4 pages case study
Arun1990
24-08-2017-gsp177e-2f2f.pdf
GSP 177e
Fundamentals of Investing
STUDY UNIT 3 Chapter 2
Topic 1 INVESTING IN REAL ESTATE
Topic 2 INDIRECT REAL ESTATE INVESTMENTS
Second Face-To-Face Seminar
Thursday 24 August 2017
Simon WONG
OUTLINE OF SECOND F-2-F SEMINAR
Quick Review of TMA01
Study Unit 3 Chapter 2
Topic 1 Investing In Real Estate
Topic 2 Indirect Real Estate Investments
TMA02
Introduction
By the end of this lesson,
you should be able to:-
1. Explain the characteristics of direct real estate
investments and indirect real estate
investments
2. Evaluate the merits and demerits of such
real estate investments
Chapter 2 Topic 1 : Investing In Real Estates
LEARNING OUTCOMES
At the end of this study topic, you will be able to:
1. Analyze the key features and considerations
involved in real estate valuations and
investments
2. Evaluate the relative merits and demerits of
real property investments
3. Discuss the latest developments in real estate
Chapter 2 Topic 1 : Investing In Real Estate
Compare & Contrast PROPERTY INVESTMENTS
( Extract from The Straits Times Thu. Jan. 9 2014
Bought in 1980 , Sold in 2014 )
CHAPTER 2 Topic 1 : Investing in Real Estate Compare & Contrast PROPERTY INVESTMENTS
( Extract from The Straits Times March 18 2015)
Investing In Real Estate
What is real estate investment ?
Answer : Refers to investments in real property such as LAND, BUILDINGS and related financial claims and rights resulting from such ownership
Why real estate investments ?
Answer :
1. Achieve capital appreciation
2. Obtain stream of incomes
3. As part of asset allocation strategy
CHARACTERISTICS of Real Estate Investments
IMMOVABLE hence importance of following considerations :
1. LOCATION ( local or foreign, zone, surrounding, future potential )
2. TYPE of property ( land, building, hotel, student accommodation etc)
3. OWNERSHIP rights and tenure ( leasehold or freehold, pooled or
individual title, and applicable encumbrances etc. )
4. INCOME generated (quality and quantity) and EXPENSES incurred
5. CONDITIONS of property
GEARING / LEVERAGING often involve loans or mortgages to fund purchases, LTV, consider
interest costs, debt servicing, terms such as topping up if value drops
TIME CONSTRAINT - drawn of nature of real estate transactions
LIQUIDITY difficulty of finding buyer willing to pay the asking price
nature of real estate investment difficulty of breaking
LEGAL ENVIRONMENT frequent changes and imposition of taxation,
ownership rights and inheritance rules
FRAMEWORK FOR REAL ESTATE INVESTMENT ANALYSIS -
5 STEPS to EVALUATING PROPSOALS
1. Set INVESTOR
OBJECTIVES
such as GOALS,
PURPOSES,
CONSTRAINTS
3. Collect data on determinants of valuation such as
DEMAND and SUPPLY factors, cash flow projections; ANY leveraging ; TAX
issues etc.
4. Carry out the valuation
and investment
analysis
2. Analyze FEATURES of PROPERTY such as physical
attributes, location, property rights, time frame
etc
5.Collate, synthesize and INTERPRETE the results of the analysis and finalize
with decision making
DETERMINANTS OF VALUATION
IN REAL ESTATE INVESTMENTS
3 Approaches to PROPERTY VALUATIONS
1. COST APPROACH
- for newer properties where prices for land and buildings readily
available or can be assessed
- for older properties, need for replacement costs and estimates
of depreciation or deterioration in value
2. COMPARATIVE SALES
- based on prices from comparable properties transacted around
same time and at nearby locations
- drawback of this is EACH property is UNIQUE, no easy comparison
3. INCOME APPROACH
- Use PRESENT VALUE calculation of ALL the future income
stream that the property can generate less operating expenses
- For e.g. if PV of expected stream of income is $ 120,000, and the
market capitalization rate is say 5 %, then property is valued at
$ 2.4 million ( $ 120,000 / 0.05 ).
