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Saturday, 6 December 2008

Property vs Equity as an Investment


I happen to have chat with my former colleague on the investment merits of equity versus property, in the context of passive income as primary concern and capital returns being secondary. Under this context, an investment must be one that provides a stable cash flow, either from monthly rentals or dividend payouts.

Property vs Equity

Rents vs Dividend

At first glance, property provides stable rental returns, usually in substantial monthly figures that can supplement or even substitute active incomes from work. Monthly rental figures in the magnitude of $3,000 to $5,000 are reasonable for renting out entire 3-room condominium units in reasonably attractive locations, close to basic amenities like MRT station, food centres etc.

On the other hand, dividend from equities are usually paid out once a year and are far less stable than rents. The amount are usually meagre and are regarded more as extra annual bonus than monthly income supplements.

Leveraged vs Unleveraged Portfolio

But on closer look, the significant difference in payout can be attributed to leverage. To obtain the rental figures listed above, a typical condominium would have cost anything from $700,000 to above $1,000,000. A typical well-to-do middle income household that can afford to purchase a second property would typically have to draw down a housing loan ranging from 80 to 90%. Few from this group will be expected to 'cash and carry' their property.

In contrast, few sensible people who invest in stocks with objective of getting stable dividend returns would take up any loan to finance their purchase. If the typical well-to-do middle income household above who can afford to pay a 20% down payment or $200,000 on a $1,000,000 property, instead use the down payment to for share purchase, it would have earned them only $14,000 in dividend annually or $1167, assuming a 7% dividend yield (a respectable figure in 'normal' times). This is way below the $3,000 to $5,000 for rents above. The difference attributed to leverage can hence be seen quite clearly.

What if they are willing to take up a $800,000 loan to buy shares? Combined with their original $200,000, there annual dividend income would have been $70,000 or $5833 monthly, a equally respectable figure. But in both scenarios, I have not taken into account the cost of borrowing. Since equity loan are usually unsecured and the cost of borrowing will be much higher than a comparable housing loan.

Fall out from current financial crisis

Every crisis offers new opportunities. The current credit crisis is no different. Property prices and rents have started falling and could plunge further given weaker demand and greater supply in the years ahead as more new property projects are ready. More information can be found in the URA's website.

If falling property prices offers opportunities, plunging equity prices offers even greater opportunities, though the risk should be higher (risk must commensurate higher returns). Once built, the condominium should remain there but there is no guarantee the company still exist to honour the claim by the shareholder.

I extract out 7 relatively high and stable dividend play equities from SGX and summarise them in the following table:

The 7 are well represented by 3 shipping trusts, 2 REITs and 2 food industry related business. The stability in yield arises by nature of the business, e.g. Singapore Airport Terminal Services and Pacific Andes, or by long term contracts e.g. The shipping trusts and REITS.

Taken together, these 7 offers an averaged yield of about 26%. Reusing the example of the middle income household above, a $200,000 investment would give $52,000 annually or $4,333 monthly, without leverage!

But the fact these equities offers such high yields is due to the underlying risk. Other then Singapore Airport Terminal Services, the other 6 businesses are highly leveraged and there is no certainty all will survive the current credit storm. Even if they could, there is a high chance dividend could be cut due to lower income and hence reduce the yield significantly.


Given the current credit storm, if I have the funds to purchase a private property, I would rather threw them into equity. The chance that all 7 high yield stocks above turn into useless scrap paper ALTOGETHER is actually quite low, at least, that's what I think. Unfortunately, I don't have such funds now...still waiting for Singapore Pools to give me a hand.



Anonymous Anonymous said...

Agree with your view. My concerns about high yield stocks are consistency in dividend payout, high leverage risk and depreciating assets (infrastructure and shipping assets). Yield above 20% looks like opportunity of a lifetime and too good to be true. I can happily retire if I put in my saving in those high yield stocks and trusts you recommend. Should I? :)

9 December 2008 at 14:09  
Blogger Market Uncle said...

The fact that the price has corrected so much (and hence the yield surge) is due to the risk involved. But personally, I'd think the potential returns outweigh the risk. Anyway, do exercise due caution, especially if you are risking money you are not prepared to lose.

9 December 2008 at 21:29  
Blogger PanzerGrenadier said...

There are other factors at play for property purchases.

First of all, ability to get financing is key to whether you can get into property. Not everyone has a stable job in government or SAF and banks assess each applicant's credit worthiness and ability to pay the loan.

Also, people tend to understand property more than they understand why share prices go up and down.

It's now a better time compared to before subprime to invest in blue chips for long-term yield but holding power is key to winning.

In the meantime, it's living within our means, saving and investing, growing and protecting our means as the way towards financial freedom.

Be well and prosper.

10 December 2008 at 12:35  
Blogger Market Uncle said...

Hi PanzerGrenadier,

I fully agree it's now a better time compared to before subprime to invest in blue chips for long-term yield. Holding power comes when one invest with cash they can afford to lose.

10 December 2008 at 21:28  
Blogger Kay said...

Given enough cash, I will choose properties over equities. Perhaps my thinking is warped, but it always occurs to me that a piece of property cannot disappear overnight as it is tangible while equities can since companies can fold up. Besides that, if you look at the private property index from URA, the returns in the long run is very good.

11 December 2008 at 14:16  
Blogger Market Uncle said...

Hi Kay,

I felt that given the same resources, people tend to be willing to take a much longer term view if they invest in properties, than they would if they invest in equities.

Depends on how one value the property and equities, should a rational investor goes into any under "nobody want kind of valuation", equities should give a much high return if they are willing to take an equally long term view.

You are right to say that equities have a higher intrinsic risk then property (hence the yield). However, one can diversify into many equities, but not into many properties. Hence, the risk can actually be managed in equities.

11 December 2008 at 22:37  
Anonymous Anonymous said...

dear uncle. why is it that i read bad news about economy shrinking, retrenchments, exports falling and yet the stock marktet seem to be so bullish today? there is no no logic when people do not dare to buy at cheaper prices but now are rushing to buy at much higher prices even though the economy is so bad? how come

2 January 2009 at 17:24  
Blogger Market Uncle said...

Depends on your point of view. The "experts" could say that the stock market are forward looking and most of the bad news are factored in. Thus this rebound is in anticipation of better things to come.

On the other hand. When is market every rational? If so, everything could be predicted and no money can be made.

2 January 2009 at 20:14  
Anonymous Penny Stock Newsletter said...

I would say Property is Equity.

12 December 2011 at 02:56  

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