Implications of crisis on property outlook

There are no revelations to date which have changed my view of the outlook for the market. This collapse was expected. If you read over my market commentary blog that will be evident enough. I did actually expect the derivatives market to require the bail out, but actually that aspect of the financial market has been secondary.
So what is coming. In my last 'market commentary' post I stated that the US Congress will approve the bail out. Some commentators are expecting less than $700 billion because of a reluctant Republican Congress. I would however argue that that is mostly political posturing and the $700 billion figure will be required to preserve confidence. The other option is making a smaller commitment with the possibility of more if required.
The property market in the USA is falling because its highly leveraged. The same is true in a number of Western countries. This is not the case in a number of Asian countries. With the prospect of inflation, and low debt levels as a percentage of GDP, places like the Philippines make a lot of sense for investors. Japan is already in recession, has high public debt, but its domestic debt, not foreign debt. We can expect a subdued market in Japan but yields on non-CBD property are still good. In the countryside yields on foreclosed property are very good.
The Philippines can expect a lot of support from OFWs, though some of those will be returning home. At the end of the day, higher interest rates and inflation are not going to undermine the market significantly because most property buyers/holders paid cash, or are supported by OFWs. That spells little downside for Philippines property.
In contrast, the US property market has more downside then several years of consolidation as taxes and interest rates rise to reflect the higher inflation. A serious and protracted recession for the USA, but not a depression unless the Fed does something silly. There is also the prospect of some countries with surpluses stimulating the global economy, eg. EU, China, South Korea and Australia with increased domestic spending. Japan would need to increase taxes to justify increased spending. One would expect energy taxes to be the principal target for tax because its discretionary cost (at least directly speaking) and it helps achieve greenhouse gas objectives.
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Andrew Sheldon www.sheldonthinks.com

New centres for condo development

The Western Australian government is considering the development of high rise condominium developments in the north of the state. The concept arose as a political football, the argument being, if the Arab states can do it, why can't Australia. That argument can of course be extended to many countries in Asia which are a lot more central than the Middle East. There are some major problems. The most important being:
1. The lack of an international airport - this is a critical issue
2. The remoteness of the area - the region is far remote from any significant commercial centre
3. The isolation from markets - places like Malaysia, the Philippines and Indonesia are closer to Japan, China, South Korea.

One could take the argument that Australia does offer some advantages over these other countries because it offers more secure Torrens title. But does anyone seriously worry that they won't have a chance to sell property before any threat of property expropriation could arise. If you wait for a dictator to say 'we are nationalising all property' then you have waited too long. But you are not entirely safe in Australia. State governments (say NSW) are prone to place taxes on property because of its value. For this reason I tend to think the sovereign risk concerns are overstated. Also foreign holders of Asian property are not so large, so there will be no mass exodus. There is on the contrary, a seeming consensus on the direction of economic policy.

So where is the best location for high rise condominiums? I can suggest several locations in Asia that are more attractive than the NW of Australia. These include:
1. Davao City, Mindanao, in the Philippines
2. Laoag City, Luzon, in the Philippines

Laoag is particularly attractive because its on the doorstep to China, it has an international airport, with a growing number of connections. It is remote from Manila, but I don't see that as a problem since the regions have a lot to offer.
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Andrew Sheldon www.sheldonthinks.com