Valuation by PROPERTY VALUERS ( EXPERTS)
Use of professional appraisers to give
valuation of property since valuation is a
complex process requiring many
technical details
Use more than 1 professional appraiser to
arrive at a range of values
REAL PROPERTY INVESTMENTS
ROLE OF LEVERAGING
Real estate investments are very seldom transacted without the use of borrowings or gearings by the investor.
Amount, tenure and types of gearing would depend on :
1. The circumstances of the individual investor his income level, net worth, relationships with his existing bankers and his objectives
2. The rules and regulations governing real estate lending ( Loan to Value ( LTV) ; TOTAL DEBT SERVICING RATIO ( TDSR) etc )
4. The levels of interest rates and future outlook of the economy
With increased leveraging, the risk would definitely be higher for the aggressive investor (
conservative borrowing level.
Use of financial intermediaries in Real Estate financing ( brokers )
Impact of
TYPES OF REAL ESTATE INVESTMENTS
WHAT YOU CAN INVEST IN
Land ( LAND PARCELS versus LAND BANKING )
Commercial office building / strata office units
Retail malls / individual shop lots in shopping centre
Shop houses ( whether under conservation laws )
Factory units ( by types of permissible end usage; floor
loading; power supply; )
Warehouses ( ground floor or availability of ramp-up )
Residential public housing, landed, apartments and
sq. ft. )
Hotel rooms / villas with leaseback arrangement
Student accommodation
Car park lots
Storage locker units
SWIFTLETS HOUSING as Real Estate play ???
A favourite
investment
vehicle that is
often used in
investment
scams
FACTORS TO CONSIDER IN CHOOSING
PROPERTY INVESTMENTS
LOCATION - COUNTRY, CITY, ZONING, EXACT LOCATION
DAY and NIGHT DIFFERENCES
TRENDS and FUTURE DEVELOPMENT PLANS
EFFECTS OF CITY PLANNING and TRANSFORMATION
WHO IS THE DEVELOPER reputation and past track records,
publicly owned or privately owned
quality of development and expectations
LEVEL and TYPE of LEVERAGING
CERTAINTY OF FUTURE INCOME STREAMS
CERTAINTY of FUTURE RULES and REGULATIONS
Administrative issues - Choice of TENANT ,
CONTROL of EXPENSES
WHAT IS YOUR EXIT STRATEGY ???
POPULAR DESTINATIONS FOR OVERSEAS INVESTMENTS
- LONDON and UK ( Extract from the Straits Times Jan. 17 2015 )
POPULAR DESTINATIONS FOR OVERSEAS INVESTMENTS
TOKYO , JAPAN ( An extract from an ad by Property Agency CBRE )
POPULAR DESTINATIONS FOR OVERSEAS INVESTMENTS
BALI HOLIDAY HOMES and HOTELS INVESTMENTS
POPULAR DESTINATION FOR OVERSEAS INVESTMENTS
- ISKANDAR MALAYSIA e.g. of INVESTMENT TOUR
Want to know Iskandar Malaysia?
Come JOIN US on trip !
Iskandar just hit its HIGHEST level of investments ever! Why? Isn't there an oversupply? Who are the REAL businesses setting up shop in Iskandar?
Highlight that the Property Tours are strictly EDUCATIONAL and for LEARNING purposes. While we do visit a number of property sales galleries during the trip, there will be no hard selling of real estate on the trip.
The objective is to expose tour participants to the most exciting offerings in the market. Get a feel of where are the good buys and which projects are not. What are the industries that are thriving there ??
Enjoy FREE Q & A session .
Fee is $ XX per person.
Include Lunch / Transportation.
Only xx seats remaining.
Itinerary as follows (subject to change)
Where is High Speed Rail Station (Singapore - Kuala HSR) to be located ?
