The Property Strategy

There are two topics that dominate social conversations in Singapore. Children’s Education and Real Estate. Nothing else seemed to loom as large.

In one of the earlier post on this substack, we discussed the important pieces of an investment portfolio. But we did not talk about property. Given that this would be a huge monetary outlay for most families, we believe property deserves a separate discussion. This post is an attempt to address this big topic in our lives.

I have to caveat that I have not gotten it very right with Singapore property. All the posts in the original infosite detailed my read about Singapore’s favorite investment topic and how wrong I have been by being somewhat bearish. That said, I have nonetheless benefited through luck, timing and some simple strategies which I do hope to share in the post.

This discussion is not about predicting where Singapore property will go from here or how the cycle will transpire. Like trying to time the stock market or forecast macro trends, it is just too difficult. Nobody thought property can rally the way it did during and after the pandemic. Just when we think the property sector was too hot and bound to cool, things heated up further in Singapore’s previous swamp site (see below).

  

A few months ago, we have a crazily popular project launched in Jurong, which was a swamp in the 1950s. People queue hours to ballot for units. When their no.s were called, it was as if they struck lottery. Winners celebrated when they have to write a million dollar check to buy a 99-year lease of a Mickey Mouse condo unit in a former swamp site. Only time will tell if they would actually make money.

I had a chance to look at proprietary data of many property transactions in the past thanks to a good agent friend. Properties that we know today that we thought should had done so well, e.g. The Sail (see below), people have lost their family fortunes. These sad datapoints with a lot of money lost can be seen across almost all condos in Singapore.

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The Sail @ Marina Bay had 30 unprofitable transactions and 27 profitable transactions. At the time of writing, the leasehold condominium has 28 unprofitable and 28 profitable transactions over a 12-month period.

Source:

https://www.edgeprop.sg/property-news/profitable-neighbours-unprofitable-condominiums

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So, please remember, it is very difficult to predict anything. Nobody can consistently and successfully predict the markets, nor macro trends (recall that everyone said 2023 will see a recession, but it didn’t happen) nor elections and certainly not property cycles. It is important to invest in ways such that you will never risk the house. I cannot emphasize more on this point. We must be very careful with large % of net worth, with leverage and margins, with savings we cannot afford to lose and needless to say, with property investment due to its size.

This is so important, I feel I must repeat, be very careful with:

• large percentage of net worth
• leverage and margin trading / financing
• savings we cannot afford to lose
• property investment  

To me, property discussion should also be in different basket because of the sheer size of the investment and how it functions as a life utility rather than financial instrument especially when we are talking about the first property. If we view property more as an investment and lump it in with our other investments, rather than part of our lives, things can get really complicated as we shall discuss.

I have dissected the discussion into the following sub-topics which we will delve into for the rest of the post:

1. Thoughts on the first property 
2.  Rent and mortgage 
3.  Second property in Singapore 
4.  Overseas properties

1. First property

The first property is not an investment and it is best not to lump this property together with the rest of the investment portfolio. It is difficult because the capital outlay is huge and if we ignore this capital outlay and simply look at what’s left of the investment portfolio plus savings, sometimes it doesn’t make sense intuitively because what is left is too small to matter.

However, it is an important segregation because when we see property as an investment vehicle and less as a shelter over our heads, we might be enticed to make the wrong decisions. The trick could be to buy a property we can afford (i.e. HDB in Singapore). Once we have secured the shelters over our heads, we can think more clearly about investments.

Recently, there was a video where Charlie Munger (RIP Charlie..) spoke about his view on his first property. I think it is very apt to share it here. I have paraphrased it though.

   

The property you live in also dictates how your family will live and behave. It is not simply an investment or a shelter. So if you see your property as such then the following logic should naturally hold - buy your first property and do not trade it. If you want to upgrade, do so in accordance to the way you want to live your life and always try to upgrade when dollar psf are at lower points (not easy) so that you can buy the bigger house at a relatively lower valuation.

On the flipside, when we do not have a property, we are essentially shorting the property market. As seasoned investors would be reminded, shorting something has unlimited downside. We may end up in a situation where we have to pay rent for years and the market rises and rises. The cost can be unbearably painful.

This is a good segue to talk about rent and mortgage.

2. Rent and Mortgage

I hate paying rent. You pay a significant amount of your salary to someone else and help him pay his mortgage. Shouldn’t we then buy the property and pay the mortgage ourselves? Then at the end of the day, we will own the property vs paying rent which we get nothing ultimately. When we first start out in our careers, it is difficult because the capital outlay is just too big. Yes, it is not an easy discussion. There are times when you cannot help it and you have to pay rent. For example:

• Working in a foreign city for just a few years
• Rent is subsidized or has other benefits (e.g. tax)
• The rent is way lower than mortgage and we can arbitrage rent (i.e. renting out our purchased property and staying somewhere else paying a lower rent)

Otherwise, if things checked out well, we should always strive to buy our first property well and pay mortgage.

We can have a whole debate about mortgage. But going by our logic that we should always treat our first property as a utility, then we should strive to pay down mortgage asap. We can take our time when interest rate is low. But as 2022-23 showed, interest rates can spike rapidly and we might get caught paying 4-5% on mortgage which is ridiculous. So always buy an affordable first home and strive to have a manageable mortgage.

Remember, when you are paying mortgage, the bank owns the house, not you. People talk about using mortgage and financially engineer profits with property’s leverage. I would suggest doing that with a lot of prudence with the first property.

3. Second property in Singapore

When we have the shelter over our head well covered, then we are eligible to think about second properties and how they factor into the investment portfolio. Here we can think about asset allocation and compare returns but property differs largely due to leverage. Based on just equity returns, without leverage, property usually generate mid to high single digits over time. This is not too different from stocks and just a tad higher than T-bills. Therefore, money should be deployed into real estate only if our analysis shows that the equity return on some particular property investment is better than the alternatives. The chart below is enlightening.

In the earlier post, we established that we could 2-4x our money if we can compound the portfolio at a high single digit return over 10-20 years. Property can achieve that because of leverage. However we do require many other elements to work as well. We are talking about good agents (cannot emphasize their importance more here), bank lending, support from family (parents, significant other etc) and legal and tax advice!

In Singapore today (early 2024), we need to do a lot of legal gymnastics because individuals are not allowed to own multiple properties without paying significant amount of taxes. For married couples, we need to “de-couple” legally so that husband and wife can own one property each. For foreigners, unless you have money to burn, it really doesn’t make sense because you need to pay 60% tax on buying the first Singapore property!

As such, investing in second properties in Singapore is not something we can just execute by clicking the buy button on the Interactive Broker platform. It requires a lot more effort.

4. Overseas properties

Overseas properties can be even trickier since we need to handle everything remotely. The biggest barrier is to find the right person / agent on the ground whose interest is aligned. If you have dealt with enough property agents you know that good agents who really have your interest at heart are like unicorns, very rare.

To sum things up: 

•  Don’t trade your first and only property 
•  Use mortgage wisely and try to pay down as much and as soon as possible 
•  Weigh second properties against the investment portfolio well and 
•  Don’t buy overseas properties

These are my views inherited from very smart people who had successfully navigated life in Singapore with some based on my own experience. 

