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Why properties are typically mediocre investments

One of the things I’ve noticed in Malaysia and many other Asian Countries, is the idea that “Investing in property will make you rich” is so prevalent among the community, particularly the Chinese.

And the success stories are so numerous. Li Ka Shing, one of the many Chinese who made it in Hong Kong, Wang Jian Lin and the countless others who made it big in China (Shanghai and Shenzen), Tan Sri Liew Kee Sin, Tan Sri Leong Hoy Kum, Tan Sri Jeffrey Cheah, along with Tan Sri Lee Shin Cheng and the many other property development tycoons.

And this does not include the hundreds of thousands of Chinese in Malaysia who made it via investment in property. It’s not uncommon us Chinese who were born in the city areas to have parents who have made it to the middle or upper class via the purchase of a house back in the day.

Why was this the case?

Even if you were to take the best piece of land in the world. Over the last 500 years, it would have returned less than 1% per annum, compounding, lagging far behind equities etc.

Most of the gains in real estate came in the las few decades. This is due to populations growing exponentially in city areas in the last few decades.

And when it comes to Asian countries, the gains were much more extreme due to

1. Third world to first world jumps in 30-40 years
   
   It’s in Asia, due to the extremely fast paced development, (a combination of FDI and extremely hard working people). It was not uncommon for countries to go from backwater swamp to metropolis in 30-40 years. Just look at Singapore and Hong Kong etc.
   
   This coupled with an explosive growth in population in city areas. Created an extremely strong demand for real estate in the cities.
   
   I do not see how Subang, Sunway or KL etc can double the populations now. Just being in KL makes me want to vomit blood. Malaysia have a lot of land. If prices get to high or population too dense, people will start moving, therefore lowering the future growth.
   
   And with remote working becoming increasingly popular, I really don’t see how cities can maintain high population growth rates moving forward.
   
   
    
2. Extremely low deposits.
   
   Prior to 2003, purchase of houses in the US required deposits of 30% or so. It was around 2004 and 2005, that this was loosened to 10%, then no deposit, then NINA loans (no income, no asset loans). I don’t need to elaborate on the effects of this in 2008.
   
   In Asian Countries, we have started with 10% deposits to begin with, due to government initiatives to encourage home ownership. And these low deposits have also therefore encouraged an appreciation in real estate price.
   
   Historically, people have required higher returns in exchange for the higher level of risk assumed, or lower liquidity.
   
   For example,
    

Fixed Deposit/Money Market: 3.5%

5 year Treasury: 4%

10 Year Treasury 4.5%

AAA Bonds: 5%

SP500 stocks: 10%

Low grade bonds: 11%

Penny Stocks: 13%

Real Estate: 15%

Venture Capital: 25%

However, in Asian Countries, this was subverted in a major way. Due to low deposits and accommodating banks, the investment philosophy is now “Make Enough in Rental to (Mostly)Cover Deposit). Which translates to roughly 5% or less returns unlevered.
 

3. Natural Feedbacks and the Asian Propensity for property.

Given the large increases in value. It naturally attracts more investment (which is immensely stupid really), and what the wise man does at the beginning, the fool does at the end.

We get people pushing up property prices to untenable areas. And often this craze even flows to the non-city areas, where they do not have the benefit of exponential growth in population. Making what is a mostly speculative investment, PURE speculation.

One does not need to look much further for that than Ireland.

Even in Hong Kong, the building sold by Li Ka Shing to a private investor was so expensive, the rent increase so insane, that even “Goldman Sachs’ a tenant in the building decided to move out. If even Goldman can’t afford your rent, who can?

And anyone who remembers the 1990’s of japan, would remember prices in Tokyo being so high, that rental yield was below 1%. To date, the Japanese property market have not recovered.

Why do people buy property?

They are many reasons why people invest in property, however i consider most of them to kind of foolish. Reasons include, 

1. Got something real to hold

If you buy OSK shares, you can go and touch the OSK building if you want. Behind every share is a business, just keep that in mind.

2. You own control.

Unless you’re a genius property manager, I don’t see why you’d want control. Especially when the alternatives are so much cheaper, have better management, and give way better returns. Dividends from property development companies are about 6-7% at current prices.

And these companies are not even paying out all the earnings. They sell for 6 times earnings or less and are often also valued at less than 30% of RNAV.

Having control also means you need to manage the property and collect rent. If your tenant is a gangster, refuse to move and threaten your family if you report police, what you want to do?

If he say he got cancer, no work , no family etc, you want to kick him out yourself?

I’d rather wait for dividend to go into account like clockwork.
 

3. It’s safer than stocks.
   
   No, it isn’t. It just so happens that there isn’t a flashing screen telling you the change in prices every second, causing you to panic buy or sell. 
   
   The prices fall just as much in a crisis. It’s just that most have no choice but to hold, thus saving themselves from their own stupidity.
   
   Being a highly leveraged investment, its actually far more dangerous as an investment. However, due to people paying more care into their decision making when buying a house compared to a stock, better decisions were usually made.
   
   Having said that, try asking someone who bought property in 2014 and 2015, how their investment is turning out. I bet more than 60% are underwater and cannot cut loss.
   
   
    

4. Forced Savings and Forced Holding
   
   Some people view the purchase of property as a kind of forced savings, which one will at the same time be forced to hold for a long time, therefore essentially, "forcing" one to not make stupid financial decisions.

   Well, do note you can very well do the same for equities.

   But if your self control and discipline towards your personal finance is so weak, that you require a gigantic amount of debt on your back, that is tied to an at best mediocre investment, in order for you to save any significant amount of money and put it to investments.

   You deserve the lower returns. Go buy a house.

