Property Investment Strategies

Buying strategy

2010-04-29T14:09:00.000-07:00

The strategy we utilise to buy property depends on our objectives. The issues which will shape your decision are the following:

1. Your cash flow - Maybe you want to use your debt raising capacity to maximise returns. Maybe you need to pay cash, or buy only foreclosed properties because you don't have (or need) proof of income.

2. Your contingent cash requirements or surpluses - maybe you are setting up a business so need some certainty over returns.

3. Your risk-reward profile or sensitivity - maybe you want to stick to what you know

4. Your investment term - i.e. maybe you want to retire in X number of years.

5. The tax regime - Say that there is a capital gains tax upon properties which you hold for less than 3 years, or on property that you don't occupy (i.e. Investment property).

6. Your time - How much time do you have to manage the property. You can use a property manager, however this might have an unacceptable impact on your returns.

6. Your profit expectations - What profit are you expecting?

If you are living on an income, then I would suggest that you will want to maximise your capacity for passive income by maximising your lending (within sensible limits). You can buy cheap land and wait for it accumulate in value. Or you can develop it or buy developed properties. We are looking for maximum land value because rental returns are not acceptional in the third world because most people want the security of apartments, and environmental conditions are not attractive, as you neighbour will 'trash your planet', so you really need to buy a lot of land (4000m2) to escape the strench or visual pollution of your neighbours. Maybe a km2 if they have noisy cocks or poultry downwind.

If you are starting small, its amazing that there are still opportunities for you. In 2007, we bought a small 120m2 lot in foreclosure for P2700/m2. Today (Yr2010) it is worth P5500 because of the market turn of fortunes. Normally, we would not buy 'fully valued' subdivision land because its got less upside because its potential 'strategic' value has been fully gained by the developer. In this case, we were looking at buying the house next door, and we saw strategic value in the land. This particular property made sense because we could always flip it if we did not want it. We even found a buyer willing to accept no 'clear' certificate of title, which undermines a lot of confidence in Philippines title.

When you are developing your buying strategy, these are the issues you need to consider for maximising your value:

1. Inflation - this will benefit any property after interest rates have knocked any property owners who have excessive interest repayments (i.e. indebtedness). i.e. We can expect those at the bottom end of the market to be more vulnerable because of financial illiteracy, lack of income security.

2. Increasing incomes - results in stronger demand - this will benefit any property in a region, as long as incomes in that region are growing. i.e. Cities and satellite cities, and tourist areas, i.e. Where people like to spend money.

3. Strategic value add - this will benefit well located properties, i.e. Scarcity benefits, close to hubs, e.g. tourism, shopping, parks, future positive developments. The value of these benefits tend to slowly unfold.

4. Opportunistic buying - buying foreclosed lots, particularly in bulk, or as one of a package, when there is pressure to sell. Or in a climate of systematic financial crisis where a lot of people need to sell. It might only benefit a certain demographic, or it might relate to the failure of a person or corporation. This tends to offer only a one-off value, i.e. You have made the profit on acquisition, so flip this type of property (subject to capital gain constraints) and move on to longer term targets of a strategic nature.

I deal with the issue of strategic buying in my property books and other blog articles. The appeal of Asian countries is that, like Japan, they have greater capacity to increase incomes through productivity gains than other countries. This is because they benefit from 'Western' technology now, but also future gains. Their capacity to 'catch up' makes them a better investment prospect. There are tax advantages as well. Of course, I would prefer to live in the West (including Japan), but buying property in Asia makes a lot of sense, particularly in coming years when the USA/EU eventually break the mercantalist policy of artificially subduing the Asian currencies - pegged against the USD.