They are definitely not gospel truths and I would welcome further discussion.

Huat Ah!

Podcast - Inflation and Interest Rates

Welcome to our podcast, as mentioned, we shall discuss further about the impact of inflation.

Inflation is real and happening today. Everything in sunny Singapore has become a lot more expensive.

Food court meals was $5 and now we have to pay $10. 

The cheapest car cost almost $200,000 which is enough to buy a house in most countries.

The cheapest condo... I wouldn't even want to go there. 

You get the idea, inflation has taken us by storm.

The hardest hit people are people in the lower income households and those with debt.

Interest cost is rising and if one is not careful, one might get caught with over-indebtedness.

It is very scary, it may cause bankruptcy and then all we worked for is gone.

So please be very careful with debt. 

Lower income households did not ask for this but yet they will suffer. It is imperative for society and the more well-off to help.

Inflation benefits savers a lot. Because the interest earned can more than offset the rise in cost of living.

Let us discuss a simple example:

The cheapest meal in Singapore can still be $3. Not in the cities but in neighbourhood stalls. Yes, it will not taste as good but it is cheap. 

It will fill the stomach and one can survive with $270 for a month. That is about $3,240 per year.

Now that we can get 3% from banks, it is possible to have some savings and the interest pays for all these meals. 

The math is roughly $90,000. If you have $90,000, your interest can pay for an entire year of meals.

Although the same $90,000 cannot even buy half a car.

This is the strange world we live in now.

But to low income households, everything has changed, they don't have $90,000 in the bank and they wonder why people are driving fast cars.

It is very warped and there are no easy solutions.

Some say the solution could be war.

It is not inconceivable.

So back to the tenet of this podcast, while we earn 3-4% interest, if we can help, we should help the lower income households, in whatever way we can.

Hope you have enjoyed listening. See ya!

SPH and SPH Reit gone!

5 July 2022 Update: Apologies for the mis-information and the anxiety that this post might have caused. While SPH is not longer around, SPH Reit is not delisted and was last traded today at $0.90. Cuscaden's chain offer would only privatize the company if it managed to buy more than 90% of outstanding shares. Since the lowball offer ($0.9372) was unattractive, it only acquired c.62%.

I have kept this post for readers who may still be interested. Will be updating on this name in the weeks ahead now that we have an actual bid at $0.9372 (which means at 15-20% discount from this price, this name will have really good margin of safety and worth taking a very close look) and there should be further developments.

Today is the last day you can trade SPH Reit. This was a stock I owned since its IPO and it is sad that I have to sell it the way I did. It was definitely not trading at my intrinsic value but I have not choice, unfortunately. In Singapore, minority shareholders continue to suffer when stocks are taken private cheaply.

For the uninitiated, the saga began around March with SPH Reit's parentco SPH embroiled in a bidding war sparked between Keppel Corp and Cuscaden Peak. Cuscaden Peak is a vehicle owned by Singapore #1 shrewd businessman Ong Beng Seng who has strong connection with Temasek. The actual shareholding is a bit complicated and I have copied the description from Shentonwire (pic below): https://shentonwire.net/2022/06/02/cuscaden-peaks-chain-offer-for-sph-reit-turns-unconditional/

To cut the story short, Cuscaden won and SPH, Singapore Press Holdings, publisher of The Straits Times, was taken private last month, ending its life as a public blue chip company on the SGX. Some shareholders took umbrage that it was taken out at SGD2.40 while most long term investors would remember this stock should be valued closer to SGD4.00, which was where it traded for donkey years.

SPH Reit was then bidded to be taken private at $0.9372 as part of a chain offer. The latest NAV of the company was $0.92 so at face value, we cannot say it was taken out at a cheap price. But, considering that rent is skyrocketing in sunny Singapore as a result of global inflation and further considering the stock's IPO price was $1 back in 2013 and the current cap rate (4.5-6%) of its five properties are pretty, which means it is not expensive (see pic below), well, I guess we have to admit Ong Beng Seng got the better bargain.

It is very difficult to have win-win transactions in life. Some people live through their lives believing it doesn't exist. Someone has to win and the other party has to lose. While that is not true, it might be so in this case. We, as minority shareholders, did not get our fair exit, with the backdrop of the current worldly state of affairs. Firstly, inflation rate is spiking and we know that properties are one of the best asset classes to own during an inflationary environment. Secondly, we all know that rents in Singapore are going through the roof, so we should see property prices soaring. 

Lastly, Paragon, the iconic Orchard property, valued at SGD2.6bn, cap rate of 4.5% seemed to be at a discount. Pre-covid, it was valued closer to SGD2.8bn. Coincidentally, the market cap of SPH Reit is also at the takeover market cap of SGD2.6bn, which means that the rest of the properties come free. Of course that is simplistic because we did not take into the account of the debt. If we do that, then we come back to the NAV of $0.92 which, gut-feel wise, also seemed cheap. 

So, are minority shareholders being short-changed?

The short answer, I would say is yes. But as a long term shareholder though, I have also benefited from collecting the c.5% dividend over the last 9 years. So this meant that I have collected 45% of my capital or c.$0.40-$0.44 which meant that I still made a decent profit selling to Ong Beng Seng at $0.9372 considering the dividend gains. It is said that more than half of long term investing gains come from dividends and in this case, that is arguably true. 

Unfortunately, for recent buyers, they might be taken out at a cheap price and there is really no good way to fight back. Perhaps Singapore needs to see its share of activist investors who can fight for minority rights and stop corporate raiders from taking listed companies out cheaply.

For interested readers, you can also read about CK Tang

2020 Happy New Year Post: Investing in Niseko, Good or Bad?

Skiing has always been a status sports given the cost (easily costing a few thousand dollars per person), the exoticness and the instagrammable pics of the family in ski-wear and gear with snow-capped mountains in the background. In the last 10 years, we have seen a huge explosion in tourist numbers to high end ski destinations globally: Whistler in Canada, Aspen in US and Zermatt in Switzerland, just to name a few. In Asia, the number one destination is Niseko, Hokkaido, Japan.

Some of these destinations had always been premium locations since modern leisure skiing started. The most important features being the quality of the snow and the geography. Skiers want snow that is powdery and slopes that can hold these snow and also provide good variety for novices and experts alike. Niseko started to attract attention around 7-8 years ago and early investors from Australia put in money to turn Niseko into one of the top destinations for global skiiers.

Niseko in December

Today, Niseko has become the undisputed #1 Asia ski destination attracting more than 200,000 foreigners during its ski season from December to late April. In 2018, mainland Chinese, Hong Kongers and Taiwanese accounted for c.50% of foreign tourists while Australia ranked #2 with 12% and the Koreans are not far behind. Interestingly, Singaporeans have been visiting Niseko by troves. 11,000 to 14,000 Singaporeans visited Niseko consistently over the last five years and the numbers look like it can only go up. Our own homegrown property developer SC Global is launching a 190 freehold apartment project in 2020 alongside world class hotels like Hyatt and Hilton.