Is the proposed train line in Sydney a political scam

Life really does require being a critical analyst of all things. Vested interests are really in the game of deception in order to get what they want. There was an advertisement on the television in Sydney today which strikes me as nothing more than a media stunt by the NSW State Labor Party. The reason I say this is because they are proposing to develop a train line at a cost of $A16 billion from St James (City) to Rouse Hill 6 years in the future. Property investors would be inclined to get excited about such a line because of its potential to push up property prices, but ultimately the political will depends on its economic justification, particularly since they are looking at a private partnership. There are of course some things to note about the line:
1. A line costing $16 billion is going to require $500 million in earnings to make it worthwhile
2. This part of Sydney is not the most populated area
3. The line will include 14 new stations - however only about 5 of these areas have significantly dense populations. It could be argued the outer areas could have carparks to service a wider area.
4. This is a new line so there is the opportunity for the line to be a much faster service than existing lines. We can therefore expect this line to be more expensive, particularly since it will be servicing some high wealth suburbs. I would expect the tickets to be 30-50% higher than other train services in the city, with some justification.
5. It will be interesting to know what the government will be doing to capture some of the value from property development in these areas. Think of the cost recovery from property development where the government owns land, as well as the additional taxes it can make because of the higher property prices. These factors need to be considered.
Nevertheless one would have to be skeptical about this plan given the political value of the news in the next election, since the area skirts safe Liberal seats. I would not be surprised to see this line reduced to a shorter line to Epping, with development of the outer line (Epping to Rouse Hill) pushed back a number of years.

We cannot however overlook the political opportunism of advocating and promoting a project which stretches beyond the term of this government. For further details see the Sydlink website. The issue here is determining whether these projects are going to go ahead. There can be a whole raft of issues preventing them, so one has to be careful anticipating and actually buying property on the basis of such 'proposals'.
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Andrew Sheldon www.sheldonthinks.com

The Philippines - strongest property prospects in Asia

The Philippines is expected to make the strongest advances in property prices over the next decade (2008-18) based on current macroeconomic considerations. The Philippines has long been regarded as an economic laggard in Asia because of its crippling corruption and low regional competitiveness compared to the Asian upstarts China and Vietnam. Several years ago however the Arroyo administration brought home some poignant lessons in economic growth, and she has slowly made changes to implement them to good effect. President Arroyo is a trained economist herself. The question remains - will this trend be sustained? Based on the breadth of the reform - we think yes. We also think that despite having no chance of a 3rd term, Arroyo will be recognised over the next 2 years for her efforts. This will mean she will have considerable influence in determining the next party leader. The factors which are likely to lift the property market are:
1. Climate: The attractive climate provides a compelling reason for expat Filipinos and foreigners to live in the Philippines.
2. Filipinos lifestyle values make the Philippines a nice balance between business and recreation. Things move more slowly here and that appeals to a lot of people, particularly retirees.
3. The Western legal system provides people with the capacity to seek court resolutions to conflicts
4. Land title reform will give landowners confidence in the validity and security of their title in the first instance. Cross-jurisdictional administration should help reduce corruption. This will take some time, but this should not delay investors since half of the country's title is already based on the Torrens title system.
5. Strong population growth could mean a lot of new property buyers if the government is able to deliver on its reform agenda. The current rate of population growth is 2% per annum, the fastest rate in Asia.
6. English speaking environment makes the Philippines an easier place for Westerners to live and do business. Even for Koreans, Japanese and Chinese, who might have struggled with another language, they can rejoice in their English skills, as well as the large populations of Koreans and Chinese already living and doing business in the Philippines.
7. Structural adjustment of the Philippines economy and its system of administration is set to have a big impact. At this point there is little in the way of results, but gradually this factor alone could help to stamp out corruption. The core of the change is the Local Government Code of 1991. This law proves that some laws improve with age.
8. Regional proximity: The closeness of the Philippines to Asian countries is likely to lift the standing of the Philippines as a tourist destination, particularly if the growth of budget airlines continues from secondary airports. The Philippines is well positioned to benefit from a stronger Asian economy and higher rates of Asian tourism. Chinese are just starting to go abroad.
9. The low cost of living, including the ‘relatively’ low cost of property in the Philippines by global standards is a compelling reason for buying property in the Philippines.
10. End of land reform: This is speculation at this stage, but the Agrarian Land Reform Program (CARP) will likely be abandoned by Congress. Currently Congress cannot reach an agreement. CARP was implemented to give landless Filipinos greater equity or reward from their participation in the rural economy rural, after they had long been marginalised by land barons. The policy of land distribution was intended to lift food output, but its had the opposite impact. CARP has thwarted investment in both production capacity as well as farm acquisition. Higher food prices, termination of CARP, greater investment for higher yields and land zoning compliance should help to raise land demand, and thus land prices. Farm prices have hardly recovered from the drought-breaking rains after 30 years of restrained investment. One need only look at the poor land utilisation rates in the Philippines. ‘This country should be a rice basket, yet it cannot feed itself’.
11. Tighter property supply as a result of tighter controls on land rezoning by local government should increase land prices more than in the past. The devolution of public administration from national to local government units should result in higher incomes and stronger economic activity in provincial areas.
12. Generous tourist visa conditions mean that allow foreigners to reside in the country on an extended tourism visa for up to 18 months. Indonesia is far more strict.
13. Credit expansion: The third wave of a global credit expansion is set to propel Asian property and equity prices over the next decade. The gains will come slowly at first, but with asset deflation sparked by higher interest rates elsewhere its not too late to buy. The Philippines is destined to be one of the best performers.