Educity ( universities such as Newcastle, Southampton, Reading, MDIS are located here)
East Ledang & Estuari ( landed gated project by UEM SUNRISE)
Horizon Hills ( a popular township community for Singaporeans in Iskandar)
Bukit Indah (the closest local township, booming and growing, from Eco Setia)
Medini (Mall of Medini, Legoland, Gleneagles Hospital, hotspot for investors)
Grand Medini and DPristine Medini ( choice investment picks for Medini)
Emerald Bay ( - landed properties in Puteri Harbour,
Puteri Harbour( Jens Hotel, Public & Private Marina, International Ferry Terminal)
Puteri Cove Residences (the crown jewel of Puteri Harbour)
Sunway Iskandar (new office space, schools and theme parks)
Pass by AscendasTech Park, Marlborough College, Pinewood Studios, Motorsports City
Tour Date: xx/ xx/ 2015 (Saturday)
( Source : Above information on investment tour to Iskandar Malaysia is extracted from similar tours being organised by Mr. Ryan Khoo for property investors in 2015 )
POPULAR DESTINATIONS FOR OVERSEAS INVESTMENTS
- BRAZIL ( Extract of Business Times report of Jan. 24 2015 )
GROWING IMPORTANCE OF CROSS BORDER
REAL ESTATE INVESTMENTS
Factors for consideration when engaging in foreign real estate transactions
o Familiarity of foreign legal framework, restrictions and
regulations on foreign ownership, financing & payment
o Foreign currency volatility and risks considerations
o Rules and regulations on capital gains and income taxes
o Issues on inheritance taxation
o Availability of investor protection for real estate investments
(e.g. availability of complaints / claims compensation processes in
Australia and 10 year NHBC warranty for UK buildings / apartments
o -
uncompleted or worse, abandoned ! and still have to continue and make
more payments !
REGULATIONS OF REAL ESTATE INVESTMENTS
Compared to investment in securities such as
STOCKS, FIXED INCOME, MUTUAL FUNDS and REITS,
Real Estate investments especially those relating
to overseas investments and locations appear to be
very much less regulated or controlled.
IMPLICATIONS ????
CAVEAT EMPTOR !!! BUYER BEWARE !!!
Role of CEA ( Council For Estate Agencies) in administering the regulatory framework under the Estate Agents Act 2010
What then is the Role of MAS in regulating Real Estate Investments ???
The need to regulate advertisements for real estate investments ( ASAS - Advertising Standards Authority of Singapore ) Question to ask : HOW EFFECTIVE ???
LATEST DEVELOPMENTS IN REAL ESTATE INVESTMENTS
transactions
ONLINE FINANCIAL INTERMEDIARIES ONLINE PROPERTY AGENTS and BROKERS ONLINE CONVEYANCING
IMPACT OF NON-
SUCH AS ECOMERCE ON RETAIL and SHOPPING SPACES SUCH AS OFFICE SERVICE SUITES on OFFICE SECTOR SUCH AS AIRBNB, Websites such as booking.com etc
issue of insurance coverage illegal usage by tenants (gambling and other illegal activities) contravenes MCST and /or building regulations contravenes requirement of minimum 6 monthly lease period
EFFECTS OF FAST CHANGING REGULATORY ENVRONMENT
SINGAPORE imposing max 6 occupants per rental unit - minimum lease period of 3 MONTHS
AUSTRALIA - UK income and Capital Gains Taxes
Chapter 2 Topic 2
Indirect Real Estate Investments
LEARNING OUTCOMES
At the end of this study topic, you will be able to:
Discuss the alternatives to investing in real properties such as equity investment in publicly listed and traded real estate companies and in Real Estate Investment Trusts (REITS)
Evaluate the relative merits and demerits of such alternative investments
Investing in Equities of Real Estate Companies
Factors to consider when investing in real estate companies which are publicly listed and traded :
Analyzing an equity investment in a real estate company is no different
from analyzing an equity investment in any other business or industry.
(Refer to Study Unit 2 Chapter 1 Topic 1 and Topic 2 on Equity Investments)
Need to analyze :
cash flows of income and expenses Profitability Price earnings ratio Book values Types and quality of assets Level of gearing and indebtedness
Different types of real estate companies for investing include residential developers, hotel operators, commercial office and retail mall owners, industrial space developers etc.
and assets amongst their portfolios.
Role of diversification when investing in real estate equities
Real Estate Investment Trusts (REITS) as
Alternative to Real Property Investments
REITS as an investment product was covered under
Study Unit 2 Chapter 3 Topic 2
To recap the main features of REITS investments are :
REITS are closed end funds managed by professional managers who
specialize in real estate management and property investments
At least 90% of net incomes attributable to a REIT are distributed
Calls for additional capital by REITS for business expansions in the forms
of RIGHTS issues are common
Advantages of investing through REITS are:-
- Professional management
- Regular income distributions to unit holders
- Capital appreciation through growth of underlying properties
REITS are already invested in many property sectors such as hospitality,
commercial office, retail malls, logistics, industrial sectors thereby
providing a wide variety of choices for investors
Compare and Contrast the 3 Forms of
Real Estate Investments
In comparing the 3 forms, look at following factors:
RISK and RETURN direct real estate have potential for greater risk
return characteristics compared to equity investments in real estate
companies and REITS.