Part of the allure is that Niseko offers more than just powder snow. Starting with Australians, global investors, including Singaporeans have been investing in retail, food and other amenities since a few years ago. Tourists can find good food, shopping as well as the whole slew of tourist services including spa and massage, physiotherapy, car rental as well as peripheral activities such as snow hiking and even baby-sitting. Night life in Niseko is also never boring, with drinking places and bars at every other block.

Niseko's Nightlife

This has led to a strong global eco-system pushing up local wages which led to higher prices for food and services which fed back to even higher wages. With high prices, the back-of-envelope calculation of an apartment investment in Niseko makes the math works. Believe it or not, a two bedroom apartment in Niseko cost c.SGD 1,000,000 today. But the same apartment could be rented out for c.SGD 1,000 a day and even with just 4 months of rental income, the revenue comes up to be SGD 120,000 implying a gross yield of 12%. Subtracting the overheads, investors are still earning 6% net rental yield.

This is very attractive to Singaporean investors used to 2% residential yield and 4% net yield for most other types of properties. As the global rich continue to flock to Niseko, hotel pricing will continue to go up, apartments can continue to charge higher prices. More luxurious apartments can easily charge SGD 2,000 for a family of four a day which is still cheaper than staying at Hyatt or Hilton at Niseko during the ski season.

So, is it a no-brainer investing in an apartment in Niseko?

It is if we assume we can sell the apartment. But Niseko is not Tokyo and land is abundant. We cannot assume there would be ready buyers after ten years. A new investor can always buy a new property developed by SC Global, or Hong Kong Land or some Japanese developer in 2030. Why would they buy an existing ten-year-old property rather than a brand new one?

The other big question is the relative pricing of properties in Japan. Given that a similar property in Tokyo is selling for almost the same price as an apartment for Niseko, does it make sense that Niseko's apartment can go higher than Tokyo even if it has a better rental yield? Mathematically, it could. This is because one can argue that Niseko's 6% yield that could become 10% is more attractive Tokyo's 3-4% yield that is not going anywhere.

Intuitively though, it is very hard to stomach why should someone cough up a million dollar on a property in Niseko when he or she could buy a good apartment in Tokyo or for that matter, a slightly smaller shoebox in Singapore. There will be a lot more demand for a second-hand shoebox condominium in Singapore as our beloved city state has become a playground for the global rich and famous. But Niseko? 

Queuing for ski lifts

Niseko is not a global city. There is limit to its growth. Queuing for the ski lifts is exhaustingly long as it is. Tourists has caused prices of food, lodging and services to skyrocket in the vicinity. This has drove up the cost of living and most locals have moved away, preferring to live in Sapporo or Chitose. Without the local population to anchor life, it is hard to see how Niseko can continue to flourish. Global tourists can love Niseko today, but they can also move elsewhere in a flash. Not forgetting that Japan is a country of natural disasters. An earthquake in Japan would cause property prices to collapse across the country, from Niseko to Tokyo to Fukuoka.

Having said that, Aspen and Whistler have gone on the same paths. Niseko could follow their success story. Property prices of similar sizes in Whistler ranged from CAD 100k to 1.5m. Expensive stuff goes for more. In Aspen, properties across the board in ranged from USD 1m to 10m. So Niseko's properties might still increase in value. The global rich is getting richer, driven by cheap liquidity, their search of yield and valuable assets will continue indefinitely. At the back of all this asset inflation is ultimately global negative interest rates. This is the same big tailwind for many types of investments, be it stocks, industrial properties in Singapore or private equity stakes in disruptive startups.

Niseko, or exotic winter holiday homes in general, could become an asset class like collectible fine wine, art pieces, luxury watches and the likes. It has the added characteristics of good rental income and a respectable rental yield at face value. So it does look attractive. But as astute investors, we must remember it's not the same as rental income from a Tokyo or Singapore property.

I would buy a property in Ho Chi Minh, Vietnam any time over an accommodation in Niseko. But that's just me.

Happy New Year 2020! Huat Ah!

Charts #22: Another Property Chart

Here's another city property chart that looked interesting. How much space can USD 1m buy? Does it really make sense? The record is now held by Monaco at 16 square metre. This is not to say property is a bad investment though.

If we think about it, this is just another greater fool game in a different scale, or as we had discuss, the reflection that the value of money will just keep getting eroded with inflation and QE. If we look at this chart in twenty years, maybe Monaco will be 8 square metre and the rest of the cities will see some positions swapped. The last city will also be much smaller than the 200 square metre listed here.

Charts #20: House Prices

This chart says it all. Property prices moved way up vis-a-vis GDP and income.

1986-c.2017

The chart is for Australia but it's probably the global trend over the last 30 odd years.

2017 First Half Review - Part 2

This is a continuation of the previous post.

The last post we talked about the revival of tech brought about by multiple rounds of quantitative easing (QE). QE flooded the world with cheap money which ultimately went into investments in these tech startups (well, at least some part of it). There is a Cambrian explosion of new ideas and business models. We saw the rise of Grab and Uber, upending taxis. We have AirBnb for room-sharing, then office sharing, then now home sharing for people who don't want to buy properties ever. We have food delivery making waves and other ideas still embryonic but with the potential to further disrupt old economy business models. Then we had gaming taking over the world by storm. 

Gaming is now a $100 billion industry, bigger than Hollywood and music combined and is poised to become a huge sporting industry as well with the advent of e-sports. Already, the number of viewers on Youtube watching e-sports is reportedly more than the number of soccer fans watching the last FIFA World Cup. We might see the day when E-sports teams are worth billions (like soccer teams) and e-sports stars make multi-millions (like soccer stars) and their merchandise and goods are highly sort after by fans worldwide. Tencent and Activision Blizzard would be the stocks to play this secular trend.

Tech brands already started world domination in 2013

However, this tech revival had only benefitted a small percentage of the global population. Tech entrepreneurs and their employees have made a lot of money but not the regular workers on Main Street. In fact. many employees of the old economy had been dis-enfranchised by tech companies. Think how Uber destroyed Comfort Delgro. or how Amazon is killing the mom and pop retail stores or even Walmart. Tech, as with many things that had happened since the Global Financial Crisis (GFC) had widen the gap between the haves and the have-nots and contributed to the rise of populism (the political trend that allowed populist like Donald Trump and Rodrigo Duterte of Philippines to be elected).

There is a polarization between the haves and the have-nots globally. This is one of the huge side effects of QE. You see, Economics 101 tell us that when we print money, we should expect inflation and we did hve lots of inflation. This happened not the normal price inflation which we shall explain why later, but asset inflation. Thanks to the global central banks coordinating global QEs, we had massive asset inflation. That is why markets are hitting all time highs, art and wine and other collectibles are getting more and more pricey and Singapore properties had not decline much despite rounds and round of cooling measures.

With money flooding the global markets, the rich or the haves are struggling to put their money into good investments. Hence they go for stocks, collectibles and properties. They are buying up prime properties in global cities. It was reported that Chinese accounted for 1/3 of all London building transactions in the last 12 to 18 months. Singapore is definitely on the priority list for the global rich to park money. Hence it might be time for Singaporeans to relook at buying condominiums or risk not being able to buy one ever again.

