To make money in real estate, you need this essential skill
One of the life lessons that has struck me time and again, is the importance of listening. The primary ways that information enters our brains is either through> READ MORE
One of the life lessons that has struck me time and again, is the importance of listening. The primary ways that information enters our brains is either through> READ MORE
Many people shy away from owning investment real estate. They worry about the hassle and risk. Tenants can sometimes be a pain in the neck. Or you can face periods> READ MORE
A few years ago, a group of us were having lunch during a ski trip to the French Alps. One of the guys leaned across the table and showed me some photos on his> READ MORE
Elon Musk, the man behind the Tesla electric car, is also involved in pioneering private ventures into space. Recently, his space exploration company has been> READ MORE
If you want to be successful in real estate investing, you absolutely must get one thing right. I have invested in all types of real estate over some 40 years: and> READ MORE
In economics, you need three things to do anything at all: Land, labour and capital. Any economic endeavour requires these three basic resources, in varying> READ MORE
Another day, another survey showing that Hong Kong is one of the most expensive cities in the world to live. The Economist Intelligence Unit’s Worldwide Cost> READ MORE
Today I’m sharing an article written by my friend, Peter Churchouse, who with his son Tama runs Churchouse Publishing in Hong Kong. Peter spent decades as the> READ MORE
One of the life lessons that has struck me time and again, is the importance of listening.
The primary ways that information enters our brains is either through the two eyes at the front, or the ears on either side. Today I’m talking about the latter.
Whether it’s listening to casual conversations, lectures, talks, opinions, even the media… I can’t tell you how many times a simple conversation, a brief comment or a short discussion has alerted me to something that has proved extremely interesting and often very profitable.
I’ve made a lot of money over the years from simple conversations that have alerted me to something, or some opportunity, that I might not have otherwise noticed or seen clearly.
(For example… the property I referred to in this article that I bought in 2006, came onto my radar during a conversation over a couple beers with a friend. That conversation ended up being worth nearly a million dollars.)
Keeping your ears open is not just about making money. It can also prevent costly mistakes.
Whenever you’re looking to buy property, you should take the time to ask your friends, colleagues and acquaintances for their thoughts.
It seems to be that every dinner party I’ve ever been to has involved at some point these two topics of conversation: Airline horror stories, and real estate.
People love to talk about property. Everyone’s an expert – or knows an expert. Everyone has a tale to tell. And you’d be wise not to dismiss this as small talk or idle chatter and tune in.
Whenever friends visit Hong Kong, I always ask about what they’re seeing in real estate back home in their neighbourhood or city. Always, always ask for opinions about property and the chances are you’ll receive plenty.
No matter how much experience you have or how much research you do, you can’t know it all. Real estate markets are huge, diverse beasts. In any city, real estate behaves differently depending on the district, street, neighbourhood and property type. There are constantly new developments coming on stream with different physical characteristics and different financing models. Councils and local authorities change planning rules, providing further opportunities to enhance value.
New infrastructure can have a big impact on nearby real estate, resulting in new opportunities – positive and negative. It’s impossible to keep track of all this in one city – let alone several.
To everyone who thinks the Chinese middle class boom is an ‘old story’ – this is why you’re wrong
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Over the years, a passing conversation, informal chat or piece of gossip has led me to dig further and on many occasions resulted in making a profitable investment decision.
Talk is cheap, so why not listen?
Over my career, research and analysis have been my main professional endeavours, and they have contributed immensely to our overall wealth.
Understanding what goes on in certain markets – the trends, drivers, cause and effect, who’s doing what to whom and why – are all vital for making informed investment decisions.
Some of my most profitable calls have been made on the back of understanding what drivers are likely to shape trends in the markets in the coming months or years.
But as important in my mind as big-picture research is, so is listening and talking to locals who share knowledge that you would otherwise not be privy to. Before you make an investment, call a few people, shout them a coffee and see if they can add to your research.
What happens on the ground
Top-down research can give us the big-picture story. But digging into the subtleties and nuances of what is happening on the ground can bring even bigger rewards.
Getting the overall market call right is hugely important, but it is that knowledge at grassroots level that can really give you an edge when you’re making big real estate investment decisions.
Listening to people who are close to these very local forces is key to success. Yes, the big picture for the London market (or the Hong Kong, Auckland, Sydney, San Francisco market) may look good, but how do you invest in it? Ask a few locals and I bet they’ll have some ideas.
Just by listening and being alert and interested in property news and stories, I have chanced upon real estate investment opportunities – many of which have led to very profitable outcomes.
If you make it a habit to ask questions, and more importantly listen to the answers, you’ll put yourself in the best position to do the same.
Finding properties to invest in is often just being in the right place at the right time, following up on a hunch or a rumour that luckily enough leads to an opportunity.
Many people shy away from owning investment real estate. They worry about the hassle and risk.
Tenants can sometimes be a pain in the neck. Or you can face periods when the property is empty, where you don’t have a tenant paying rent… but that mortgage (if you have one) still needs paying every month.
Natural events can sometimes cause damage – floods, typhoons, storms.
But as I’ve said many times in the past, I believe owning rental properties is right up there among the best investments that you can ever make.
