BT INVEST

A Personal Finance and Investment Arm of The Business Times
MARKET TODAY:

Archive

Comparing share investing versus property investing

In share investing, you look at a company’s fundamentals, future earnings, industry segment growth, momentum, etc. For the serious analyst, you will look at pricing power, purchasing power (cost), environmental factors (including regulatory frameworks) as well as product renewal cycles, research and development capability, core technological strength and last but perhaps the most important, disruptive technologies.

These days, from the time a disruptive technology is started to full adoption and becoming mainstream takes about 5 to 7 years. And in this short period of time, a market leader with a dominant position can be toppled. Therefore when analyzing a share of a company, the discounted cash flow method must only be used sparingly and not into the indefinitely future in estimating future company revenue. All in all, estimating where a share will go is as good as predicting a child’s propensity for crime at age 3. You just don’t know how it will turn out.

Property investing is a much more predictable science, sometimes.

All you need to do is model the property segment. As in any business analysis, you try as much as possible to model your investment and make assumptions (much as it’s not 100% possible).

The 2 important things to consider in property investing are: -

  • Total Property supply
  • Total Property demand

Is that all there is? Technically yes. It’s all about Supply and demand. But as we all know, life is not so simple, details into Supply and demand is where the complexity comes about.

Supply

In order to arrive at completed properties, there is a supply chain. In this supply chain, the upstream is land and consulting, further downstream is construction material followed by labour and renovation, finishing works, toiletries and electrical systems, etc. The enabler or (impediment) for supply is government regulatory controls, through it’s various ministries.

Demand

Demand is based on demography. There is the local population demand based on demographics and lifestyle, and there is and foreign demand via expansive population programs, via mass importing of foreign talents.

Supply and Demand marks the push and pull of the property market and in determining a property's eventual price level.

What about affordability?

The earning capacity and affluence of the country (as well as taxation) plays an important part in determining the total Money supply and disposable incomes available for property purchase. The supply will supposedly be available to cater to this demand. (Alternatively, supply can be built ahead of an anticipated demand.)

If the affordability is higher (i.e. higher incomes and higher savings level), such that developers are able to price the developments higher and yet make money after incurring property development cost, there will be more supply.

As more supply comes on, the margins are squeezed and therefore the demand is sated.

Is the market homogeneous?

The property market is never homogeneous. In other words, there will be supply and demand distortions in different locations.

In shares, such price distortions are usually quickly arbitraged. In Property investment, such distortions may tend to persists longer, giving people ample time to react. The only thing being, can people see it?

Is supply Static?

Supply is in itself not static, government land sales programs continue to be announced, and total land supply available for development is added onto the total number of units.

The statistics are not perfect. This gives rise to academic research versus the real research. Simply looking at the data without having a feel of and understanding the market is futile as you need to know that the data is imperfect. For example, the number of units announced for supply is based on “units”. And as unit sizes shrinks in recent years, the same amount of land can churn out more “units”. So this causes distortion to the “supply” data in the residential market, unless you can analyze it together with average size per unit. Therefore the research data becomes more and more inaccurate.

Supply can also suddenly come from existing stock of properties zoned for other use, when arbitrage becomes possible due to regulatory permits being approved or when lowering of development charge cost. There were cases where commercial properties were converted into residential condominiums as residential properties are priced higher and vice versa.

In the commercial property space, the supply is measured by the total amount of area (i.e. square feet/meters). Hence matching the supply of space to actual commercial demand will depend on a range of factors such as human flow and business needs. Will the price force the demand to shrink? (i.e. instead of using 100 square feet per staff to 70 square feet per staff?)

The variability of Property Demand?

Demand manifests itself in the form of “latent” demand and actual demand. Latent demand measures the need for dwelling based on cultural and lifestyle norms of the country or locality. In some countries, when people get married, they move out of their parent’s place to form a new family nucleus, whereas in some countries, 50% of the people prefer to continue to stay with their families and 50% prefers to move out to stay. In the latter cases, we can consider the demand as “Household formation x 50%” as the latent demand.

And measuring intent is one way to measure latent demand. But then you will be very wrong when you come to do your analysis, because the actual demand differs a lot from the latent demand. Why is this so?

There is always hypocrisy factor as play during surveys which render the data inaccurate in the first place. Hence the latent demand inaccuracy. Then there is also the actual demand inaccuracy as the actual demand is artificially distorted.

How would the actual demand be distorted then?

Actual demand can be distorted by changes in pricing of the supply, be it on a per square feet basis or on a total quantum basis. Government regulatory controls as well as subsidies can cause actual demand to distort.

Since we mentioned Pricing, then that also means that the available choices and limits on funding will play a part in such property demands.

If we stretch the home loan to 40 years or 50 years, then our monthly repayment becomes lower. This means that we will be able to incur larger risks and “Afford” a property, thereby fulfilling 1 unit or supply, consequently when we reduce the home loan tenure from 40 years to 20 years, our monthly repayment becomes so high that banks refuse to lend and therefore the latent demand do not translate into actual demand.

But then what is this demand? Is this demand for 1 room studio housing or 2 rooms or 3 rooms or larger units? So such variable demand based on size also cause demand distortion. As affordability “rises” and fall along the lines of credit availability, the supply with also make it’s own adjustments.

For example, in cluster housing, the plot ratio is very high, but the population tends to be low. If a cluster bungalow has 8000 square feet and 2 person stays in it, it is very "build-up" and dense on the plot ratio sense, but in terms of space per person, this 1 unit is 8000 square feet being used by 2 person. And this 2 person has consumed a single unit which could have been built for 8 units at 1000 square feet per unit and accommodated 8 families of 2 persons (i.e. 16 people). And therefore this demand cause the supply stock to distort.

And foreign talent will further add to the complexity as the demography of the foreigners are yet not measured. By observation, Australian expatriates tend to have smaller families, while Indian expatriates tends to have larger families who all move into the same “unit”. Then the usual 3.5 people to a household (unit) could become 2 people to a household (unit) or 7 people per household unit. This causes the "demand" to fluctuate.

Therefore, in order to make money, you must then be able to identify and understand these factors for long term capital appreciation.

As far as rental is concerned, if this is a rental property, you would need to consider the yield, the leverage from home loan financing and hence the return on invested capital which will determine your income that you can earn from this asset or (Loss of income) from this asset.

The capital gains and yield aspects are similar to share investing. You can buy a growth stock purely for capital gains (but with no or little yield) or you can buy a share which pays dividends from it’s earned income and yet grows it’s share price over time.

As in all kinds of investments, you need to do your homework and then take a bet. Share investing does not normally rely on leverage(unless you go exotic).This explains why many of the newer millionaires are made in the property market as there is leverage in the property market and also many untold bankruptcies. And as to how to leverage and finance a property, a Singapore mortgage broker can help.

Paul Ho

He holds a Masters of business administration from a university ranked within the TOP 100 universities and has distinctions in finance and economics. He also writes for STproperty, iProperty, Propertybuyer.com.sg, iCompareLoan.com and SingaporeHomeLoan.net amongst many others. He is passionate about helping people enhance their wealth and in making money work harder for them.

www.PropertyBuyer.com.sg/articles

www.SingaporeHomeloan.net

www.iCompareLoan.com