Reasons to focus on Real Estate Investment

More Reasons to Shift to Real Estate

Milan Doshi compares portfolio investments with real estate returns and gives convincing reasons why you should shift your investment to real estate

In my previous article on “Boring and Slow versus Exciting and Uncertain Returns” (if you have not read it, click http://www.iproperty.com.my/news/2410/Boring-and-Slow-versus-Exciting-and-Uncertain-Returns), my conclusion was that Boring and Slow Returns (in real estate) is anytime better than Exciting and Uncertain Returns (in other portfolio investments) … over the long term that is! See Chart 1 below taken from the previous article.

Chart 1

For portfolio investments, you need compounded returns of between 12-14% every year for the next 20 years in order to match the returns from the Net Worth Divergence effect in property investments. What is even more surprising is that over a 20- year time frame, real estate outperforms in the first 18 years and only loses out in the last 2 years! 18 out of 20 years means that 90% of the time, property comes out ahead.

Property: Less Work

When I shared this with some friends who are active stock and futures traders, they too were quite surprised. While their short term trading goal was to make 10-20% per trade or per month, after adding up their profitable and losing months, the returns on their capital averages around 15-20% per annum in a normal year. For exceptional years, the difference could be more than +/- 30%! These are traders who spend a minimum of 6 hours per day Mondays to Fridays trading and/or watching the markets.

On the other hand, a real estate investor only needs to invest approximately 50 to 100 hours upfront to find a good property, get it financed and tenanted. Thereafter, the property continues working for him for life. Even after the buyer passes away many years later, the property still continues working for his beneficiaries. Only a little time and effort is needed every few years whenever there is a change of tenants. In this regard, real estate definitely makes more sense compared to trading as a lot less time and effort is required to achieve more or less the same sort of returns in normal years. The other advantage is that there are no wild swings in the returns even during exceptional years.

Being inquisitive, I didn’t stop here. I asked a few of my good friends in the financial industry to give me names of investments which had given compounded returns of around 12-14% pa in the last 20 years.

According to my friend in Public Mutual, their best performing fund is the Public Savings Fund. See Chart 2 below taken from their website at:
http://www.publicmutual.com.my/application/fund/performance.aspx

Chart 2

Another fund of theirs which has consistently been the No. 1 fund in its category since its launch is the Public Smallcap Fund. See Chart 3 below

Chart 3

I tried computing the annualized compounded return of both these funds but it was a futile effort as both these charts only show the Gross Returns (i.e. dividends have been added in) whereas all upfront costs and annual fees have been excluded.

For the stock market, the obvious answer from most Remisiers was Public Bank. See Chart 4 below which shows the price of Public Bank from 1987 to 2009. The drawback of this chart is that it only shows the stock price performance. The quantity of shares that have increased over the years thanks to the bonus issues and dividends paid out every year are excluded.

Chart 4 of Public Bank Bhd

Volatile Shares

Hopefully some academician reading this article may take the initiative to do an “apple to apple” comparison as well as compute the compounded returns over the long term. The best I can do is to make a “pictorial” comparison using the 4 charts. The following conclusions emerge:

1. Up to 1992, portfolio investments were growing steadily with little volatility, very much like real estate. Buy and hold strategies in either mutual funds or blue chip stocks worked. It made sense to diversify and split your investment capital into both real estate and portfolio investments.

2. After the stock market Super Bull Run in 1993, the entire dynamics of portfolio investments changed. A lot of people saw the stock market as their ticket to make quick money. The money was not in the slower blue chips or buy and hold strategies, but to trade in speculative second liners based on rumours. While quick money could be made, there were also a lot of occasions that money was lost even quicker. The stock market became a casino for many people. Many people even lost their shirts on their back and more!

3. In the last 10 years thanks to the internet and globalization, the volatility of portfolio investments has increased tremendously. We have experienced and will continue to see a lot of steep “mountains and valleys” in terms of price volatility. If 100% of your capital is invested into paper assets, your Net Worth will also experience many steep “mountains and valleys”. Hence it’s advisable to shift more of your capital into real estate.

My suggestion is to allocate at least 70% or more of your investment capital into real estate to shield your Net Worth from the price volatility of portfolio investments. As long as you buy completed properties in good locations that are easy to rent out with rental enough to pay the monthly installments, the risks of real estate investment are pretty low.

4. The higher price volatility of portfolio investments in recent years also indirectly affects the property market. In globalized cities such as Hong Kong and Singapore, their real estate prices have also have experienced a lot of steep “mountains and valleys”. This is mainly due to their limited land supply and high demand from foreigners due to their foreign investor friendly government policies. Hence the timing of your entry and exit points in the real estate in these two cities is extremely important.

In this regard, we are much luckier in Malaysia and the Klang Valley in particular. Unlike Hong Kong and Singapore, we still have ample land supply and lower demand from foreign investors. Hence our real estate prices have only experienced gentle “hills and valleys”. This makes our real estate market a lot less riskier to invest in.

I hope this article gives you even more reasons to shift more of your investment capital into real estate in light of the increased volatility in portfolio investments in recent years.