While asset inflation had taken over the world, price inflation had been mysteriously low. This goes against Economics 101. I believe this is linked to the tech disruption that we had discussed. Technology companies, flooded with liquidity, had been able to provide free services hitherto. Think of how Uber and Grab had subsidized taxi fares, how AirBnb made travel affordable and how Amazon made buying stuff so cheap and how much productivity had been gained with the use of technology. Robots are taking away jobs and pressing down wages. This would continue and hence price inflation might remain low for years to come. 

The Gig Economy

The gig and sharing economy had also suppressed wages for the blue collar workers globally and this is generally not good. Without wage increase, we won't get economic growth and inflation. Mild inflation is actually necessary to create a virtuous cycle of economic growth and wage growth. This is now being challenged with the over-extension of QE. Unfortunately, the workers for these gig economies are still thinking they are better off because they can work at their own time and "be their own boss". 

So, what's the solution?

Alas, there isn't a good one. This polarization between the haves and the have-nots looked like it might just continue, until the next Global Financial Crisis (GFC). It is true that the have-nots are protesting. That is how Trump won the US elections. But Trump was not going to help the have-nots. He might just make it worse for them. Hence some believed that the end game could be a mega GFC or WWIII. If that happens, then all that had been discussed on this infosite goes down the drain. Whatever we have in our banks, in custody of other banks or security houses would be worth nothing. Hence I have always advocated that as astute investors, we might want to consider having a good portion of our assets in physical gold.

Well, that's one nightmare scenario if we don't resolve our issues in the next 5 to 10 years. As for the rest of 2017 and 2018, we might see the markets getting healthier as US continues to break new highs, Europe is finally recovering from the Grexit scare and the Brexit uncertainty and China continues to maintain steady growth (despite its shadow banking problems being unresolved). As for Singapore, we should expect the STI to also do well given that 40% of the index is related to banks and properties and we should expect them to rally with the positive outlook of the global economy. 

But the trick is also to sell into strength as valuations don't look cheap and we are not sure how long this party could last. When the music stops and lights come on, we have to face the reality - we did not solve all the problems of the last crisis. 

Happy National Day!

Read from the first post.

Vietnam Property: 5 Bagger! - Part 2

This is the continuation of the previous post on Vietnam Property.

We have established the following in the last post:

1. Vietnam has a huge and hungry population and is on the growth trajectory to be a developed country. GDP will continue grow at high single digit and property prices at a multiple of that over time. It might be the last Asian Tiger in our lifetimes.

2. The development of the Ho Chi Minh City (HCMC), mirrors the development of Shanghai. With the east of the city growing much faster: the analogy of Pudong and Puxi vs HCMC's District 2 and District 1. At current $2,000 psm, we can expect prices to see $10,000 psm in the future when HCMC becomes like Shanghai or Bangkok.

One big secular trend behind this is also the urbanization of Vietnam. As a country develops, its population moves from the rural farmlands to urban cities. Urbanization ratio over time climbs over 50% to reach 60-70% eventually. Vietnam today is at 34%. As we already know, Vietnam has a population of 94 million of which only a mere 8 million lives in HCMC (another 7.5m in Hanoi). As the country urbanizes we can expect HCMC population to explode. Most big cities in the world houses 15-20 million people when we include the sub-urban population, HCMC should see its population increase at least 50% over the next 5-10 years. 

Big Picture: HCMC City 

This is a major point because it debunks the over-supply argument. Most amateur investors would point to the enormous number of property development in the two big cities and say that over supply would come and prices would collapse. But when we think about how 5 million or even 10 million people would eventually find homes in HCMC, or for that matter Hanoi, over supply would never be an issue over a long enough time frame. Besides we are investing in the Central Business District or CBD, the core of the city where land will be limited. It is too easy to paint a bear story without seeing the big picture. 

Today, Vietnam is at an inflexion point. It's GDP per capita has almost doubled from $1,300 in 2010 to $2,200 today (chart below) and is likely to hit the all important $3,000 in a few years where the demand for cars, properties and modern goods takes off. The Vietnamese government relaxed regulations and allowed foreigners to own properties in 2015 and started to privatize many state own enterprises in 2016. These are all important milestones for growth. We can pretty much say that Vietnam is all out to transform from a developing to a developed country. 

Vietnam GDP per capita

If history is any guide, Vietnam would continue to grow its GDP at a high single digit, not unlike China in the 1990s and 2000s and its GDP per capita would reach $10,000 to 15,000 in time. The same chart above shows how it has grown steadily over the years but still at a low $1,300 which is lower than Indonesia, South East Asia's largest economy at $3,500 GDP per capita and Philippines, another rising star at $2,800 GDP per capita. The difference is that Vietnam is going to be another manufacturing hub, from shoes, to white goods to electronics. The formula that has proven to work as we saw how South Korea, Taiwan and needless to say China transformed their economies that way.

Coupled with the reasons hitherto, Vietnam stands to prosper and Ho Chi Minh City, being the commercial centre, stands to benefit the most. There is an estimated five or six new condominium developments coming on-stream in the next 1-2 years that are targeting foreigners. The HCMC property market is finally recovering after its huge decline as it was dragged down by the Global Financial Crisis (GFC). The Singapore developers already has some successes with a few earlier project launches, building on Singapore's brand name and property development prowess. One of the prominent project in District 2 called The Nassim launched by the Jardine Group targeting the luxury segment had done really well (more than 90% sold) and is set to redefine HCMC's luxury segment with potential for astronomical price increase.

The Nassim

The cherry on the cake is the affordability as a result of the low quantum of these projects. The Nassim, is going for c.$200,000-400,000 per unit and for the less luxurious projects, a state-of-the-art 90 square metre condominium can be bought for c.$150,000 - a quantum that can't even buy a 2 litre car in Singapore. Such is the irony of life. This is the function of Vietnam still being a frontier market and perhaps a reflection that everything in Singapore is really too expensive.

Well, if the story is so good, why isn't everything sold out?

As described before, there's always risk. Nothing is certain in investing and the future, though painted here as rosy and prosperous, is always but "one of the probably futures". The future is a set of probabilities. There isn't just one but many possible futures. When pundits predict one future and it turns out to be correct, more often than not, it's just luck. The true expert, points out all the possible futures and assign accurate probabilities, knowing that one of them would come true and how to bet in a win-win manner. The high probability future of Vietnam is that it succeeds as another Asian tiger and we get our 5 bagger. There is always another chance that it would falter. The government reforms could fail and the Vietnamese Dong collapses again and the story is pushed out for another decade. Or infighting in the Communist party resulting in some power struggle and the politics is thrown into disarray. If these futures pan out, unfortunately, the money put in would see substantial losses. The author would attribute a 10-20% chance of this happening. But still, the risk reward profile is highly favourable. It's 5 bagger vs losing say 30% of the capital. More likely than not though, investors won't lose their pants. There is always a buyer to sell to if the price is low enough.

The other major concern for investors at this juncture is actually financing. Because the Vietnamese economy only started to open up, there is actually no means of financing. There is no such thing as a mortgage in Vietnam today. The mortgage market is non-existent and the banks don't know how to do it. This is the state of affairs in frontier economies. However over time we can expect the Vietnamese banks to introduce mortgages and future investors would have it easier. Without mortgage or financing means, investors must put in 100% of the cash needed and be subjected to full currency risk. The Vietnamese Dong is ultimately an emerging market currency, the exchange rate is volatile and the bid-ask spread is very wide. These are the costs to investing. Although if the story pans out as we have discussed, then such trivial should be overlooked. Why think about a 3% spread or a 10% currency depreciation when the return is going to be 500%?

