Real Estate - an alternative investment.docVIP

Real Estate - an alternative investment Real Estate - an alternative investment ● 潘树盛 By Roy Phua Asia’s all enduring preoccupation with real estate is undergoing a reality check as a conse-quence of the economic crisis. Private residen-tial property prices in Singapore, have collapsed by over 45% from its peak in for example, 1996. The shock and dismay of die-hard real estate believers is not surprising. For many, however, the rationale that underpinned that real estate investment is showing surprising flaws. Arguments such as quot;land is finitequot; persuade in boom years, but are now denounced by some as intellectual garbage. The long-term prospects of real estate investment, while not entirely mis-placed, are subject to investment cycles, interest rates and changes in government policies, like all other forms of investments. Putting all of one’s investment eggs in the property basket, as many Asians have been inclined to do in recent years, is unlikely to hatch a balanced invest-ment strategy. This article examines the possi-bilities. Real estate investments are very long term in nature and possess two important characte-ristics that are often less than understood: leverage and illiquidity. These factors accen-tuate the capital gains on real estate in boom times and magnify the loss on the downturn. If one were to invest $200,000 (borrowing $500,000) to purchase a $700,000 property for example, a simple 10% rise in property price a year would translate into about a 21% return on the original investment, net of interest expense assumed at 5.5% p.a.. With that same interest assumption, a 10% fall in property price how-ever would translate into a loss of about 48% on that same $200,000 investment, the tragic con-sequence of leverage working in reverse. The illiquidity of real estate is an