Let me tell you a story about my friend Rod.
I first met Rod whilst travelling with my wife in the deserts of northern Kenya in the mid-1970s. My legs were sticking out from underneath our Volkswagen Kombi as I wrestled to bolt the gearbox back into place. Rod rode up to the rescue in his Peugeot, gave me a hand and invited us to stay at his place in Nairobi. He offered the services of his company’s workshop to make a more permanent repair to our vehicle. He worked for a global company that made and distributed farm and construction equipment, tractors, ploughs, cranes, lifts, bulldozers and so on. We became very good friends.
A few years later, after about 15 years in Africa, Rod quit his job and returned to Auckland, New Zealand. He had no clear plan of what he was going to do. Soon after his arrival back home his brother invited him to come over to a friend’s house. They sat on the expansive deck of an expensive house, overlooking the harbour, enjoying a few cold beers and chatting. His host was clearly enjoying his delightful property.
Rod happened to notice a bell ring somewhere in the house every 15 or 20 minutes throughout the afternoon. He eventually asked his host what this bell ringing was all about. ‘Oh that’, he said, ‘is my happy money bell’.
‘Huh?’ Rod asked.
‘Yes, that reminds me that every time I hear it ring another $20 has landed in my bank account’.
‘How come?’ asked my friend.
‘From my portfolio of rental properties,’ was the reply.
To everyone who thinks the Chinese middle class boom is an ‘old story’ – this is why you’re wrong
LEARN MORE HERE.
‘And what’s more, it keeps ringing when I’m asleep at night, when I’m out fishing, and when I’m on the golf course.’
Rod did some quick mental arithmetic and figured that at that rate, his host was earning about $43,000 each month. That was a HUGE amount of money at the time, and even today is a substantial income.
What’s more, this regular income was coming in without working 80-hour weeks. The host enjoyed his fishing and was a handy golfer as well.
Soon after that Rod embarked on a small business venture buying and renovating residential and commercial properties. Some he would sell, and others he would keep for rental income. He invited me to join in a couple of his projects, and I still own the first property that I bought with him. It is a great little money earner. The annual rental income is now roughly 50 percent of what I paid for the property back then.
I always smile to myself when I remember that story. I have relayed it to many people. And that story has helped guide our own activities over the years to build a rental property portfolio that will keep turning out solid rental income year after year.
So, yes, owning rental properties is not hassle-free, nor is it entirely risk-free. The properties need to be managed. Bills need to be paid, and renovations undertaken from time to time. Tenants can sometimes be a pain in the neck. There can be periods of no tenants when the property might stand empty for some time. (That risk can be mitigated by ensuring you follow this critical rule).
But for long periods of time, not a lot needs to be done. You can just sit back and watch the rental income hit your bank account.
And in terms of reward for effort, I think it is right up there among the better investments that you might make. It certainly has proved so for me and my family.
It is also usually a pretty inflation-proof investment. Rentals do tend to grow along with the economy, incomes, and inflation.
Perhaps you should be thinking of ringing your own ‘happy money bell’.
I can think of several markets where that makes a lot of sense right now. Interest rates are low in most western markets and I believe they will stay below long-term averages for some time to come. In times of stress, rental yields (calculated as the annual rental income divided by purchase price) tend to be on the high side. And as markets improve, yields come down – normally because values go up more than rentals. I like that equation.
That is exactly where many real estate markets are positioned today. And here’s a market I visited recently that I think presents an excellent opportunity for investment real estate as well.
A few years ago, a group of us were having lunch during a ski trip to the French Alps.
One of the guys leaned across the table and showed me some photos on his iPhone.
The images showed a stunning piece of property. A gorgeous chalet set amongst the trees and snow of a mountain resort in western Canada. A very seductive piece of real estate.
I commented that he and his wife must rattle around in there like peas in a pod given how big the property was.
“Yep, we do, now that the kids have grown and are off doing their own thing.”
Expensive to run, I queried?
“Very,” came back the reply, instantly. Accompanied with a sigh…
I thought so…
He continued, “In fact I could take two months holiday each year in some of the best resorts in the world with the cash that I pay just to manage this place.”
And there would be no hassle. Walk in, walk out. Maintenance and all those other costs are someone else’s problems.
Did he have any plans for the property, I asked?
“Absolutely. We’re trying to sell the place.”
He’s now retired. The capital locked in that asset needs be put to better use producing income. His property simply wasn’t doing that.
So how is the sale process going?
“It’s been on the market for nearly a year. No serious buyers yet.”
He’ll have to drop the price quite a bit to shift it.
That hurts, but given he built it almost twenty years ago, he’ll still probably come out ahead.
That is, if he can sell it…
I hear this story repeated constantly from friends and acquaintances all over the world.
This story happened to be in Canada, but it could just as easily as have been Tuscany, Provence, Phuket, Niseko, or the Algarve.
The ingredients are always the same.
They fell in love with a piece of “recreational real estate.”
The family doesn’t really use it much these days. The kids have flown the nest and have their own agendas.
Maintenance and management costs are very high. This isn’t a simple lock-up-and-leave apartment.
Worst of all, the property cannot produce a decent reliable rental income stream.
