Investment value
$0
since beginning
0.00%

Do Crazy Rich Asians only invest in real estate? 

September 14, 2018
TAKEAWAY OF THE WEEK

Unless you’ve been living in a cave, it’s probably safe to say that even if you haven’t watched Crazy Rich Asians, you’ve heard about it. It’s both a depiction of the life of the 0.1 percent and a marketing coup for the Singapore Tourism Board. The Youngs are absurdly rich, and one of the most opulent symbols of their wealth is the matriarch's family mansion at Tyersall Park. It’s an over-the-top, sprawling home in Peranakan style, and so secluded that it can’t be found on Google Maps.  

Owning real estate, or in this case, a mega-mansion, has always been a status symbol in Asia. It’s heralded as the ‘best’ way to grow your wealth, and if all else fails, it’s a fixed asset and roof over your head. Many of the real ‘Crazy Rich Asians’ have indeed built their fortunes on real estate. But is it really better than investing in the market?

You would think that Hong Kong real estate blew stocks out of the water, but this is a misconception.

We always hear wonderful 'get rich' stories on fabulous property purchases, but looking back at the data, they were more likely just fabulous acts of holding on.

Here are some things to think about when investing in property:

  1. Leverage - This is perhaps the largest driver of outsized equity returns in owning real estate, and also the biggest trigger for the 2008 Global Financial Crisis. If you pay $250,000 for a $1 million property, and the value goes up by 10% ($100,000), you have effectively made a return of 40% on your initial investment (excluding any interest costs etc). It’s quite unlikely you will lever your investment portfolio 4x. Remember, leverage is a double-edged sword that will also amplify your losses in a downturn.

  2. Liquidity - Stocks are far more liquid than real estate investments, and prices are transparent. You can buy or sell stocks anytime during market hours, and you can see the bid/offer spread on your screen. You can list your property for months without any buyers, or perhaps the best ‘offer’ for your property is vastly different from the last transacted price. However, the ease of trading stocks also means that you are more prone to poor behaviour and the whims of your emotions. It’s far easier to sell off your investment portfolio in a panic - all you need is a few clicks. You can’t really sell a property in 5 minutes.

Real estate forces you to behave as a 'good investor' given its frictions. Imagine if you had the same frictions when it came to investing in the stock market?

  1. Diversification - Adding real estate as an asset class to your overall investment portfolio can offer diversification benefits. However, unless you are in fact a Crazy Rich Asian who can afford properties in different cities around the world, it’s difficult to diversify within your real estate investment. For most of us, buying one property will make up the majority of our net worth. It’s much easier to diversify when you invest in stocks - you can buy shares of a globally diversified fund with thousands of holdings with just a small amount of cash.

  1. Income - Both stocks and real estate investments can generate steady income from dividends and rental income respectively. There are different risks involved: dividend payouts are not guaranteed, and the amounts are subject to the underlying company’s discretion. Rental yield is subject to supply and demand dynamics of the real estate market, and there can be periods when your property can’t be rented out at all.

  1. Holding and transaction costs - There is a cost to holding real estate - you have to pay maintenance fees, utility bills, insurance, property taxes and more.  It’s also more hands-on work - you have to deal with leaking aircon units, clogged bathrooms, and pest infestations in the garden. Transaction costs are also much higher for real estate - Singapore property agents on average charge 2%  to broker transactions, and there are additional stamp duty costs.

Investing in real estate should rightfully lead to higher returns because you should be compensated for the illiquidity and transaction costs, but that is not always the case. There was a study done entitled “The Rate of Return on Everything, 1870-2015”, where researchers looked at 16 advanced economies over the past 145 years. They adjusted the returns for inflation, included dividend income for equity returns and rental income for residential real estate returns.  

Source: Bigger Pockets

There are real estate tycoons and stock market tycoons.

Both real estate and publicly traded securities  are better investments than staying in cash, and both have a place in your portfolio and in your life. Owning properties is the Asian dream but there are alternatives to think about before just the diving in.

If you enjoyed reading this article from The Know, you can subscribe to our weekly memoFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.
View on endowus.com
THE WORLD IN VIEW

Business 

Who is the man taking over as chairman of Asia's biggest company? (SCMP)

Opposites attract: NGOs and money managers unite (The Economist)

Singapore plans new bill to attract more of world's millions (Bloomberg)

Markets

We’re living in what may be the most boring bull market ever (Bloomberg)

Warren Buffett's biggest wins and fails (Visual Capitalist)

Do you know how much you're paying when you invest via regular premium insurance plans? (Business Times)

Singapore

China, Japan are Malaysia's priorities: Anwar. But Singapore? (SCMP)

Singapore orders return of first batch of pilfered 1MDB money (Bloomberg)

Longform

How Led Zeppelin came to be (Rolling Stone)

Podcasts

Malcolm Gladwell: Do more choices make us happy? (TED // 12 mins)

Good to Know

Elon Musk’s brain isn’t like yours (Bloomberg)

Japanese, Haitian, and now a Grand Slam winner: Naomi Osaka’s historic journey to the U.S. Open (Washington Post)

China, the birthplace of fake meat (The Economist)

What happened to Fan Bing Bing, China's most famous actress? (NY Times)

Technology is creating an ideal of beauty that literally doesn't exist (The Economist)

Finally, a cure for insomnia? (The Guardian)

JP Morgan is gamifying credit scores (Business Insider)

SUBSCRIBE TO THE KNOW