The other risk is the possibility of intermittent rental income.

As alluded to in the previous paragraphs, Vietnam is only starting to open up very recently. There is no concept of mortgage yet. Global manufacturing firms only started to setup shop 1-2 years ago. The rental market is only for expats working with the global firms. Most Vietnamese people are still living in villages and couldn't afford rental. The rich and famous Vietnamese are actually fellow investors in these luxury properties and they are not about to rent. They just buy properties when they need to stay in the city. Hence while the rental yield is touted to be a good 6-8%, actual rental would be a function of how good the property agents are, whether they can secure good tenants working for MNCs. The rental market is thus highly competitive given the new capacity for these luxury condos coming in the next 1-2 years.

Nevertheless, if the main scenario pans out, then the return should be in the tune of a few hundred percent and missing one or two years of rental yield of 6-8% shouldn't move the needle too much. To reiterate, this is a five bagger story. Vietnamese properties in Ho Chi Minh today sells at $2000 psm but should reach $10,000 psm which is closer to what global cities like Shanghai, Taipei and Bangkok is selling at. Such opportunities don't come often. 

Seize the day!

Read from the first post! This author owns a property in HCMC.

Vietnam Property: 5 Bagger! - Part 1

Here's an investment opportunity of a lifetime, yes once in a lifetime. If there is one post that you should read in 2016, this is the one. It's about Vietnam - the last Asian Tiger.

For most of us in sunny Singapore, Vietnam is probably not on most people's radar. It's not as vibrant as Bangkok and the rest of Thailand, there is no historical site like Angkor Wat or Borobudur, hence not as big a tourist attraction. There are also no famous beaches, and no theme parks. Even the traditional costume Ao Dai (pic below) doesn't appeal much (sorry Vietnamese ladies) because it is an obvious rip-off of the Chinese cheongsam with an added disadvantage - showing less skin. Also, the investment story sort of pales against Myanmar's, which we saw a huge hype that started when Ms Aung San Suu Kyi was allowed to run office after spending 21 years under house arrest. Of course, Myanmar's property prices actually skyrocketed since 2012. Meanwhile, Vietnam had major issues after the Global Financial Crisis (GFC) which it still hasn't fully recovered from. It's currency, the Dong depreciating big time, the nascent property bubble burst and most investors then were still licking their wounds.

Vietnamese lady in Ao Dai

So what's the story now? Well here's the plot. In the past few years, China has gotten really expensive as a manufacturing base and global MNCs were looking for alternatives. Vietnam has a huge and young population (c.100m! Almost as big as Japan!) that is highly literate, hardworking and hungry. The Communist government has also seen how successful China has become and strived to modernize Vietnam. It's the same roadmap that all the past Tigers had followed, including our own beloved motherland's plan: start with manufacturing, lure MNCs with cheap workforce and government support, built up the skills of the people and put money in their pockets. As the nation prospers, GDP per capita compounds and property prices skyrocket. South Korea, Taiwan, Hong Kong and Singapore all prospered. Before the Asian Tigers, we had Japan and after, China, the biggest dragon of them all, basically following the "manufacturing to first world status" master plan. These countries succeeded following the same path transforming from developing to developed countries. So will Vietnam.

What's more: Vietnamese are also descendants of Han people, known for their tenacity and vigour. They will work hard and compete hard. Vietnam is also a coastal country with access to the vast oceans (as with all the other Tigers), which allows it to export manufactured products and import goods for internal consumption when the economy grows and its people become rich enough to buy good stuff. Hence it is highly probable than not that Vietnam will be as successful as all the Tigers and Dragons before her, if not more successful. She will also most likely be the last Tiger of our lifetimes, barring North Korea opening up. That's another story for another day though.

But why property?

Well, stocks are also possible, but I believe the property story is easier to understand and probably gives higher ROIC and lower risk as we shall discuss below. As the country develops, not all regions will grow as quickly, it's good to bet on the commercial centre of the nation - usually the one or two main cities. Stocks are more difficult to capture one or two city's growth. In the case of Vietnam, the commercial centre that we are talking about is the Ho Chi Minh City (HCMC). This is a beautiful city originally named Saigon but changed to be named after the Father of Vietnam - Bac Ho, who led the country to freedom by defeating the Americans after a bloody ten year war. Or rather it was the Viet Cong, using guerrilla tactics against modern technology that won the day. The Vietnamese dug elaborated labyrinth of tunnels beneath American camps and surprise attacked them until the US soldiers were so fed up that they decided to wipe out Vietnamese by the villages. Elderly, women, kids were all not spared. (Well, that's an over-simplification but for more, check out Wikipedia or google My Lai Massacre).

Bac Ho on a T-shirt

That's all history btw. The war ended in 1975 and the country started to rebuild after decades of trial and error, the last effort thrown off course by the GFC and set the country back for a few years. But today, HCMC is a spiralling city, something like Singapore in the 1960s, Shanghai in the 1980s and Bangkok some years ago. Motorbikes, rather than cars, jammed up the roads, high rise buildings are starting to pop up and road side stores and shophouses co-exist to provide local food and international cuisines. In today's world, we also see the co-mingling with global brands and modern concepts. Starbucks and designer cafes littered downtown HCMC and Zara and H&M have also setup their flagship stores. So this is the first important point - at the rate the city develops, we should see more modernization and property prices go up multiple folds.

Today, HCMC property prices range from $2,000 to $4,000 psm or per square metre (the convention used in Vietnam). In comparison, Shanghai is at $10,000 or more per square metre, Taipei is at $8,000 psm, Bangkok high end properties are at $6,000-9,000 psm. Needless to say, Singapore and Tokyo are much higher at $12,000 psm or more. If HCMC becomes on par with any one of these cities, we can expect HCMC properties to be multi-baggers. At the very least, it should double. 

Now let's look at HCMC in detail, this is where it gets even more interesting.

Ho Chi Minh City (HCMC) is divided into two halves much like most major cities by a river. The Saigon River runs through it like a snake and the old city was mostly built on the west of the river. This is very much like Shanghai where Puxi was the old town and Pudong was designated as the new CBD, given that land was abundant and bare, so the government could designate and plan much better without historical baggages.

Stylized HCMC map

In HCMC, the old CBD (marked as CBD in a white circle above) was labelled District 1 or D1 while the new areas were labelled District 2 to 7 (D2-7). District 2 (D2) is the most interesting, spanning from the north east to the east with parts of it already connected to the upcoming metro network. The stylized map above from Capitaland's Vista Verde project shows it better. D2 spans from the area near the top two bridges are where current expat communities and international schools are located with metro lines being built to where Vista Verde stands, which is supposedly near the new CBD. Capitaland, Keppel as well as other developers are building multiple projects in the areas mentioned above. The price for some projects starts at $2,000 psm while District 1 prices are now at $4,000 psm and above.