One might well take comfort from the negatives in the Philippines because they can only get better.
14. Peace in Mindanao: Perhaps the greatest obstacle to development is the 30-year fight by the Muslims of Mindanao for independence. More moderate Muslims are negotiating an measure of autonomy with the national government, but recent negotiations have failed. It is still too early to say if the Philippines government will reach a peace accord with the Muslim free-fighters of the Muslim Islamic Liberation Front (MILF). Much of Mindanao and the Sulu Islands have been off-limits to development because of conflicts that have left this promising region as one of the poorest in the Philippines. There is the promise of extraordinary gains on property investment once these security threats are removed. But given the uncertainly, Davao looks like the safer investment option.
15. Port reforms are needed to improve the efficiency of the ports. This is a significant cost for importers and exporters alike. The cost of domestic shipping has fallen due to the development of RORO port facilities.
16. Corruption remains at a high level, and the President's family has been implicated in some corruption scandals.
17. Labour productivity is very poor in the Philippines. There are programs to address it, but they are not so significant at this point. Education standards over the last 20 years have declined.
18. Acquired assets: The Philippines has a high level of bad debts as a proportion of total loanable funds. This has been a significant drag on the local economy. A bout of inflation at the current time should actually help the banks liquidate these bad debts.

For these reasons I retain a positive opinion on the outlook for the Philippines economy, and the property market in particular. I actually did not recognise the significance of the trend until I started researching and analysing this market. The reform of local government in the Philippines is not publicised much. For more information see our latest report Buying Philippines Property. Download a copy of the first chapter here.
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Andrew Sheldon www.sheldonthinks.com

Outlook for Asian property prices

Asian property markets are going to produce some of the best property price gains ever seen in the region. The strength of Chinese property markets is just a precursor to what is going to happen in other Asian property markets. The big increases in property prices that were experienced in the East Asia were largely confined to reformist, pro-market, pro-investment China and Thailand. There is every reason to believe that the Philippines and Indonesia will do particularly well over the next decade based on reformist agendas currently underway.