And this all comes just as retirement is hitting home and that regular paycheck is fading…
The following day and a similar story.
This time a property in France, but with a slight twist.
Although in this case it was a delightful country property that could produce some income as a B&B, the French tax regime makes running a small business virtually impossible.
The French bureaucracy is stifling. Take my ski instructor, for example. His little ski instruction business requires the services, and costs, of at least two tax advisors.
It’s no surprise that tens of thousands of French people have moved to Hong Kong in the past decade. France simply doesn’t support entrepreneurial-minded people who want the freedom to create personal wealth.
So a sale is their only escape. The money will be taken to England where a real estate rental business can be viable and the tax system is codified and transparent.
So what’s the problem? Well, the real estate market in rural France was dead.
The owners know they are going to take a big hit if they are to get their cash out in any kind of reasonable time frame.
I know other owners of recreational type real estate in France, Italy, Spain, Croatia, New Zealand, Australia, even Canada and the U.S. who are trapped with their properties.
Yet, in major cities in these countries real estate markets are often doing well. Prices have recovered in many and now stand at levels well above pre-crisis highs.
Even if they are not at such levels, recovery is in the air at least.
But more importantly, there is liquidity. By that I mean deals are getting done.
That is not the case in those wonderful beach, river, mountain and lakeside locations.
Regular readers will know that I am a big believer in owning real estate for long-term capital preservation, growth and income.
A small property or two in your investment portfolio can provide a big boost to your income stream later in life.
As we know, the vast majority of people retire with an income stream way less than that immediately prior to retirement.
Huge numbers of people retire without any private income stream at all. Reliance on state handouts is their lot.
The western world is facing a retirement crisis. It’s a fact. And it’s something you’ll hear more from us on in the coming months.
Regular readers will also know my views on recreational real estate investment. In my opinion, it is often not an investment at all. It is an expensive consumption item.
We all have the potential to get seduced by that wonderful country cottage, the beach house, the chalet in the mountains. I have almost succumbed to this temptation a number of times myself.
I remember sitting in the enormous garden of a friends house in the south of France one sunny summer afternoon a few years ago, drinking rose and thinking “I could make this work.” I even got in touch with a few agents… But fortunately, I came to my senses.
To everyone who thinks the Chinese middle class boom is an ‘old story’ – this is why you’re wrong
LEARN MORE HERE.
The trouble is that rationality tends to fly out the window when we look at these beautiful examples of the builder’s art. There is no doubt that you and the family may love to spend a couple of weeks, or even a month a year if you’re lucky.
But think about some of the realities.
Owning a recreational home somewhere means that you will probably feel obliged to go there every holiday you take. It narrows your options. Perhaps you might want to go to other places, experience other countries, locations, activities. Owning that cottage by the lake means that you may not get to enjoy other experiences so much, if at all.
And what about management of the cottage, chalet, house when you are not there. Or when you do go there. I know people who spend the first week of their holiday doing maintenance chores and fixing broken gear at their holiday home. If that is what cranks your crank, then fine. But for most of us, we view our holiday time a bit differently.
And who is going to manage the property for the many months that you are not there? To check that pipes have not broken, that the windows and roof are not leaking. To ensure the place doesn’t become overrun with insects, mice, cockroaches… it happens, I assure you.
And then there is the cost of that management service. Employing a professional management company can be expensive. You can pay anywhere from 10-40 percent of your rental income to your management and listing agency.
On top of that, you have all those local fees, duties, taxes, and charges that might be levied on you as an owner – which may differ if you are a foreigner.
And if you’re a foreigner, there are plenty of countries in Asia where you have very weak property rights.
For example, in Thailand, you’re not allowed to have outright ownership of landed property (i.e., a house, not a condo/apartment).
You can have 49% ownership. Then you need to get a (trusted) lawyer to create a structure that allows you to circumvent that. On top of that, the land is only leasehold and often just a 30-year lease.
My email inbox is loaded with files of wonderful, seductive, gorgeous recreational real estate sent by agents from all over the place.
I do find myself having a browse and getting a sense of how markets are behaving. But I do not get tempted these days.
I have enough expensive vices in life as it is. Being a boat owner is one of them!
But don’t get me wrong. I don’t believe you should never indulge your real estate fantasies. But recognise them for what they are. Just that. A wonderful fantasy, to be enjoyed and paid for.
The two examples I gave earlier are just a couple of many that I’ve seen over the years. I’ve seen so many friends and acquaintances put their hard earned money into holiday real estate without even owning proper investment real estate!
To my younger readers, the ones in their thirties who’ve maybe now got a little cash in the bank, please ignore recreational real estate. Forget about it.
In my opinion, it only makes sense if you already have a property or two under your belt, maybe a home and an investment property.
I know if you live in London or Hong Kong you won’t necessarily be able to afford a family home. But please, if you are looking at real estate make sure at least it’s a solid investment property.
And by that I mean, a nice one or two bedroom apartment. It should be a location where people where a suit and tie to go to work. Somewhere you and a better half would be happy to live yourselves.
That’s exactly how I’ve built my investment property portfolio. My properties all have 1-3 bedrooms. They’re located in areas favoured by professionals and are therefore rarely vacant. They are in major global cities with solid property rights and a transparent legal system. And they require minimal maintenance.