---------------------------------------------

Andrew Sheldon www.sheldonthinks.com

Lining up all your positives

2009-03-24T14:25:00.001-07:00

When buying property you really want to create a list of plausible benefits and disadvantages before you even look at any specific locations. Of course looking at locations can help us develop the list as we stretch our understanding of what is possible. We are looking for lifestyle and investment benefits. The things we might include are:
1. Growth values: Those factors which are going to offer you a greater return on your investment include:
a. National population growth: National population increases demand on the land. Those pressures are greatest in those areas where population is growing fastest, where land supply is constrained by regulation (NSW govt policy) or topographic influences (Wellington, Queenstown)
b. Regional property growth - the total national population does not have to be growing, people just have to be moving internally, eg. Nagoya in depopulating Japan
c. New freeway/highway developments - these tend to reduce travel times - important for holiday destinations outside the city, eg. North Sydney and South Auckland highway extension opened up new areas for weekenders, so lifestyle values drove up prices up to 4 hours north of the city.
d. New airports - These give people the potential to travel longer distances, eg. Australian and New Zealand regional airports
e. Deregulation - This reduces costs which allows far more people to come with fewer hassles. It also tends to stimulate new business activity, which further expands growth. eg. ASEAN, Aust-NZ common markets, EU. Travel and market deregulation are the big factors. Watch the ASEAN region. The Philippines is particularly promising because its English speaking, its an attractive country, its regionally segmented, and it has the most generous visa rules in the world. You can stay 18 months before you need to leave the country (for a few days).
f. Extension of train lines - We are now in recession so we are not going to see a lot of private business building new infrastructure, but you might see governments do it to stimulate the economy. You can anticipate where new stations will be on occasion with existing line extensions. New lines are harder to pick. Sometimes existing urban development or topographical constraints will give you a clue so you can anticipate the development. eg. Tokyo subways
g. Larger block sizes - Larger properties give you the possibility of subdividing it at a larger date. It does not help if everyone shares the same benefit, but its good if you buy one of the original blocks of land in an old town or city which gave residents particularly generous block sizes. eg. Australia or New Zealand. Lot sizes in these countries are often 800-1200m2. Even the Philippines which has historically not regulated land development now makes sense because they have universally adopted policies to do just that.
h. Shopping precincts - Commercial land is more valuable than residential land, and residential land close to commercial precincts is just as special for its convenience, particularly if it preserves its 'residential' character and is not overrun by the neighbouring development. The convenience needs to be retained, the congestion needs to be avoided, as well as the broken bottles and noise that can accompany regional hubs.
i. Exchange rates: Of course it makes more sense to buy in those locations where you can extract some foreign exchange advantage. At the moment we have low commodity prices (except precious metals) so Australia and New Zealand make the most sense because they are free-floating currencies.
2. Lifestyle values: There are those values which make a place a nice or comfortable place to live.
a. Developed countries: Having lived in developing and developed countries I prefer the developed countries for nicer surroundings, amenities, cultural experiences. Living in wealthy, large cities offers the greatest promise, but small, wealthy towns can also offer this, particularly if you have a choice of towns. But the city has far more options. Living in the Philippines, each mall is a carbon copy of the other, except in the wealthy areas.
b. Nice people: City people tend to be cold, goal-orientated, uptight and arrogant, whereas rural people are relaxed and easy going. Some places are just large enough to have a nice balance. eg. Some rural country towns, expat communities elsewhere. Just sometimes you get a glimpse in some new bar in the city before its ruined. If you are an old man needing validation from some 20yo girl, you might appreciate the illusion of a girl from the Philippines desperate to embrace materialism.
c. Nice climate: There are countries where you are uncomfortably hot or cold, and there are those which are just right. Those which are right include Australia, South Africa, and the elevated areas in tropical areas like the Philippines.
d. Convenience: Convenience means different things to different people. It might be enough to be close to your local pub, maybe family; some want the convenience to their favourite holiday destination. Maybe Americans are only too happy to stay in the USA. Australia and NZ might be considered isolated, but given their glorious environments, for many this is enough because its a self-contained experience. It seems perfect with the common market between Aust-NZ.
e. Space & natural surroundings: Many like the buzz of a city, but I suggest a great many people like to escape from people, and to embrace natural surroundings. The USA, Australia, NZ, Canada and Japan are great in this respect, but you will pay in Japan given the cost of tollways. I remember friends paying $100 in tolls just to go from Tokyo to Mt Fuji. That's why the Japanese train system is such good value, you can only afford to use your car for local trips. That's why Japanese 2nd hand cars have unbelievably so few kms on them. These countries had the foresight to protect wilderness areas. Surprisingly Japan also has a lot of wilderness - I have seen it, and its very beautiful too.
f. Contextual values: There are a whole range of values you can appreciate because they are specifically important to your life. For me its mountain biking, whitewater canoeing, public libraries and good communications infrastructure. In a few years it might be schools, day care and hospital facilities.