If we trace the development of Pudong, we can perhaps see where HCMC D2 will go. Pudong started development in the 1990s when the Chinese government realized they needed to grow the city to cope with the development of the country. Pudong was ideal given its proximity as well as the availability of raw land. Today Pudong commands higher prices than Puxi which is why HCMC D2 could see prices leapfrog that of D1 and go even higher. Bearing in mind that both D1 and D2 prices will keep going up as the economy grows which means that D1 can go from $4,000 to $8,000 psm while D2 can go from $2,000 to perhaps $10,000 psm ie five bagger.

Of course this process will take many years as development of a new CBD would not be just a 1-2 year affair. While it is possible for stocks to achieve similar returns, it would take a lot more effort trying to analyze which stocks could do that with better risk reward profiles. It's also more difficult to buy Vietnamese stocks given that its stock market is still too nascent and lacks liquidity and depth. 

Next post we look at some other factors and the risks, stay tuned!

Negative interest rates, skyrocketing asset prices!

This is a continuation of the previous post.

Inflation had always been around, so the nominal zero that we saw was never really zero. Inflation of 3% meant that money depreciated value 3% every year, we just didn't see it so we think it's not there. When inflation is 3% and interest rate is 2%, effectively money in the bank is still being burnt. After the Global Financial Crisis (GFC), nominal interest rate became zero, but inflation was around 1% and hence real rate was already negative. But unfortunately our primitive human minds can only think in nominal terms, not real terms. Hence in the long history of financial markets, nominal interest rate  (ie the one that we have been talking all this while, which is the one always quoted on TV and news) didn't need to go subzero since inflation was always positive.

But now that inflation is negative, things are really different, and actually also dangerous. It might make sense for interest rate to go negative. In real terms, we will still be fine though. In negative inflation or deflation, money now appreciates in value, so negative interest rates serve to stop that appreciation which is not normal and actually harmful.

Banana money issued in Singapore during WWII

You see, deflation is a silent killer. It is not as dramatic as hyperinflation when money becomes worthless like how Singapore's own history with banana money showed (pic above). Banana money notes worth $10 might be just $5 a few months later and then dropped to $3 after a year or two. By the end of the war it was not even justified to be used as toilet paper. There was a famous anecdote told by our late founding father Mr Lee Kuan Yew that when he received his salary in banana money, he simply bought anything he could because the money would be worth much less very quickly. So he quickly bought stuff like a billiard table, machines and what not even when he had not much use for them. It turned out to be an important strategy.

When the next global financial crisis hits, it might be worthwhile to learn this because fiat currency and investment assets could become worthless as the global financial system comes to a halt. It would be vital to own hard assets that are useful for sustaining life: land, livestocks, electric vehicle, solar panel and power generator etc. Well, that's story for another day.

The topic of the day is not inflation but deflation.

Deflation, as alluded to in the previous post, causes a different set of problems. First prices to decline, that's by definition. This procrastinates consumption, slows innovation and brings economic growth to a standstill, which exacerbates further price declines. It creates a vicious cycle and leaves the economy in stagnation. It's a slow death process that could trap an economy indefinitely. Again, we have go back to the Ant-Man analogy. It really feels pretty much like being trapped in the subatomic quantum realm.

Quantum realm, or rather, the black hole from Interstellar

Economic theory tells us that interest rate is the key lever to pull to regulate the economy. Inflation is one of the results that we see, the others being employment and growth. In an economy that is growing well, inflation is usually at around 2%. Interest rates could be around 2-3% to be moved up and down accordingly. If the economy is weak, interest rate should be lowered to stimulate growth and vice versa to prevent overheating. However, conventional wisdom put a limit on this powerful interest rate lever. Interest rate cannot go below zero. When the Global Financial Crisis (GFC) happened, interest rates were lowered to zero. But it wasn't enough. Now that China is at the risk of imploding, coupled with the world slowing drastically, the global central bankers are at their wits end.

Drastic times calls for drastic measures. In order to stimulate the global economy which is not growing and having negative inflation, a few countries started with negative interest rates. If zero interest rate is not enough to get people to borrow money, then we pay them to borrow money! In theory, this should work if it's not prolonged. People would wake up, work harder, come up with ideas, create new businesses which would require capital, borrow money, increase consumption, innovate and in no time, the economy is up and running again.

Unfortunately, reality works differently.

If money being deposited into the bank costs money rather than earning interest and if lending to people means I have to pay the borrowers instead of them paying me, then I better do something else with my money. What will happen is asset inflation. For quality assets, it would be massive asset inflation, perhaps even hyper inflation. The most accessible hard asset for most people is property. So negative interest rates also mean that property prices will skyrocket. This has important implications for Singapore's property market.

Stylized chart of Singapore Property Price vs Value

The chart above shows how Singapore property price and value had move over the past 10 years. Essentially prices nearly doubled from 2005 to 2008 but collapsed as a result of the GFC but went on to more than double, peaking at 220% of 2005 prices in 2013. The red line shows my estimation of the true value of Singapore's property. Recall that in value investing doctrine, we buy when price is less than value. Unfortunately, this only happened once in the last 10 years for Singapore property. This was in 2009 when the blue line i.e. price dipped below my estimation of value which is the red line. Well, we might get a chance in 2016 and 2017 if the world hadn't gone into negative interest rates.

In the following chart we try to understand what happens to value and ultimately price in the negative interest rate environment or NIRE. This has nothing to do with basketball shoes. Here we show prices in blue (price) and red (value) again, essentially the same data points from the previous chart but we also added a purple line.

Stylized chart of Singapore Property Price vs Value in NIRE

In the red value curve, I assumed that Singapore property value grew at 4-10% over the past 10 years. (4% growth during the lean years and 10% for the boom years) and should grow around 4% until 2020. Singapore is a mature economy and hence growth at 4% would roughly mirror GDP growth which is fair. This is just simple compounding at work and we see that in 2020, Singapore property value should be around 2.5x of what it was in 2005. In the graph, it reads about 250 on the y-axis. This means that if property prices remain where it is today until 2020, value gets to be higher than price and we would be able to buy Singapore property soon!

Alas, with the reality of NIRE hitting us (NIRE again stands for negative interest rate environment and has nothing to do with basketball shoes), what is likely to happen is that global money will start chasing high quality assets as discussed in the first half of this article. Singapore property is at the forefront of high quality assets. Global rich started buying Singapore around 2005 which caused prices to skyrocket as we had seen. Billionaires from all over the world starting to buy up bungalows. District 9, 10, 11 properties are already used for money parking of rich Chinese, Indians and Indonesians. This is going to further exacerbate.

This is depicted in the purple line in the same chart. While the red line shows a pedestrian growth in value mirroring GDP growth, negative interest rates know no bounds. We know that property value doubles when rental yield drops by half. Now that yield can go negative, it could only mean value can only skyrocket! In the chart, I arbitrary computed that value could shoot up to 600 by 2020 (vs only 250 for the red line).

To put this into better context, let's use some real numbers. In the past, say a good property in a good location (i.e. District 9, 10, 11) have provide a monthly rental income of S$4,000. This comes up to around S$40,000 a year after subtracting the peripheral costs. A property, valued at 4% rental yield means that its value should be S$1,000,000. As global interest rates fell, some of these good properties are being valued at 2% rental yield, which mean S$2,000,000, which is roughly what it is today.  This was more or less what happened with the Singapore property market over the past decade. Then the government stepped in to cool it down, some rationality prevailed and prices finally started falling in 2014 and 2015.