By the time you’re in your late 50’s, the mortgage is paid off, you will likely be sitting on good capital gains. On top of that you’ll have an asset that’s spinning you off extra cash flow month after month.
I can’t tell you how many folks in my generation wish they had a couple of those kinds of assets right now…
More recently, a good friend emailed me saying he was considering buying a lake house. What did I think?
Usually when I get an email like that, the alarm bells start ringing. My default response is to fire back an email that includes something along the lines of what I wrote above.
But this time I said, “Go for it!”
Well, my buddy has worked hard and enjoyed success in his profession. He’s invested wisely and – critically – he owns a few investment properties already (one of which he asked my advice on a few years ago).
He’s not one of the “younger readers” I refer to above who should be focused on building a core asset base rather than splurging on this kind of vacation home.
Nor is he particularly old. But he’s just a guy who made the right decision and bought investment real estate when he was younger. Because of that now he has the luxury of being able to even consider a decision like this, with the kind of financial independence that we all aspire to.
My friend is the perfect example of what happens when you make those tougher decisions earlier on in life. Because recreational real estate is always tempting, no matter your age!
And maybe when you’re in your thirties or early forties, and if you have a little money in your pocket, the idea of that lake house or chalet in the mountains is tantalisingly seductive. But that’s when the tough decision counts.
Do some people make money on recreational real estate? Of course. But in my many, many years in real estate I’ve found that to be the exception, not the rule.
Don’t confuse recreational real estate with an investment. It’s a consumption item, a dream to indulge in for you and your family.
And don’t assume this is something you can easily sell if the need arises.
Elon Musk, the man behind the Tesla electric car, is also involved in pioneering private ventures into space. Recently, his space exploration company has been taking orders for people who would like to send some of the ashes of a loved one on a two-year space odyssey that would have them circling Earth in his proposed space vehicle.
A friend who recently secured a spot on the flight for a deceased family member tells me that there are 300 slots available on the flight – with a ticket price of US$2,500 each.
Before I elaborate any further, let me ask you a question: Can you guess what sector of the U.S. public real estate space has performed best over the past two decades?
Grade A office space? Residential property? Retail? No: It’s the self-storage sector… which easily occupies the most mundane and least glamorous spot of the real estate spectrum. This is simply where individuals and businesses rent some space and store their belongings (personal effects, furniture, corporate documents)… that’s it.
Take a look at the breakdown of compound annual growth returns (CAGR) in U.S. real estate investment trusts (REITs) by sector over the past two decades. A US$1,000 dollar investment in self-storage REITs back in late 1993 would be worth over US$30,000 today.
I’ll highlight two conclusions from the table above. Self-storage comfortably outperformed every other real estate sector. More importantly, REITs across the board have outperformed the S&P 500 over the past 20-odd years. I’m a big believer that you should have REITs in your portfolio. These are real companies backed by real assets and income.
The self-storage boom
Back to the self-storage market. The U.S. has by far the largest and most extensive self-storage industry of any country globally, with close to 7.5 square feet of self-storage for every man, woman and child in the country.
Australia, the next largest market on a per capita basis, boasts 1.2 square feet per capita, a fraction of the U.S. market. Europe is generally underserved by this business. The U.K. is the only country in Europe that offers more than 0.5 square feet (0.59 sq ft) of self storage space per capita. For many countries in Europe, the per capita provision is less than one-tenth of one square foot per person.
LEARN MORE HERE.
Hong Kong and Singapore, where residential housing is small and expensive, have the smallest self storage space per capita on average in the developed world. The industry provides a mere 0.62 square feet per capita in Hong Kong and 0.28 square feet in Singapore.
China’s self-storage players provide a minute 0.0006 square feet per capita. That represents 0.9 of one square inch – less than the area of your thumbnail.
Asia, and China in particular, are ripe for growth in this sector
This mundane business is a growth industry in places like Hong Kong, Singapore, China and other rapidly developing consumer societies. Just take a step back and think about the bigger picture for a moment.
Between 2014 and 2050, India and China are projected to add approximately 700 million people to their urban areas. In other words, the equivalent of two times the entire U.S. population will be moving into cities across India and China over the next three decades.
The second factor to consider is this: There isn’t much space for these folks to live. In Hong Kong, for example, the average apartment size is less than 500 square feet.
So when you have a lot of people, who are increasingly joining an upwardly mobile consumer middle class, moving into small apartments, then we know that the demand for self-storage space will increase as well.
Similarly, as office space becomes increasingly expensive, we’ll see demand from the corporate sector. Companies are required to retain records, and still continue to do so in paper form. Storing records in self-storage facilities is a cost-effective solution for many smaller businesses.
Measuring volume rather than square footage
When we look at self-storage we tend to use the same metrics in determining value as we do for other property uses. We look at effective rental per square foot (or square metre). For storage, as a user, we’re concerned more about volume rather than square footage.
How much household gear and boxes can I squeeze into a particular cubicle? To determine that, we need to look at our monthly cost in terms of cubic feet or cubic metres of storage volume.