Investing in Property

There is only one good reason to invest in property. Only one. (the second reason only applies if you’re bumiputra)

It is the only asset where the bank will allow you to leverage 10 times. Therefore, even a small gain of 5%, could result in a 50% gain in net worth. Do note it cuts both ways.

One of the things i’ve be spending a long time trying to find out, was how invest in property intelligently by talking to people who actually made buckets in real estate with mostly skill, not luck

When I was in Johor, I grilled Calvin Tan for many many hours on this.

And the essence boils down to this.

“Buy at 10 times rental, sell at 20 to 25 times rental. If you can't find at 10 times rental, don't buy.”

And the ability to buy at 10 times rental, only happen during recession at the auction houses. When literally no one show up to the auctions but you.

There is a cynical saying in real estate markets, characteristically said during tougher times, when optimistic generalisations can no longer be summoned forth.

"Only the third owner makes money"

Not the homeowner who first bought the house during a boom cycle. (First owner)

Nor the bank who repossessed the home and auctioned it off at less than the loan and bankrupted the first owner. (Second owner)

But the investor who bought the property from the bank amid distressed conditions and then rode the up cycle. (Third owner)

Ie, bought at 10 times rental, sold at 20 to 25 times rental.

Buying Property as a Bumiputra 

Now if you’re Bumiputra, you should probably focus on property. Due to the bumi discount for property, I think most bumiputra’s have very little good reasons to be poor.

Bumi lots (Property) on auction go for easily 11-15% cheaper. At times maybe even 18%.

Non bumiputra cannot buy these units. You can easily buy prime locations with 6-8% yield, more than enough to comfortably cover instalment, while charging the lowest rental in the area. This Bumi discount also often disappears in a bull market when sentiment is all time high.

And these days, Bumiputera’s can even push for the Bumi discount from developers when buying non-bumi lots

That is just easy money.

Do whatever you can to get the first RM25,000 to Rm35,000. And plot it down to buy a property yielding 6-8%. Just keep doing that till your 3^rd or 4^th property, when the deposit gets too big.
Done.

Other Salient Points

Most of the time, property is an inherently speculative investment, due to the loose financing standards in Asia for property.

Fundamentals are also extremely hard to value, as you need to analyse an area and its potential.

They are a few common denominators however.

1. Buy where there is a lot of Chinese or fair skinned Asians (unless you’re in India)

In Malaysia, property investment that have historically worked out is in areas with high Chinese populations.

There is something about us Chinese that is very Kiasu, and like to make money. And when people you have a group of people who like to make money and thus very industrious in this respect lumped together. You get very good natural feedbacks.

As incomes of that area rise, the people there are willing to spend more money, which results in businesses opening in the area. As those business do well and expand, it brings in even more people.

Higher income individuals are willing to splurge on school, hospitals etc. Bringing the best schools and hospitals to the area. And when the best schools is in that area, even more families want to move to that area, increasing prices.

This works just as well in Indonesia, Philippines, Vietnam, Cambodia etc.

Penang, Selangor, Kuala Lumpur, Johor. Got Chinese , high property prices.

Kedah, Kelantan Pahang etc.. Holland.

2. Population and Economic Flows

The fundamental analysis in property usually consist of making an intelligent guess on the economic and population growth rates in certain areas. Thus making it by and large a speculative venture.

Beyond, “Go where the Chinese are” they are very little hard and fast rules for it. A lot of it needs to come from experience and gut instinct.

However, one thing for certain is, it is a very scenario, when a government can actually dictate and drive where the economy or population will go to, to any significant degree, once a central economic hub is established.

A decade or so ago, the Malaysian Government tried to make Putrajaya the next capital of Malaysia, by moving all company functions there. But by and large, Putrajaya is a failure in that respect.

If you bought property there then, you would likely consider property a very stupid investment.

3. AirBNB is not the answer

One of the things being down now, is to use AirBNB to boost returns and enable on to cover the instalment.

Some areas like Regalia Suites in KL, is particularly popular because its one of the places where there is an infinity pool facing the KLCC, making it very Instagrammable for travellers.

However, if you paid a price where by it would only work or cover your instalment if you did AirBNB, you’ve fucked up. In a crisis, travel is going to drop like a rock. If you practice that “Die in MASSIVE debts” philosophy when it comes to property investment, by holding 5-6 with compression loans, you are likely to die after being a bankrupt via jumping off the infinity pool.

Your margin of safety is to buy at so good a price, that you can offer the lowest rental in the area and still cover instalment. That way, even in a crisis, your tenant wont move.

Hard to find? Yes, it should be. Cannot find? Don’t buy.

4. Consider the rubbish

One thing you should consider, is buying properties that look like rubbish in good areas. Often the problem is cheaper than the discount given during auctions. Especially if you have a good workman on hand.

Conclusions

Honestly, I didn’t really feel like sharing this article as I don’t think it’s that good.

I started writing this down by compiling some of the notes I got from talking to people, and currrently, I feel very little confidence in investing in property and in identifying economic and population trends for specific area.

But the best way to get the correct answer on the internet, is to give the wrong answer.

Considering the amount of retired chinese on this forum, who are likely to have made their money in property from back in the day. Can probably learn a thing or two from the critiques on my stupidity.

I doubt i'll be able to buy property unless its so cheap, that even a blind man can see, but due to fear, people refuse to buy.

Considering I need to borrow 10X to buy one, it’s probably for the better that I wait till then.

I am building my "property deposit in crisis" fund, but it’s not a top priority to be honest.

Having said that, Johor looks like a fantastic place for property now. A lot of Chinese in and around the place. And you can get KL rent at half the price. It’s not that hard to find one yielding 5-6% (KL or Subang is like 2.5-3% now). Just read calvin’s posts.

Unfortunately, I’m no longer in Johor and am in no mood to manage a property 350km away. Might be time for me to start a business there just so I have a reason to stay in JB.

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