These are all factors I'm inclined to consider when I buy property. I am a drifter, going from one new experience to another, intellectual and geographical, so these are just some of the issues I consider. I am pleased to say I have for the last 8 years ceased to be a prisoner of some corporate, governmental regime that has told me how to live. I have managed to etch out a living that reflects my values. They key is finding self-aware people who know what they want, and who are heading in the same direction as you. Real people. Its interesting that when you know what you want, you actually attract those people. It has nothing to do with being 'positive', creating a 'positive aura'. That's nonsense, its about being self-aware.
----------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Airline deregulation = Property boom

2009-03-24T14:20:00.000-07:00

Deregulation around the world or even the removal of tax imposts can act like stimulus on domestic markets. We can see this with the creation of a common market in the EU. It resulted in West Europeans buying up property in places as far away as the Czech Republic and Hungary. The next place which is likely to benefit from such a boom is New Zealand. Australia and NZ are moving towards a common market, and this is likely to result in a boom in certain tourist cities in New Zealand. By focusing on the tourist hubs and airport gateways we can expect significant capital appreciation in future years. For more information refer to this article.
-----------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Positioning for the next property boom

2009-02-11T12:15:00.001-08:00

It is actually not so hard to read the future if we just focus on data. When I went to the Philippines and looked at property. I did so because it was my GF's place of birth. Upon preparing considerable research however I realised that this country has a lot to offer, and that the impediments to it realising that potential were in the process of being eroded. The remaining obstacles in the Philippines are primarily:
1. Institutional framework - whether tax collection, procurement, policing, management
2. Infrastructure - mainly telecommunications
3. Regulation - land zoning, civil disturbance, market price regulation
4. Service - contracts, service culture

This is a huge pool of problems, so it will take some time to deal with these issues. I can nevertheless see evidence that these issues are slowly being addressed. The implication is that once the Philippines comes out of this market slump, it will be one of the best performers. Why?
1. Greater restrictions on land use
2. Greater capacity for debt leveraging
3. Greater investment from Filipinos abroad
4. Greater investment in regionally-based call centres
5. Strong population growth - currently 2% per annum
6. Continued roll-out of telecommunications infrastructure
7. Compliance measures to increase tax collection by BIR

It will take a long time to convince people that the Philippines is anything but a failed state; and in fairness it is just the start. I offer this advice to allow you to position for a counter-cyclical investment in a promising market. Thailand and Vietnam have shown us what we can expect from a reformed market economy.
-----------------------------------------------
Andrew Sheldon www.sheldonthinks.com

The best investment opportunities

2009-02-11T05:42:00.001-08:00

The best investment opportunities. There are not too many great investments in an economic contraction like this, but there are some. I would suggest the following:
1. gold stocks - Stimulus will eventually result in govts printing money.
2. Precious metals - Silver, platinum, palladium all good.
3. CFDs or derivatives in precious metals - mind you, you are taking a counterparty risk
4. Foreclosed property in Japan - outlook not great now, but great yields outside the city, premature to buy in the city CBDs. Outer fringe areas make great buying, rural areas always good for lifestyle. Sooo cheap! You could buy a house for as little as $10-20,000 due to depopulation.
6. Rural property in NZ - City property is overpriced, but if you dont need to work in the city, or want to rent, then prices are modest, and the NZD is at a low point for foreigners earning USD,JPY,EUR. The NZD has fallen from USD0.80 to USD0.50. So great currency trade in beautiful country, no capital gains tax or transfer taxes, no GST on property. People will say the economy is in bad shape. Yeh, that's why its cheap. Its a counter-cyclical investment, but when cheap, sell when currency recovers in 4-5 years. The 9% budget deficit will turn around like it did in the 1990s. Expect compulsory super to boost savings.
7. Property in the Philippines - regional property is more appealing, as it will benefit from more call centres going there. Yes, during a contraction, call centres are still shifting to the Philippines. More are being set up in smaller regional centres rather than Metro Manila as the infrastructure improves.
You can find more info by searching Google for foreclosed property. A lot of Westerners are doing it, and it makes sense if you are living there for a few years. Japan & the Philippines property markets are among the most under-leveraged and did not have the big gains. That will be important when the global economic activity finally picks up.