With negative interest rates, it means that money being put in the bank would lose value. The banks will be charging 1% for funds park there. These rich people having 10 million dollars in the bank will not be happy paying that bank $100,000 every year. They will be happy to buy Singapore property at 1% yield or even 0.5% yield. At 1% yield means the same property we talked about is worth S$4,000,000 and at 0.5% it is worth S$8,000,000. We may see Sky Habitat selling at $3,000 psf some day. This is the reality facing us.

Can this prediction be wrong? Of course, and actually it shouldn't be viewed as a prediction.

Nothing is ever cast in stone. The future is always a set of probabilities ascribed to a few scenarios. This could be one future reality. Its probability of actually happening gets higher if more central banks adopt negative interest rates. The big swing factor being the US Fed. There is always the alternative reality that the world finds its growth trajectory again, we move away from NIRE *Phew* and we get one chance to achieve the Singapore 5C dream again!

Let's hope that's the future waiting for us.

Look for Free Options

Those who have knowledge, don't predict. Those who predict, don't have knowledge - Lao Tzu

Investing is not about predicting the future. Predictions are usually not accurate. We heard the famous ones: Bill Gates predicting nobody needed no more than 640KB of memory, Dow Jones 36,000, who needs cars when we have horses blah blah.

Yeah, how right. So what do we do if we do not want to predict?

We want to be prepared. This post serves to illustrate how.

First we must accept that the future is unknown. It is a set of probabilities. We want to make sure that whichever future pans out, we will be okay. In mathematical terms, it means that the expected return is positive. In investing, we want to look for free options, or near-free options. In layman terms, it just means be prepared, don't anyhow bet.

It's easier to use an example, so we go back to Singapore's property market, my favourite topic. As of now (mid 2014), we can probably trace 3 paths that our beloved property market would follow in the next few years:

1. It will crash and burn, ie prices collapse, falling 30-40%, most speculators fall into deep shit and every Tom, Dick, Harry and his wife and his dog totally shun this market. That's when value investors come in.

2. It will continue to cruise along, doing nothing much at 2% rental yield or an average of $1,500 psf ie 90% of Singaporeans would not be able to afford anything any time soon and foreigners continue to nibble on some of our high-end stuff.

3. It will rise and rise as Singapore becomes the Monaco of Asia. Prices rise to $2,500 to $3,000 psf or higher and stay there forever. 99% of all Singaporeans and their children and their children's children will never be able to afford anything and have to resort to living in Iskandar.

Iskandar. Not too bad. Who wants to retire there?

I have posted in the past about why I think Singapore's property market should not continue to rally. But it's not supposed to be a prediction. It's merely a view I hold which I would attribute say a 70% probability that this future is likely to come true.

As for the other possible futures: 2 and 3 above, I would attribute say a 20% probability that our property market would do nothing and a 10% probability that we would become the Monaco of Asia and we will all have to move to Iskandar some day.

So the way to invest here is to make sure that no matter which future pans out, you would be ok. And if one of them happens to be right, you make a lot of money.

Now obviously if you have bought 5 properties on leverage and is paying interest instalments out of your salary, you are betting on Future 3. But if you believe my probabilities, then if Future 1 pans out. Good luck! See you in Iskandar, sorry I mean your makeshift cardboard at the void deck this weekend while I bring my kids to Legoland! That's way too much prediction and too little preparation.

On the other extreme, if you have sold your home and your mum's and in-laws ones as well and on top of that you go short $500k of Singapore property stocks, then you are heavily betting Future 1. But if Future 3 pans out, then jialat liao (ie in deep shit!). Not only you have no place to live, your short would probably be losing close to a million dollars. Makeshift cardboard at the void deck all over again. Again, that's not rational investing.

In investing, most of the time, it's very difficult to make free money or in investing lingo - to find arbitrage opportunities. You have to take some risk to make some good return. But that's just not very efficient. So the lesson here is really to just keep finding those arbitrage opportunities or what I would call "free options".

A free option or a near free option is a bet that would give a good payout if a stipulated event happens in the future but the cost is either free or almost zero. It could be said that one of the goals of investing would be building a portfolio of free options or near free options.

I must stressed that this is not going to be anything easy. The market is efficient and arbitrages are easily profited away by the professionals. Arbitrages are like dollar notes that fell out of people's pocket accidentally on Orchard Road. It would be picked up in a blink. So it's really not like money would fall from the sky. In investing, some of these free options are hard to come by.

But there are times when "free options" come about. We just have to be savvy enough to spot them. In the Singapore market, ironically, one example would be the property play Ho Bee. In early 2012, Ho Bee's share price fell to $1 as it was becoming clear that Sentosa's luxury properties might struggle to find buyers and Ho Bee was the Sentosa developer. It was clear that Ho Bee could have some serious issues as lower sales meant its cashflow would get tight but it had to finance its huge capex for its residential projects and its crown jewel commercial building: the Metropolis.

The Metropolis is a mega-deal for Ho Bee, at 1 million square feet of rental space right outside Bueno Vista MRT, this property alone is worth more than $2 when converted to Ho Bee's share price and even after netting all its debt, there is still $1.5 left. So when Ho Bee traded at $1, the market was saying Ho Bee's entire Sentosa plus other projects are worth nothing and its prime Metropolis could either be marked down drastically because Ho Bee might have to do a fire sale of this prized asset to survive.

Now I am doing this analysis with the full benefit of hindsight. I didn't invest in Ho Bee then and I am drawing conclusions now just for the purpose of illlustrating what's a free option.

The market is not stupid. Remember markets are usually efficient and I believed that there was a likelihood that Ho Bee needed to sell a part of Metropolis cheap to keep itself going in 2012, hence the market priced it below Metropolis valuation. But at $1, the market priced in the worst possible scenario. If it had gotten any lower, someone would have taken Ho Bee private. In fact, the management could just bite the bullet, partner with some private equity and took itself private at say 80c since the company and its management owns 70% of itself already.

So there was a free option on the table when Ho Bee was at $1. I would attribute say 20% probability that it could still fall another 20% which if it did the prudent decision would be to buy even more Ho Bee. But in another scenario, there is an 80% probability that it could rise 50% back to Metropolis minus debt at $1.5.

As things turned out, the upside was 100% and more. Today Ho Bee trades at $2.20. 

So ironically, despite my negative view on the Singapore property market, a prominent property play called Ho Bee was a free option regardless how the whole Singapore property market performed.

How much should HDB pay for the land?

One of the most popular posts talking about HDB Singapore on this blog is titled: What's Wrong with HDB Prices?

This has a perennial debate since Marlboro Tan's time and recently our new HDB Minister Mr Khaw talked about this again. Obviously Mr Khaw is a more eloquent man and what he says make a lot of sense:

"You need to acquire a piece of land , you need to reclaim a piece of land. All those costs money to tax payers and we are just trustees of tax payers and those costs are to be accounted for. And even when you have got that land prepared, then land is only valuable when we invest in infrastructure, roads, MRT, etc etc. And all those costs billions of dollars. So to say that land cost is pittance and therefore should be excluded from total construction cost, I myself think it is not quite an appropriate argument."

