Wealth Management Singapore

The Role Of Property In Your Asset Allocation

4 CommentsFriday • July 9, 2010 • by marco

Property is a significant source and store of wealth for affluent individuals around the world, a major allocation for their capital and, in many cases, a source of huge pleasure and enjoyment. It is a long-term investment that offers the potential for income, capital gains and a hedge against inflation. The optimal asset mix for an asset allocation for a wealthy client usually includes real estate properties, specific businesses, various equity and bonds.

Property Investments of Investors Globally
Although the property market as a whole remains uncertain currently, high net worth investors continue to see the asset class as an important part of their portfolio. In a survey done by Barclays Wealth, among the 2000 high net worth investors surveyed, the average portion of their portfolio allocated to property is 28 per cent, excluding their main residence. Of course, there is no one “right” allocation to property for all investors. An investor’s own ideal position will depend on a host of factors, including their investment horizon, risk appetite, location, time of life and personal preferences.

The survey suggests that, in general, allocation to property increases with wealth. Wealthier individuals will have higher the allocation of assets to property. This phenomena can be attributed to the fact that property investments are substantially larger that requires more informed decisions.

Over the next two years, 35 per cent of respondents plan to increase the proportion of property in their portfolios (not including their primary residence), while 48 per cent plan to maintain their current allocations. The main reason that investors give for the increase is that they believe property offers better long-term prospects than other asset classes.

Direct or Indirect Investment

Direct Investment
This relates to investors directly selecting specific properties. The great advantage in this strategy is control. Direct ownership in property allows for the development and execution of strategy and direct influence over return. However, direct investment makes it very difficult to create a well-diversified real estate portfolio. The real estate allocation for most retail investors is not large enough to purchase enough properties to diversify and will increase exposure to local property market and property type risks.

Indirect Investment
Real Estate Investment Trusts (REIT) are private and public equity stock in companies structured as trusts that invest in real estate, mortgages or other real estate collateralized investments. These usually include large residential estates, grocery-anchored shopping centers, local retail properties and malls, commercial office space and hotels.

Another way of indirectly investing is through real estate investment groups. These are small private funds for rental properties. A company will buy or build a set of properties and then allow investors to buy a share through the company by owning shares of the company. The company operating the investment group collectively manages all the properties, taking care of maintenance, advertising and tenants..
Property investments in this post will refer to direct property investments.

Attractiveness of Property Investments

Singapore
Property investment is a dream for many local investors, who love brick and mortar. The geographical, demographical and economical characteristics of Singapore make it an ideal location for this asset class.

The metropolis has a good and stable political and financial climate. Social assimilation is easy with wide use of English and Mandarin. There is absolute recognition for legal private ownership rights, which can be a strong reason for diversification of wealth.

With the increase in wealth of Asia, Singapore is likely to attract the affluent residents and workforce. The two Casino Integrated Resorts are also part of the strategy to make Singapore the playground for wealthy travelers.
With population and tourist increase, land however, is extremely scarce and will never increase. This simple concept of demand and supply ensures a healthy property market.

Singapore property prices have lower volatility as compared to properties in major cities in emerging Asia. Though property prices have been steadily rising over the years, there is no risk as of a bubble forming yet. Investors generally hold properties for long-term wealth management and estate planning purpose.

For those who plan to increase their allocation, the main reason cited is that they believe that property offers better long-term prospects than other asset classes. This suggests continuing uncertainty about the trajectory of financial assets and a desire for more tangible, straightforward investments after the turmoil of the financial crisis, which many people see as caused by complex financial instruments.

Use of Leverage
A property investment is one of the very few investments that can take advantage of leverage to a degree of accuracy and low risk. A loan of 80% for any other investment is highly unlikely. With stable rental and also property prices, the risk of the loan can be planned and managed.

Unique Individual Deals
In direct property investments, each individual deal is unique. Firstly, there are no two properties are exactly the same, obviously space being the issue. This allows for selection of the best deal available and there are always very attractive deals around.

Low Correlation
Property has generally been considered to have a low correlation with financial markets, although correlations do fluctuate slightly over the course of an economic cycle. In the financial crisis of 2008 and the subsequent economic downturn, correlations spiked and many asset classes experienced substantial losses. While diversification can help lower risk over the long term, in short-term crises there is still potential for many asset classes to suffer at the same time.

Rental Yield and Capital Gains
Property as an asset class has the unique characteristics to have equally strong rental yield and capital gains. Depending on leverage, the rental yield can be between 1 per cent to 4.5 per cent. As property prices increase due to increase demand and naturally due to inflation, capital gains is achieved.

Conclusion

However, there are still instances of success and failures in property investments. With property deals substantially larger each deal a different result, investors need to understand the secrets and pitfalls of it. Each investor’s experience with property investments vary, ranging from satisfying, risky, profitable, passionate. Most importantly, since it is an investment of substantial size and each with varying outcomes, research and understanding of property investments is important. Finally, as a asset class, affluent investors should seriously consider it as an asset class for rental and capital returns as well as preservation of wealth.

Do contact me if you have any questions or drop me a comment. I will put up a post soon regarding advice for property investments and commercial vs residential properties.

Posted in: Managing Wealth, Singapore

Tagged with: Property Investments