---------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Telco investment a guide to Filipino property opportunities

2009-01-28T01:24:00.000-08:00

The Philippines is an interesting market. The country is experiencing strong urban population growth, though economic activity is subdued as elsewhere. Low household debt levels and gthe prospect of greater regulation of property zoning presents a far greater opportunity for capital growth than elsewhere. It remains to be seen how the credit crisis impacts on the Philippines government reform agenda, however the Philippines will benefit from a continuing shift towards BPO call centres. Of course it will need to overcome cultural challenges to increase its market penetration. Eventually Filipinos will be engaging in sales (‘cold calling’) as well as performing customer support. It’s just an issue of cultural familiarity and training. I would suggest that the greatest prospect for property appreciation is in the regional cities which are likely to experience greater income growth as call centres shift to regional areas to profit from lower wages and greater worker retention (due to less competition and worker migration). Rural workers are more loyal, though such locations are currently disadvantaged by poor telecommunications infrastructure. The best way to establish where to buy is to determine where the new tfibre optic lines are being built, and where call centres will be able to get quality P1 line connections.
-----------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Should first home buyers buy now and where?

2009-01-27T02:40:00.000-08:00

The answer to this question always depends on the context. You would think that the Australian government has seen the folly of debt given the current extent of indebtness. Yet its solution to the current crisis is to provide first home grants to aspiring home buyers or builders. One would think that we could do with some more savers in the country. But the political agenda is not about good policy, but rather stimulating economic activity at any price; whether that causes financial ruin for some naive 20-24yo who has managed to save a deposit. Tough love from government.
It is not entirely a bad idea to shun such gratuities, but there are times and opportunities when you should buy property using such grants. The instances in which you might buy property could be:
1. you are employed with exposure to the rural sector
2. You are living in a rural area where property prices are low, yields are high
3. You have saved up a deposit and you would be borrowing less than $50,000.

Given that the Australian government is offering $14-23,000 to first home buyers, in this context I would happily buy a property in the countryside. It would be insane however to buy property in the city, or fringe areas for some time yet.
---------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Buying property for the exchange rate benefits

2009-01-04T20:56:00.001-08:00

Recently my partner and I bought a property in NZ. There are several attractions to buying property in NZ.
1. The very cheap currency - when commodity prices collapse so does the currency
2. The absence of capital gains tax (CGT) & goods & services tax (GST) on property
3. The attractive lifestyle - NZ is far more fun compared to when I first came here years ago
4. The change in government - the new National government are likely to be better economic managers, perhaps similar to the Aust Liberal Party, but in a moderated sense because these are different times.

The attraction of buying NZ property makes particular sense if you can pay off the loan in foreign currency (whilst the NZD is low) so you can sell it when the currency (and commodity prices) is stronger. You also have the flexibility of making this work in other ways. You can rent the property when the currency is low, and use rental property abroad to pay off your (low NZ) costs of living. When the NZD shows signs of strength, you can move offshore to enjoy the same benefits in another country, or you can refinance your home to pay off another investment property if the local property market is still hot.

The issues that come to mind for investors are:
1. Setting up a bank account - try ASB, BNZ or Westpac
2. Speaking the local language - English in NZ
3. Residence visa - easier if you have a NZ or Australian partner, you are a business owner, or you qualify for their skilled migration program. eg. Tradesperson.

'Buying NZ Property – Download the free sample readings!

The NZ property market is shaping up as one of the most attractive property investment markets for the next few years. High yielding property and the collapse of the NZD make NZ the perfect counter-cyclical investment if you buy right! In addition, there is no capital gains tax, transfer taxes, VAT/GST or wealth taxes in NZ, so rest assured that NZ property is tax-effective! Learn more now!

New Zealand Property Report 2009 - Download the table of contents or buy this report at our online store for just $US19.95.

Implications of crisis on property outlook

2008-09-30T02:58:00.000-07:00

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.
-------------------------------------------------
Andrew Sheldon www.sheldonthinks.com

New centres for condo development

2008-09-20T16:07:00.001-07:00

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.
------------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Is the proposed train line in Sydney a political scam

2008-09-04T17:44:00.000-07:00

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'.
-----------------------------------------------
Andrew Sheldon www.sheldonthinks.com

The Philippines - strongest property prospects in Asia

2008-08-24T23:54:00.000-07:00

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.
------------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Outlook for Asian property prices

2008-08-24T22:58:00.000-07:00

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.