This conclusion is supported by the fact that the world is currently passing through one of those unique periods of time when productivity and industrial capacity are growing at very strong rates because of liberalisation of markets, credit expansion, as well as the ready flow of capital and information. In these formative stages the flow of information is not so good, but the efficiency of these flows will improve over time.
There is considerable concern about the state of credit markets. These issues will surely raise the cost of capital in the short term, but in fact they will spark reforms globally that will only improve the competitive forces pushing the cost of capital even lower. This is a long cycle, and whilst we are already seeing higher cost of capital, I think these pressures will subside. I don't see any unwinding of the global credit expansion, rather a shift to Asia and other developing countries. The Philippines is one of the most exciting property stories in Asia.
You might ask what does the current inflationary pressures mean? Well there has been inflation for some time now, that is over the last 5 years. This has not been significant by government measures because it does not include asset prices. People truly don't understand inflation. When asset prices come down 'cost of living' prices (inflation) must go up, or a lot of that credit has to be liquidated. No government has any interest in causing deflation, they merely want to stabilise prices, and the best way to do that is to bail out failing banks as they raise rates.
We can expect higher interest rates in Western countries, but this will only see hedge funds and other investors shift their focus to Asian nations. You might ask - How can this occur? The Asian markets are too undeveloped or immature to support such products. If these products are not supported in Asia, as I would expect, then the asset classes will be supported by offshore markets. Its also possible that more developed Asian markets like Singapore and Sydney might provide a basis for the development of property investment vehicles, not just for foreigners, but Asians as well. The focus of such products are likely to be tourism, commercial and residential developments. Just as the world was excited by the industrial expansion of China, watch over the next decade as Chinese people start to travel. Not just Chinese people, but increasingly Koreans, Thais, as well as Russians, Arabs and other peoples.

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Andrew Sheldon www.sheldonthinks.com

Approaching property investment

Property investing strikes me as a strategic game like chess. At this time my partner and I are buying property in the Philippines. There are a number of things that strike me about property:
1. Luck: Some things strike me as too good to be true, but sometimes those opportunities are real. This is reason to seek information rather than walk away because of suspicion. Finding out more is hard because you can't go around asking people why is this property so cheap, as you might find yourself introducing competition to the equation. There are instances when I thought this property is just too cheap, there must be something wrong with it. The owners must be fraudulent. Maybe its something you don't know, maybe it is. You can only watch for evidence and keep learning.
2. Lateral thinking: Buyers are sometimes fortunate that sellers are clueless to the potential of their property. At the moment we are buying property from a farmer who is clueless that the modest property prices in the past is history, than things are going to be more exciting in the future. He seems clueless to the fact that his lot has a spectacular view.
3. Critical thinking: It pays to be critical thinking when you are buying property. There is usually a counter-argument to be made for every assertion you hear about a property. eg. "Its great arable land". Response: 'Yeh, its a pity there is no view and the flatness is fully priced into your offer". That is the thinking you have to take when interpreting other people's statements.
4. Anticipating the future: It is important to understand where the future is going, and what type of evidence there is to support your views. For instance. We know roads are going to improve, travel distances are going to fall. We know large cities are where the money is, we know agricultural land is cheap, we know that people like a scenic view. These are trends or facts we need to consider when buying a property. There is also evidence of trends we can use like - noting that wealthy people are buying properties in the area, resorts are being built, foreigners (generally more astute and worldly buyers) are buying in the area.
5. Understanding people's perceptions: People's perceptions are determined by their experience. We are buying some cheap land from a farmer for $1.50/m2 because he looks at the steep 30 degree slope and says I can't farm there. He does not see a resort on the next headland on similar land. We might ask if this land is so attractive, why isn't a developer already here? Sometimes there is something wrong, eg. No power, poor roads, but sometimes a key block is held by a wealthy person and he refuses to sell for a cheap price. This is why a minnow like us is able to buy a lot where big developers can't get a sizeable position.

6. Strategy is the art of anticipating problems: Dealing in a partnership is hard when you offer different skills. I am the critical thinker, my partner is the sales/operations executor. So in buying property, I need to anticipate what she is going to say because it might impact on the value proposition. Occasionally we slip up. Sometimes like now there is no opportunity around it. We are close to buying this land. The land is useless without road access. Unfortunately in the process of negotiating access to this land, the owner might stumble across knowledge that would make the land too expensive for us. The neighbour might tell them that 'the buyer is a foreigner, you should ask for more', or he might place a counter offer. Sadly the absent landlord is not open to us, and he's difficult, so it might be better if they make the approach. Just I think we will need to be careful. Buying land is often like that. Knowing which card to play, knowing what your partner might say, and preparing for those encounters.
In 2 days we will know if we have secured the place.

