for the COV of some HDB resale flats!

Location wise, the unit is located in Krabi, an up and coming location that is just 2 hours drive away from Phuket.  For those who have never heard or been to Krabi, the location has two of Asia’s top 10 beaches, as rated by TripAdvisor’s 2013 Travellers’ Choice Beaches Awards (http://www.ttrweekly.com/site/2013/02/three-thai-beaches-in-top-ten/).  There has been recent emphasis from the Thai government to further develop the Krabi’s tourism industry (http://www.ttrweekly.com/site/2012/09/pm-to-support-krabi-tourism/).  As a result the increasing tourism prospects, major foreign brand names such as Ritz Carlton, Sheraton, Sofitel, Mercure, Big C and even fast food chains like McDonald’s, Burger King and Starbucks have established their presence there.

While some investors may have reservations to invest in a location that is not as established as Phuket or Ko Samui, I am of the view that Krabi has still some potential for capital appreciation.  From my own experience, a piece of land that my company bought in Krabi sometime last year went up in value by about 30% to 50% within several months.  This suggests that, as a result of the burgeoning tourism industry, there is a lot of interest in Krabi properties and could potentially be the next hot spot for investors.

That said, it is important to note that investing in such locations are not without risks.  Nonetheless, it could be the cup of tea for aggressive investors looking for exceptional returns, yet not wanting to lock up too much cash in a foreign land.

In conclusion – some rules of thumb

While investing in overseas properties is not as easy as we assume, in a climate where bank interest rates are unable to keep up with inflation and Singapore property prices have reached an unsustainably high point, venturing abroad could be a option worth considering.

As it is not possible for me to do a detailed write up on what Singaporean investors should look out for when venturing abroad, here are three simple rules of thumbs that I follow when I look for overseas properties:

Rule of Thumb 1: Be prepared to hold long term.  No one can tell how the property markets will do in future. Hence, if you were mentally prepared to hold on to your overseas property over the long term, even if it takes a bit longer for your investment to reap good returns, you would still be financially comfortable to hold onto that investment.

Rule of Thumb 2: The investment should have positive cash flow.  Many investors place a lot of emphasis on capital appreciation at the expense of cash flow.  From many instances that we have come across, investors often sell at a loss because they are not able to financially sustain the property.  Hence, by ensuring that the property has positive cash flow, investors will have the financial means to hold onto their overseas properties for the long haul.

Rule of Thumb 3: Buy units from reliable companies.  I often hear horror stories of how some investors bought certain overseas properties, only to later find out that they did not get what they were promised. Hence, when I look for overseas properties, I will always check to see if the company I am dealing with is reliable.  While there is no foolproof way to ascertain the reliability of a company, a good tell tale sign would be to look at how long they have been in the market. Generally, successful companies that have been around for some time would want to maintain their reputation by delivering on their promises.  Apart from that, another tell tale sign would be to look at the financial strength of the company, especially if it is the developer that you are buying directly from.  To illustrate, one of the main reasons why I decided to go ahead with the Krabi purchase was because the developer had the financial banking of a USD$300million fund.  Apart from that, one of Singapore’s largest banks is providing the developer construction loans as well as mortgage loan for their buyers.  Ultimately, no banks would lend a financially unsound developer and the involvement of such large financial institutions gave me additional reassurances that I was dealing with a credible and reliable company.

Reading up to this point, I believe some of you may start to realise that investing overseas is very different from investing in Singapore.  Nonetheless, as the saying goes, “fortune favours the brave”.  Despite all the challenges, I believe there are definitely some interesting and worthwhile deals abroad.  It is my wish that after reading this article, some of you would be inspired to learn more.  Those who wish to know which developments I bought or have other queries, please drop me an email at [email protected].  With sufficient research and careful selection, perhaps the overseas deal that you come across may turn out to be the deal of a lifetime.



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