A storage cubicle in Hong Kong, for example, with an internal floor area of four by five feet, has a usable volume of about 180 cubic feet. Rent for a cubicle of this size, in a good quality facility with air-conditioning, parking and industrial grade lift access will cost around US$10 per cubic foot per year. This is enough to store a couple pieces of furniture, a few big suitcases, half a dozen document boxes and some sports equipment.
As for outer space self-storage (no pun intended)
Assuming that the Musk space vehicle takes 25 percent of the ashes of 300 deceased people, the total amount of space that will be used to store these remains in outer space will amount to a fraction under seven cubic feet, according to my calculations. That’s equivalent to a box 3.5 feet long, two feet wide and one foot deep. A little bigger than that grand suitcase you take on holiday.
This equates roughly to about US$53,750 per year for each cubic feet of extra-terrestrial storage versus US$10 above.
But back on Earth, look to Asia
As I said earlier, Asia is drastically underserved in the self-storage space. Just look at the table below. Again, China… the most populous nation on Earth has less than a hundred self-storage facilities!
Not only will demand be underpinned by urbanisation, but other factors such as:
Death: with increasingly aging populations in Japan and China in particular, as people pass away their belongings are often stored before being distributed amongst relatives and disposed of by executors.
Divorce: increasingly common and accepted in Asia, divorce is a big driver of storage demand. As couples separate, and typically downsize, they use self-storage for belongings – especially larger furniture items that do not suit an intermediate single lifestyle.
As this sector matures, we will see more opportunities arise in this space and we will look to capitalise accordingly.
If you want to be successful in real estate investing, you absolutely must get one thing right.
I have invested in all types of real estate over some 40 years: and this factor has a bigger impact on property price than any other.
I’m talking about a property’s location…
It is the oldest cliché in real estate. But there’s more to it than meets the eye.
The basics of the “L”
A property’s location is the single most important factor in determining your investment success. That’s a fact.
You can buy the grandest house in the world. But if it’s next to a smoke-belching factory, or in the middle of a rundown neighbourhood with no prospects of gentrification or upgrade, you’re not going to build wealth.
Real estate prices can vary significantly at a very local level. The position of a property on one side or one end of the street matters. Prices can differ enormously within and across neighbourhoods, suburbs and districts.
The particularities of location are infinite. How do you judge the desirability of one position over another? How do you assess human nature? What really drives people to pay more for the same piece of property in one location versus another – not only now, but in the future?
When it comes to location, a few simple ideas have worked for me repeatedly over decades of investing in real estate in many different cities.
I buy properties in places where people wear a suit and tie when they go to work.
Does that sound a bit elitist? Perhaps. But this makes my life so much easier. People who wear a suit and tie to work are usually in higher-paying jobs. Therefore, as an upwardly mobile white-collar worker they are typically able to afford to pay more to buy property or to rent it.
In these days of casual work clothes, you’ll have to give this point a bit of latitude, but you know what I mean. I always buy in locations where white-collar workers want to live, whose earnings are in the higher salary brackets.
LEARN MORE HERE.
Your “suits and ties” need to get to work.
New transportation infrastructure, like underground rail, can be a major value-enhancing factor, in particular in big cities where getting to and from work can be a major hassle
For example, in Hong Kong, the construction of new mass transit rail lines has had a huge impact on property prices. In the early 1980s, the prices of residential property in the new town development of Tsuen Wan, some miles to the west of the densely developed tourism and office district of the Kowloon peninsula, sold at about a 40 percent to 50 percent discount to the more central Kowloon prices.
As the mass transit link to the new town came on stream, that discount narrowed to about 20 percent to 25 percent. Anyone owning property in Tsuen Wan saw the value of their apartments rise sharply relative to prices in the core urban areas.
“They aren’t making any more of this.”
You’ve probably heard this old saying when referring to beachfront land. But it applies equally to land in the inner core of prime cities. There is no new land being created in Central London, or Manhattan, or around Sydney Harbour, or indeed in many large cities around the world.
As cities grow, there are often increasing pressures on existing land resources that make land increasingly valuable. Recognising this, municipal authorities may dramatically increase how many people can occupy a particular piece of land.
For example, low-rise warehouse areas in the middle of a city may be rezoned for high-rise offices, or apartments, or hotels or retail.
So authorities are making more “use” of land by rezoning it from industrial buildings to residential or commercial spaces. in many areas around the globe. This is a reflection of the changing industries that work out of our cities, and the increasing populations of renters and home-owners who are attracted to city living. Look out for locations that could be moving from industrial to mixed use and you just could be onto something
You don’t really get a feel for an area unless you visit, spend time there and walk around. Every location is different – and every micro area differs too. A lot of people invest without checking out the property, or the neighbourhood. This is a terrible idea. Unless you don’t care whether your real estate purchase makes money, you absolutely must kick the tires before you buy anything. And far and away the best way of doing this is to go there. Walk and walk and walk some more to get a feel for the neighbourhood, the shops, the people, the streets, everything. Seeing is believing – go take a look.
You can research any location from anywhere in the world, thanks to the worldwide web. But if you want to find the best locations, you’ll need some local knowledge to back up your research. By asking a local, you might find a location you hadn’t considered before, or realise a location isn’t as great as you thought.