----------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Approaching property investment

2008-07-08T23:25:00.000-07:00

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.

------------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Buying foreclosed property in the Philippines

2008-02-06T05:14:00.000-08:00

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.
-----------------------------------------
Andrew Sheldon www.sheldonthinks.com

Buying an apartment in Metro Manila

2008-02-06T04:53:00.000-08:00

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.
------------------------------------------
Andrew Sheldon www.sheldonthinks.com

Philippines property one of better opportunities

2008-02-01T14:56:00.000-08:00

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.
-----------------------------------------
Andrew Sheldon www.sheldonthinks.com

Buying foreclosed properties

2007-12-30T07:46:00.001-08:00

Buying foreclosed property is a sensible approach to securing real estate, but you should be aware they have their advantages and disadvantages - depending on the market circumstances. The advantages are:
1. Distressed prices - these assets are often being dumped into markets with no buyers
2. Bank indifference - Banks are primarily concerned with recovering their own money, thus there is some willingness to accept low-priced offers from prospective buyers
3. Under-utilised assets - foreclosed assets are often under-appreciated assets because the previous owner was unable to make a profit from it, or didn't have the chance
4. Foreclosed property assets often have a negative perception attached to them, whether its a fear of reprisals from the previous owners or threats by the yakuza (in Japan). This means you can get a low price because buyers are scared off.
5. Illiquid markets - Foreclosures tend to be dispersed across the whole country, which means you can get steep discounts in illiquid local markets because most of the buyers are in the cities. For retirees or holidayers this means they can get particular bargains away from the city.
6. Panic sentiment - The wall of fear gripping the market can create a wave of panic selling, resulting in steep discounts. This is particularly pertinent where their is perceived to be no value for the asset. eg. Vacant, unproductive land. Such assets can become compelling buying at the right price.
7. Limited disclosure - The limits placed on disclosure can drive down prices prompting many buyers to stay away. In Japan bidders are not permitted to enter the property. Most buyers are reluctant to bid on properties they can't look at. In the Philippines the information is very scant, and bank managers are less than service-orientated
8. Generous financial terms - Bidding on foreclosed properties requires a deposit of just 5-20%.
9. Financial literacy - In some markets buyers are less sophisticated than others, so foreclosures in these markets can be more compelling. The same of course is true on the selling side, where poor financial literacy increased the number of foreclosures (sellers). Financial literacy is particularly prevalent in the rural areas.

See http://foreclosured.blogspot.com for further information on specific market opportunities.

Why buying property makes sense

2007-12-30T07:13:00.000-08:00

Property does not always make sense. The argument that property never falls in value is a nonsense, even the assertion that it doesn't fall by much, or that you would be paying rent anyway. Property is a market just like any other - except that its considerably less liquid. It can take 2-3 months to transfer property title. So buying property is a matter of timing. The best evidence of falling property markets is Japan in the 1990s and the USA in 2007-8. Between 1990 to 2003 Japanese commercial property prices averaged falls of 7-9% per annum for over a decade. These are huge drops. You can't argue that you should 'hold' investments because your yield was improving, as your capital was being grossly undermined. Many Japanese buyers realised this, and sensibly gave their properties back to the banks rather than pay off loans that were larger than the value of their houses.

The biggest determinants of housing prices are:
1. Rising employment - increasing the number of renters becoming landlords (buyers)
2. Rising immigration - increasing demand
3. Rising incomes - increasing the capacity of buyers to buy more & more expensive properties
4. Rising population - increasing demand
5. Regional migration - shifts between regions even within cities
6. Falling interest rates - increases the confidence of buyers, as well as lowering the cost of interest payments
7. Supply constraints - increasing in the Philippines (albeit slowly)

Of course all these factors are part of the total picture giving buyers a lot of confidence, as well as holding off sellers. But the power to expand wealth from property is far greater when you consider the following:
1. The capacity to leverage your property value by borrowing money from a financial institution
2. The capacity to spend on incremental capital works to lift yields on your total investment
3. The capacity to subdivide the lot into smaller lots

All these elements make property a very good investment, and a very lucrative one if your timing is good. Apart from replacing rent, it can also be a great income earner, whether you rent the asset fully, or just a portion (a bedspacer or granny flat).

