Buying strategy

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

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

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

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

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

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?

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