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Andrew Sheldon www.sheldonthinks.com

Buying foreclosed property in the Philippines

I wanted to refer people to the opportunity to buy foreclosed property in the Philippines. My girlfriend and I recently bought 2 lots for a total of 2600m2 in Lipa City, Batangas for P700/m2 (thats $US 15/m2). We bought these properties through a local bank.

If you are interested, I am offering a report on 'Buying Foreclosed Property in the Philippines". I have gathered a lot of information prior to this purchase, and I have travelled around the Philippines, and done alot of research for an energy report in the past, so I know something about this economy and the opportunities. See my foreclosed blog for further details - http://foreclosured.blogspot.com.
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Andrew Sheldon www.sheldonthinks.com

Buying an apartment in Metro Manila

My girlfriend and I just bought a new apartment in Metro Manila - really nice place for the price. We bought a 2br apartment on the Marikina River, Pasig City, in a DMCI development called Riverfront Estate. Its well located 5mins from Teandesitas Shopping Mall, 10 mins from the Ortigas & Pioneer Commercial Precincts, 10mins from Market Market & the C5 Expressway that takes you south to Batangas, Bicol and the airport, 15mins from Eastwood and The Fort, as well as other smaller shopping & entertainment precincts. Our place is 66m2 - 49m inside, plus more for the balcony. It cost P2.3mil (USD50,000). We take possession in 4 weeks since we have paid our 20% deposit. The estate has a clubhouse with wifi, swimming pool, and a park along the river. Surprisingly I didn't see any sign of pollution in the river, but I suspect they are cleaning the river during the construction period.
We looked at other apartments which were as much as P70,000 per m2, this one is just P22,000/m2 if you include the balcony.
There is a 100m2 apartment with 3bedrooms, maid's room and 2 bathrooms for sale as well. What I like most about this place was the quality of the design and finishing. It was far better than other places in this price category, and it is low-rise, and it has wifi in the courtyard. Cyprus Towers apartments & amenities near The Fort was affordable as well, but the building has a very cheap looking exterior, and the view out one side was of slum areas. Riverfront Estates was cheaper, better designed, and better located. You couldn't even place a refrigerator in the kitchen at Lee Gardens in Mandaluyong.
http://www.dmcihomes.com/project.php?id=540&name=Riverfront_Residences.
If you are interested in purchasing one of these apartments, we would happily help you. You can contact us propertypo@gmail.com.
You might ask why am I recommending apartments since most of us know that apartments offer a less attractive return on investment than land. There are several reasons:
1. Estates and condos give you a security and sound buffer from you and the poor peasants outside, and they are an oasis from the traffic
2. Estates provide a better forum for business networking
3. Estates have facilities that we would not otherwise have access to - if you use them

I don't recommend over-investing in Manila property. I would only suggest a basic place since there is far better properties in rural areas. I forecast that Manila will be a gentrifying slum in years to come and the cockroaches will take over. I prefer places like Subic, Calamba and Lipa City. The only reason to buy in Manila is for a city base, or holiday visits. If you are not buying in Metro Manila then I would be more inclined to recommend foreclosed property. See my blog http://foreclosured.blogspot.com for info on those opportunities. Further details on the 'Buying Philippines Property' Report.
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Andrew Sheldon www.sheldonthinks.com

Philippines property one of better opportunities

I made a post somewhere about the Philippines stock market being one of the better opportunities for stocks, and so it is for property. The fundamentals could not look much better:
1. Strong currency - from repatriation of Filipino workers whom are avoiding weak USD
2. Strong food & mineral export prices
3. Subdued oil prices - because of the strong peso
4. Call centre market should continue to expand

In the long run though inflation will crimp the expansionary potential of low interest rates, so the low interest rates have bottomed. For further information on the Philippines property market you can download a free chapter of 'Buying Philippines Property', with its considerable discussion of the foreclosed property market. This eBook comprises 2-volumes and 330+ pages. Ask about the complimentary list of over 3100 foreclosed properties.
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Andrew Sheldon www.sheldonthinks.com