When considering risk, see how the investment is being
REGULATED
LIQUIDITY - physical real property investment is most illiquid, as it is
LEVERAGING real property investments usually carried out with
gearing or borrowing to finance the acquisition due to relatively
larger size of such investments. EQUITIES and REITS need smaller
outlays but this does not mean an investor cannot also leverage on
such investments
DIVERSIFICATION much easier to consider diversification in
EQUITY and REITS investments than in real properties
ISSUES IN REAL ESTATE INVESTING
DISRUPTORS AND CHALLENGES IN REAL ESTATE
> SHORT TERM LEASES ( such as Air-BNB ) for
RESIDENTIAL PROPERTIES and impact on HOTELS
> SERVICE OFFICES for the OFFICE SECTORS
> ONLINE CONSUMERISM ON RETAIL and
WAREHOUSING SECTORS
SUMMARY
We have evaluated the basic characteristics of real estate
investments, discussed on the valuation methods used and
examined the different types of properties available for investors
After that we reviewed the factors affecting cross border real estate
investments
This was followed by evaluating the various alternatives to real
estate investments such as investing in equities of real estate
companies and in REITS.
What are Leverage Investments?
o The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
o Some examples of leverage investments:
Currency/Forex trading
Futures
Commodities
Stocks/FX Options
Margin Trading of stocks/bonds
Leverage Investments Overview
Read this book
before you even
start trading 1 cent
with FX Trading.
FX Trading
74.8% of forex traders do not
consistently make money
(Forex Magnates U.S. Forex Brokers
Profitability Report for Quarter 2, 2011)
References
( Please refer to your Study Guide for full Listing )
Gitman, Joehnk and Smart, Fundamentals of Investing, 2011
Web based Chapter 18 Real Estate and Other Tangible Investments
found at www.pearsonhighered.com/gitman
Chapter
Chapter 12 Mutual Funds : Professionally Managed Portfolios
Pages 458 - 459
Online materials from :
www.internationalinvest.about.com
www.realestate.about.com
www.propertyguru.com.sg
Reflection Question
Now that we have come to the end of the course lessons, it is time to reflect on your understanding of the following table which provides a summary of the various investment products covered in your course.
Cash Deposit @ Bank
Fixed Income Products
Equities, Mutual Funds & REITS
Local Real Estate
Foreign Real Estate Schemes
Amount to Low Medium to High
Low to Medium
High ??? Low
Risk / Return Potential
Low risk, Low
return
Low to high risks &returns
Low to high risk &returns
Medium to high risk &
returns
High risk & high returns
Very high risk, but very high
returns ?
Level of regulation
Very high
Very high Very high Medium ??? ???
Quality of Inter- mediaries
High High, require CMFAS
High, require CMFAS
Medium to high, under CEA rules
Uncertain, some CEA rules apply
Uncertain
Availability of recourse
YES YES YES Depends Uncertain Very Difficult, or impossible
Payment In Full In Full In Full Progressive Progressive ? In Full
COMPARE and CONTRAST
TMA 02
Mr. T is a very HNWI. His net worth is estimated S$250 million. To invest S$5 million in cash in SG real estate but clueless choices in SG.
What is his risk profile? What sort of return he is going after? How liquid does he want in this investment? Hint: 5/250. Significant?? Asset Allocation in investing in SG real estate? Long term investing or short term investing? His investment objective(s): income gain or capital gain or both? What is our current economic situation and property market conditions?
Suitability of the 6 investment choices: Merits and demerits of all these 6 investment choices. Market capitalisation of those listed investment vehicles? How is the property market situation in SG? Which sector can perform better? Which few investment choices can best meet his investment objective(s)? How should the asset allocation be?
TMA 02
Should he leverage on his S$5 million cash? If should, how much to
What is/are the possible risks if Mr. T takes up your recommendation?
Good Luck and Have Fun in Your Real
Estate
and Investment Journey !