For example, a property next to a cemetery might not be a big deal in the West. But in China, where buyers take Feng Shui (that is, harmonising with your surrounding environment) seriously, a property next to a cemetery would be a horrible investment. Chinese investors wouldn’t be interested. It’s unlikely you’d find this information out on a basic web search. But any local would know.
So whenever you’re looking to invest in real estate, remember location is the one thing you can’t get wrong. It’s the first step to successful real estate investing.
In economics, you need three things to do anything at all: Land, labour and capital.
Any economic endeavour requires these three basic resources, in varying amounts. From the simplest business you can think of (say, a kid setting up a lemonade stand on the side of the road) to the sprawling empires of multi-nationals, they all need some land, some labour, and some capital.
(Sometimes a fourth factor of production, entrepreneurship, is included, depending on which economist you talk to.)
Land doesn’t mean just real estate. It includes anything that comes from the land, like natural resources, forests, and water.
But for now, we’re focusing on the real estate element. By this I mean the square footage or acreage of land upon which towering office buildings, factories, apartments, and shopping malls are built. This is the commercial, residential and retail real estate that underlies nearly everything we as individuals and businesses do on a daily basis.
Your portfolio probably doesn’t have enough bricks and mortar
Given how essential real estate is to everything, you’d think that its importance would be reflected in the average investment portfolio. But it’s not.
In global stock markets, real estate is hugely underrepresented.
For example, take a look at the MSCI All Country World Index (ACWI). This is one of the largest aggregate global equity market benchmarks available. It captures large and mid-cap companies across 23 developed markets and 24 emerging markets. It includes nearly 2,500 stocks. The chart below demonstrates how the MSCI ACWI is broken down by sector.
The three largest sectors are financials, IT, and Consumer Discretionary (that is, non-essential consumer goods and services). And the very smallest slice of the pie is real estate, at just 3.14 percent.
It’s not just the MSCI ACWI where we see such a small weighting towards real estate. In the S&P 500, for example, it’s just 2.9 percent.
This is important: Because of the low weighting of real estate in broad equity indices, if you want listed real estate exposure, you will need to actively seek it out yourself.
But I own my home – don’t I have enough real estate?
When it comes to personal wealth allocation, a lot of investors factor in physical real estate that they own – whether it’s the roof over their heads, and/or an investment property. And they’ll think, I’m covered with real estate, so I won’t bother putting it in my stock portfolio.
This is understandable. But it’s wrong. You see, your physical real estate returns are tied to whatever city or area you’re living in.
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What this means is that limiting your real estate investments to the home you live in is like limiting the stocks that you buy only to companies located in your city. It’s the opposite of diversified.
In fact, this is the epitome of “home bias” – the tendency for investors to gravitate towards their domestic market, rather than diversify globally. (And in this case, it’s literally “home” bias!)
Real estate stocks and other listed real estate securities offer you a couple of additional advantages, from an investment perspective, over the roof over your head.
In the real estate world, especially real estate investment trusts (REITs), we can often buy a basket of real estate assets for far less than they’re worth.
For example, one REIT we’ve recommended in The Churchouse Letter trades at a 30 percent discount to book value. That means you pay 70 cents for one dollar of property assets.
This doesn’t mean necessarily that the discount will disappear any time soon (unless analysis suggests otherwise). But what it does mean is that you have a nice margin of safety. Simply put, would you rather pay 70 cents for a dollar of property? or a dollar?
Owning physical real estate as an investment has a lot going for it. But being a landlord can be a hassle. Chasing up tenants for rent, finding new ones when the lease expires and your tenant moves out, repairs, taxes, maintenance… it’s time-consuming.
But real estate holding companies and REITs in particular offer you much easier way to be a landlord. And the rent collection is automatic – dividends just slide straight into your brokerage account.
What’s more, you can buy properties that you’d never be able to if you were investing on your own. It’s unlikely you’ll ever own a price of a prime downtown Manhattan office building or a luxury retail mall in Beijing. But real estate stocks offer you an easy way to do just that.
So the next time you’re giving your portfolio a check-up, take a look and see what kind of real estate exposure you have. And if you’re looking for reliable, dividend-paying stocks backed by real assets, then have a think about property securities. (And we’ll be talking a lot more about this in coming weeks.)
Another day, another survey showing that Hong Kong is one of the most expensive cities in the world to live.
The Economist Intelligence Unit’s Worldwide Cost of Living Survey released recently showed Singapore as the most expensive city to live in, with Hong Kong second.
When it comes to the cost of real estate, Hong Kong prices are at the top of the list. Buying a no-frills one-bedroom apartment near Hong Kong’s central business district will set you back around US$1 million.
Just take a look at Hong Kong’s residential prices since 2008 versus the U.S. and U.K. Prices are up more than 100 percent!
Why is Hong Kong property in such a massive bull market?
Over the past few weeks, I’ve been asked about this numerous times. The week before it was Bloomberg’s Rishaad Salamat doing the asking (click here watch the interview.)
And then last week I spoke about Hong Kong’s property market at Morgan Stanley’s 7th Annual Hong Kong Investor Summit.
