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 "land is finite"

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