The problem is always in the calibration. So how much should HDB pay? So in the 1970s HDB paid almost nothing for the land and hence it cost $10,000 to buy a 3 room then. Of course, that's too ancient to talk about and now HDB pays market rate for land parcels and sells at a loss to Singaporeans. To Mr Khaw, this seemed to be the correct approach.

However market rate is determined by supply and demand in which supply is determined by the government. Market mechanism also sometimes breaks down because moving prices create anxiety and cause people to behave irrationally. We saw that in the Singapore property market when people pay S$1700 psf for some suburban project and more than S$3000 for super luxury condos. In absolute quantum of millions and tens of millions of dollars, these are monies that can buy villas and hectares of productive land in other countries.

Perhaps the solution is for HDB to move towards targeting a long term moving average of market prices which could reduce some volatility in HDB selling prices and also for the government to better regulate the sale of land to control the market. HDB should also move towards percentage based subsidy for new buyers and receive a percentage based grant from the government to ensure that it doesn't go bankrupt.

Well actually since it's a Singapore government entity, HDB Singapore technically shouldn't go bankrupt as the Singapore government has the obligation to bail them out as the MOF had done by providing billions of grants over the years.

Sky Habitat's Crash Landing - Part 4

This is a continuation of a series of posts analyzing the Singapore property market. Interested readers can start from the first post.

We talked about valuation in the last post. We shall examine where the "right prices" should be for Singapore property and what if this blogger is completely wrong.

By "right prices" I mean when prices become less than intrinsic values and hence if we buy, we stand to protect our capital and hopefully earn a decent return. As with the most simple stock valuation method, we need to come up with a good earnings estimate then multiply it by a multiple. In property space, this translates to estimating a good sustainable rental income, multiplied by a multiple, or inversely - divided by a reasonable yield.

To use a specific example, we use our favourite development: Sky Habitat. Say we think that Sky Habitat can rent out at $4psf per month. ie annual rental is $48psf but after taxes and expenses we are likely to get to $40psf. And we think that a reasonable yield should be 4%. So this means that Sky Habitat's fair value should be $40 / 0.04 = $1000 psf. So at $1400psf today, it has to decline another 40% in order to become palatable to value investors.

Now how do we justify these no.s? Why $4psf? Why not $5psf? And why 4% yield and not 1% like Monaco? I have always advocated that investment is an art, not a science. These no.s are merely one set of assumptions. Well we can always explore a couple of ways to triangulate to a real and good sustainable rental and a reasonable yield.

Yield is easy, so let's start with that. Singapore's own historical range is 2-5%. 2% yield today points to super ex, and 5% in 2005 was when nobody talked about property. Globally, as shown on the previous post - 4% looks like a good average yield, with some margin of safety. You can argue using 3% too, but that is not being conservative and hence not giving yourself that important margin of safety. So I would use a 4% yield.

Let's look at rental. How do we come up with the right long term sustainable rental rate for Sky Habitat?

One easy way is to look at rental across Singapore.

River Valley $4-6psf
Orchard $5-6psf
Current Bishan $3+psf
MRT locations $4-5psf

So where should Sky Habitat be? I give it $4psf. Well some might argue for $4.5psf, or maybe $3.5psf but I shall leave it to you to work out the ranges. Remember this is an art!

Another good starting point would be our GDP per capita. Singapore's GDP per capita currently sits at SGD 80,000. This represents the average pay of a worker in Singapore. From here we need to work out what is the comfortable rental that a worker would pay. Yes most Singaporeans have a place to stay and won't rent. And most expats who would rent don't just earn SGD 80,000. But, this is the most easily accessible number so we start with this. Super eng readers (those with lots of free time) can go singstats and dig out better no.s. But do update us here!

Let's say this hypothetical average worker and his hypothetical wife also earning average pay is comfortable with using 30% of their annual combined salary ( of SGD 160,000) to pay the rental, this works out to be SGD 48,000. Assuming they are comfortable living in a 1,000 psf condo and not Mickey Mouse's toilet, this would mean that they can pay $48psf per year, or $4psf per month. So qian right? (As in such a coincidence!) $4 psf is a rental level that can be supported by an average household earning our average GDP per capita.

Well, we could always tweak the assumptions. Say Bishan should not just attract an "average" worker but an expat household earning SGD 200k. So the household income is higher, which can then support a higher rental, which leads to a higher intrinsic value. Investment is an art. So use your own liberty and artistic skills.

But no matter how you tweak, you will probably find it very hard justify $1700psf is Bishan's true intrinsic value. Not today, at our current GDP per capita, at our current rental and yield levels.

It can only happen if we push the yield very low. Remember global rental yield has a 1-9% range?

Just to make things clear again, there are 2 variables here. Rental and yield. In order to justify a high intrinsic value, you either push up rental, or push down yield or both. So to justify $1,700psf, you can argue that Bishan rental should be $5psf (ie $60psf per year or 60-70k absolute annual rental!) and yield should be 2%. So $60 / 0.02 gives you $3,000psf. So $1,700psf is now cheap! Buy Sky Habitat! Buy 2 units at one go! Wait maybe should buy the whole floor!

Ok, need to be serious.

This point on the yield actually leads me to the next important topic. What if all I have analyzed is wrong? Singapore becomes a Monaco and our yield is forever at 1-2%. This is not an impossible scenario. As we looked at the charts on previous post. Most key Asian cities have low yields. Shanghai, Taipei, Hong Kong are at 2-3%. (Though none at 1%, Monaco is still the lowest.)

In investment, you need to bet in a way such that you don't get killed if you are wrong. Nobody gets it right all the time. In fact the best investors gets it right about half the time only. So don't do silly things like selling your only home into this market or go short $300k of Capitaland. A good way would be to buy long dated puts on City Dev, or Ho Bee for that matter (this is for advanced readers here) or simply wait for property prices to collapse and then buy or upgrade to that dream condo.

But back to Monaco. Will Singapore become Monaco? And hence property rental yield is forever at 1-2% (currently it is about 2-3% which translates to 50-100% upside for here!).

This will happen if that is what our beloved Government chooses or what happens if the rich property-vested Singaporeans' opinion overwhelms that of the rest. Singapore becomes the Monaco of the East. A tax haven, a safe city for the region and a playground for the global rich to park money. We now have F1, casinos and yacht harbours, just like Monaco. Damn it, even our flag looks similar! Why not property yield?

Flag of Monaco

It can happen. I am not kidding.

But it will be a sad day for Singaporeans because our kids will never afford their own homes, and the majority (sorry actually Singaporeans will become minority since foreign talent will be more than 50% of the population when it hits 6.9 million) of Singaporeans will become slaves in their own country, working hard, earning relatively ok money but yet unable to afford anything.

Fortunately, recent Government moves sort of mitigated this. Property prices have become a political issue and the government seemed quite determined to bring down prices. And yes the white paper probably wouldn't fly given all this backlash. Let's hope that Sky Habitat lands safely.

The full series:
Part 1
Part 2
Part 3
Part 4