A lot of people think that buyers from mainland China are pushing up prices in Hong Kong. (Remember, Hong Kong is politically separate from China, but it’s under Chinese control.)
Over the past few years, we’ve seen the story of “Hot Mainland China Money” playing out across real estate markets all over the world.
There’s a lot of mainland Chinese cash looking for a home outside of China, for diversification reasons and because wealthy folks simply want to move their money outside of China’s borders.
Their number one investment target is offshore real estate in markets like London, Los Angeles, New York, Vancouver, Sydney and Auckland, to name some prominent examples.
This “hot” mainland China money has also gotten a lot of the blame for property price increases in Hong Kong.
But I want to show you some data on why that conclusion is wrong for Hong Kong.
Here’s why Hong Kong is different
You see, back in 2012, the Hong Kong government introduced a new stamp duty aimed at cooling Hong Kong’s red-hot property market.
This additional Buyers Stamp Duty (BSD) added a whopping 15 percent to the purchase price of residential property for certain buyers. Any buyer who is not a permanent resident of Hong Kong is subject to this stamp duty, along with corporate buyers acquiring a property in the name of a company.
So for that $1 million small apartment, you now have to pay an additional BSD of US$150,000… and this is before we get to other stamp duties or costs payable.
This BSD, therefore, captures individual mainland Chinese buyers, along with anyone who is looking to buy residential property in the name of a company and not themselves.
But in each of the past two years (2015 and 2016), less than 5 percent of the total residential sales transactions have been subjected to this additional BSD.
So even if ALL of the BSD taxpayers were mainland Chinese (unlikely given that people living in Hong Kong and elsewhere continue to use companies to buy Hong Kong property), it’s obvious that mainland Chinese money cannot be blamed for driving prices up.
Mainland buyers are a fraction of the total. We cannot blame them for Hong Kong’s high apartment prices.
So, if not mainland buyers, who is to blame? The Federal Reserve for keeping interest rates so low for so long? Perhaps, but the real culprit is much closer to home.
The Hong Kong government
All land in Hong Kong is owned and sold by the government. Public housing is provided by the government and either sold or rented. This housing, which accounts for about 56 percent of the total residential housing stock, is provided for lower income families who would normally find private housing unaffordable. These families don’t usually buy in the private real estate market.
On the private side, land parcels are auctioned by the government to local (and increasingly mainland Chinese) developers.
Those residential units are built and sold into the market.
Take a look at the chart below. It shows the number of both public and private residential units completed each year. This is Hong Kong’s total annual housing supply.
Between 1984 and 2005, total annual housing production was around 67,000 units per year.
But between 2006 and 2015, that number dropped to just 24,000… that’s 65 percent below the long-term annual average!
Hong Kong’s population has continued to grow, along with a need for more housing.
Government land policies have cut back the supply of housing to meet those demands, in both private and public sectors.
The government’s own forecasts of future private housing supply in the coming few years still fall well short of long-term average production.
And even their forecasts are often very optimistic. Our research has shown that over some 30 years, the government overestimated future housing supply by an average of 23 percent!
So what does this mean?
Well, from a supply point of view, Economics 101 will tell you that lots of demand without supply will lead to high prices.
And it means that when a government holds so much control over a scarce asset (in this case land) then it commands a huge influence on pricing.
We should use that to our advantage. Hong Kong has some of the largest and most profitable real estate developer companies in the world. Several are trading at very attractive valuations compared to their longer-term averages.
As for the folks trying to get on the world’s most unaffordable property ladder who keep asking me, “Pete, when’s it going to end?”, I’m afraid that the base case scenario is that prices don’t meaningfully correct any time soon.
You might not be able to buy an apartment, but you can still participate in Hong Kong’s property market with the right real estate stocks.
I’ve been covering Hong Kong property stocks for nearly 30 years, and I tend to focus the majority of my recommendations on a handful of top quality companies. (But in the interests of being fair to subscribers of The Churchouse Letter, I won’t include those here.)
Alternatively, you can take a look at the Guggenheim China Real Estate ETF (New York Stock Exchange; ticker: TAO). This gives you a basket of Hong Kong and Mainland Chinese real estate developer stocks and REITs. Around 80 percent of the ETF is in Hong Kong real estate stocks, with mainland China taking up the other 20 percent.
If you’re looking for a Hong Kong property ETF then this is OK. Although jumbling up Hong Kong and mainland China stocks in a single ETF isn’t ideal. These are completely different markets and should be treated as such.
Just yesterday, mainland Chinese developer stocks fell between 3-5 percent in a single day due to real estate tightening curbs announced over the weekend. Hong Kong property stocks were more or less flat!
Today I’m sharing an article written by my friend, Peter Churchouse, who with his son Tama runs Churchouse Publishing in Hong Kong. Peter spent decades as the Head of Asia Research and Regional Strategist at Morgan Stanley in Hong Kong, and is a fantastic source of stories and insight on investing in Asia. Peter specialises in real estate. He ran the real estate equity research team at Morgan Stanley, ran an hedge fund specialising in Asian real estate, sits on the boards of major listed Hong Kong and mainland China property companies, and has put together an incredible track record of global real estate transactions over the past four decades.