Buy properties for land value

2007-12-30T06:12:00.000-08:00

People often recommend that you buy properties for land value. What they are suggesting is that you should maximise the land value in any purchase. Regardless of whether you are buying off-the-plan or a 'used' property, you should attempt to break the property value up into:

1. Basic land value
2. Value of improvements

For example I saw a property developer in the Philippines offering house & land packages for P1.5million. They were reluctant to tell me the value of the land, reinterating the point that its a package. Finally he told me that you can buy land in an adjoining lot for P3000/m2. This is a good reference for benchmarking. Given that the package included a 80m2 lot with a 80m2 (floor area) 2 storey house, the implication was:

Having established that vacant land next door is selling for 3000 pesos per sq metre, based on the package price of P1.5mil, we know that the implied value of the house is P15,750/m2. Based on previous independent advice, I know that P12,000 per m2 is a reasonable amount to pay for a basic house, so these lots look overpriced. Of course they are sold this way because most Filipinos lack financial literacy. They think they are getting a good deal because the nominal price of P1.5mil ($US30,000) is low. But they might wonder after they move in - Why is the neighbourhood so noisy? The reason - the neighbouring lots were empty when their house was under construction. Now the neighbours are building their house, its apparent that they are too close to their neighbours. Soon when the whole neighbourhood is filled with kids, dogs, roosters, jeepneys and tricycles, they will realise that they bought into a slum.

Most developers are marketing to suckers who don't know the value of property. Why buy in a fully priced subdivision? Security and facilities are the only reasons, but will you use them? Its crazy that people buy these residential lots and sit on them for decades. Of course if you want to avoid the premiums involved in such packages, you need to consider:

1. Buying a vacant lot and getting an architect/builder to build a house for you

2. Buying a 2nd hand house - privately or foreclosed

3. Establishing a consortium to buy & develop your own subdivision - You need a sought after area because there are many failed subdivisions around

One of these approaches means that you can buy at a reasonable market value. But markets are not static. We should be trying to buy a property for its future capital growth potential. We are looking for a re-rating in the value of the land component - which is why we shop to maximise the land value. In contrast, the house value will depreciate so we want to minimise that capital component. There are several potential capital growth factors we should be looking to find:

1. Trends favourable: Look for areas where the trends support the future demand for your property, particularly where the trend has just changed and is likely to be sustained. e.g. Expansion of the city, development of your area, growing popularity of larger size lots, growing popularity of 2br homes, possibility of a new train station after the area population density increases.

2. Focal point established: Is there some feature in the local area that makes the land more valuable, e.g. A new train line that has reduced traffic, a new shopping mall attracting jobs, an attractive beach

3. Improved accessibility: The impact of a new toll way is considerable because it provides much faster access to the city. An area previously too far away from the city becomes a magnet for weekender accommodation, sparking a lot of property development.

4. Other special attributes: You need to decide what is a positive attribute and what is a negative. The positives are considered to be schools, churches, large lots, big houses, beaches, waterways, access, forests, shopping centres (if you are not too close); whilst the negatives are considered to be industrial areas, prisons, slums, pollution, etc. Of course these attributes are subject to change. e.g. The prison might be closed in time, and the slums might be redeveloped by government or private enterprise.

5. Rezoning: In some countries the distinction between different types of land can be HUGE. The implication is that you can significantly benefit if you are able to hold the land when the zoning is changed. Large projects attract jobs, so they tend to more readily get approved. But there is no reason why you can't profit on their coattails, particularly if you are able to anticipate change. Restrict zoning laws tends to artificially elevate the value of land. If you hold agricultural land on the fringe of a growing city, you will eventually profit from the increase in land value. But the increase in value will not be straight line, so timing is important. Look to buy such fringe land after city property has increased. Get rid of it before, and realise its value before any collapse in the economy.

The implication of these statements is that you should not buy strata title property like apartments, condominiums. I think this is true, though it will depend on personal circumstances. Buying a strata title might be a lifestyle decision. If you tend to buy the property as a owner-occupied premises, it might make sense. You might prefer a small, low-maintenance garden, greater security, or to unlock the land value from your house prior to retirement. These are all valid decisions.