Peter and Tama write The Churchouse Letter, a monthly publication about investing in Asia, along with a free email called Peter’s Perspective, which you can sign up for here.
Below, Peter recaps a famous deal that changed the course of history – and highlights timeless lessons for investing in real estate.
By Peter Churchouse
The “mighty” Mississippi River is born a mere trickle in Lake Itasca, some 1,500 feet above sea level in the northern U.S. state of Minnesota.
From there it meanders its way south, gathering volume as the increasing flow from tributaries swell it into the fifteenth largest river in the world (and fourth-longest, at 2,320 miles, or 3,733 kilometers).
The river creates some of the most fertile agricultural terrain in America, along with navigable rivers, forests, prairies, and mineral riches.
These bounties led France throughout the 17th century to explore the Mississippi River valley creating settlements across the region.
By the middle of the 18th century, the French held sway a length of terrain from New Orleans in the south, to Montana in the north.
This “Louisiana Territory” was enormous, covering some 828,000 square miles (over 2 million square kilometers).
That’s nearly three and a half times the size of France today – or the size of Cambodia, Vietnam, Myanmar, Laos, and Thailand combined.
The territory becomes a bargaining chip
The territory came to be, as historian George Herring puts it, a “pawn on the chessboard of European politics”.
France ceded control to the Spanish at the culmination of the Seven Years’ War in 1762 under the Treaty of Paris. But Napoleon Bonaparte regained ownership from Spain in 1800 under the secret “Third Treaty of San Ildefonso” between the French and Spanish.
Around the same time, U.S. President Thomas Jefferson demonstrated foresight and smart thinking by agreeing to increase American presence in what was a politically unstable area of North America.
However, he was concerned that political instability in the area could undermine efforts to occupy these lands and lead to further conflict with the American state.
Word filtered that France had entered into a secret agreement with the Spanish to take back control of the Louisiana Territory.
Soon thereafter, Napoleon’s France was facing revolutions across its colonies, most notably Haiti and Hispaniola, where French forces suffered thousands of casualties from war and yellow fever.
Napoleon’s visions for the French colonies in the western Atlantic were in tatters.
His plans to use the Mississippi basin as a base for food production and trading activities to support French colonies in the region now made little sense.
The colonies were breaking, and French forces would be inadequate to protect the Louisiana Territory.
Moreover, plans were afoot for conquests closer to home in Europe. But he needed money to fund those military adventures.
America’s big deal
Jefferson offered to purchase some of the territory from Napoleon. Specifically, the Americans said they were prepared to pay up to US$9.375 million for New Orleans its surroundings.
Napoleon countered, offering Jefferson a deal of incalculable value…
He proposed the sale of the vast Louisiana territory for US$15 million. That’s equivalent to roughly US$250 million today.
The Americans couldn’t believe their luck. The offer was completely unexpected. They were stunned.
In a single stroke, the newly emerging America could almost double its total land area, at a cost of less than 3 cents per acre.
Signed in Paris on April 30, 1803, and aptly announced to the American public on July 4, this deal became known as the Louisiana Purchase.
America went on to become the most powerful and wealthy nation on earth.
Four lessons in deal making from the Louisiana Purchase
In my decades in finance and real estate, one thing I’ve learned is this: the core underlying principals of investing rarely change.
You see, the fundamentals aren’t new. Technology, computing, speed of information dissemination and transparency – sure, these have all helped change the game.
But throughout the span of recorded human history, the same lessons are there in plain sight, again and again. They’re timeless.
The Louisiana Purchase was more a political deal than an outright real estate one.
But there are some major lessons that still ring true today.
Firstly, motivated sellers offer value.
If you’re a buyer, the best sellers of real estate are ones who need to get out, and fast.
Distress equals opportunity
There are hundreds of reasons why an individual might need to sell: Maybe they need cash to bail out their business, maybe they’re leaving the country, it could be a divorce, it could be a case of over-leverage… who knows?
Regardless, a motivated seller usually gives you (as the buyer) negotiating power – in other words, the opportunity for a lower price.
And hopefully, you can pounce, which brings me on to the next lesson: The ability to act quickly can be critical.
Take the Louisiana Purchase. The deal was completed on the April 30. Napoleon’s offer of the entire territory was only made NINETEEN days prior to that!
Had the Americans not acted so quickly, who knows what could have happened.
We do know that Napoleon’s two brothers were trying to talk him out of the sale.
Some of the best real estate buys I’ve made have been done quickly – sometimes on the spot.
Combining a speedy transaction with a motivated seller will give you a better price. Period.
But critically, you have to know your market inside out.
A seller looking to offload quickly often wants to sell you more than just his property. He wants to dump you with the problems that come with it.
Maybe there are structural issues, a leaky roof, asbestos, or a new sewage plant to be installed close by. You get the picture…
The final lesson from the Louisiana Purchase is this: Don’t sell real core assets to fund spending.
It’s one thing to sell assets and reinvest, it’s quite another to do what Napoleon did.
He frittered the entire proceeds on senseless wars and military incursions, squandering one of France’s greatest financial and economic assets.
Some time later Napoleon was reported to have said, “America is a fortunate country. She grows rich by the follies of our European nations.”
I couldn’t agree more!
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