With bond yields at today’s lows, the days of strong returns on local fixed income investments are probably over. Encouraged by the strong Philippine economy, investors are adding risk to their portfolios by buying stocks, consequently driving share prices and stock valuations toward the high heavens.
So, if both bonds and stocks don’t look so cheap anymore, what’s left for us investors to do? Firstly, there’s a need to be more selective in buying stocks—limiting purchases to inexpensive companies with rosy, long-term growth prospects. Alternatively, one should also consider investing in another asset class that benefits from the current “risk-on” investment mindset—property.
Buying property today means more than just buying a home. It has evolved into an accepted investment vehicle. Financial planners recommend real estate for enhancing the clients’ risk-adjusted returns, while retirees use it to add predictable income—against uncertainties from insufficient social security allowances or from a lack of defined retirement benefits.
Fund managers also include real estate as an asset class in determining their asset allocations. Property helps to manage risk by diversifying investment portfolios—due to a low correlation to stocks and bonds (especially in volatile markets), while also acting as a hedge against inflation. Higher acquisition costs from buying real estate can likewise be offset by the absence of annual management fees associated with a stock or bond portfolio.
Perhaps the best reason for investing in Philippine real estate is that the growth drivers are firmly in place. The business process outsourcing industry is alive and well, anchoring a captive market for office space, while providing jobs for would-be property-owners. Overseas Filipino worker remittances are resilient and will continue to bolster the market for homes. The government has prioritized infrastructure development and tourism, which support expanding medium-term demand for property, amid naysayers’ claim of a bubble forming in residential condominiums.
So how can we invest in real estate? One way is to simply buy property and then renting it out to a tenant, to generate a decent return or yield. The owner pays for the mortgage, property maintenance costs and taxes. He then charges the tenant rent—to cover the costs or to produce a monthly profit. Rental yield (annual rent divided by property cost) at Bonifacio Global City, for example, can reach as high as 10 percent. With Philippine real estate values rising throughout history, it’s also likely that the property would appreciate over the life of the mortgage, benefitting the landlord with a higher-valued asset.
Others choose to engage in real estate trading. Property “traders” buy the assets and hold them for a short period (three to six months), with the intent of selling them at a profit. This is also called “flipping” and is premised on buying massively undervalued real estate in hot markets. Another type of “flipper” earns by buying reasonably priced assets and adds value by renovating them, which implies a longer holding period, depending on the scope of the improvements. This can be risky, if selling becomes difficult in a bad market.
Another option (by next year, hopefully) is to invest in Philippine REIT or real estate investment trust. These are instruments issued by corporations (or trusts) and traded on the stock exchange. Companies issuing REITs use the proceeds to purchase and operate income properties. These companies are then required to pay out at least 90 percent of taxable profits to REIT owners in the form of dividends. REITs are attractive because they are more liquid than actual property and enable investors to access non-residential real estate (i.e. office buildings, malls). They also appeal to equities investors who want regular income, similar to cash dividend-paying stocks.
The most promising segment of real estate is probably office space, where there is a glaring tightness of supply and heightened demand from BPOs and financial services companies. Over the last two quarters alone, rents in Makati and Mandaluyong have already climbed 20 percent. Yet, according to real estate service company Jones Lang LaSalle Leechiu (JLLL), Manila office rents, currently at an estimated $220 per square meter per year for Grade A projects (also according to JLLL), remain one of the cheapest in Asia—more expensive only than Jakarta, Kuala Lumpur and Bangkok. This bodes well for companies like Megaworld, SM and Ayala Land which corner just less than half of the total supply of office space. More upside here, we reckon.
In the residential segment, the growth drivers mentioned earlier suggest that if a bubble is indeed forming (given 17,000 units of additional supply in the next five years), it may not happen anytime soon. To become a successful property investor, it’s important to choose a good location (i.e. Makati CBD, Global City, Sta. Rosa Laguna) and a developer with a strong reputation (i.e. Ayala Land, SM, Greenfield). During times of crisis, you want a developer with proven capacity to build and deliver the house or condo you paid for, even under bad market conditions.
As for investing in property stocks, I also like companies with an affinity for leisure tourism and retail-- another massive growth area. In this space, under-the-radar developers like Global Estate Resorts, Inc. (GERI), Shang Properties (SHNG) and Robinsons Land (RLC) stand out, presenting an elusive combination of strong growth and at a reasonable price. GERI has promising core projects in Boracay and Tagaytay, while both SHNG and RLC have significant interests in shopping malls and hotels.
In the end, it helps to carefully consider real estate and other alternative investments, to tap a wealth of opportunities outside our traditional channels of equities and fixed income. As Gus Fring of AMC’s captivating TV series, Breaking Bad, astutely put it: “You are a wealthy man now. One must learn to be rich. To be poor, anyone can manage.”
The author is the investments director and equities portfolio manager and is a member of the investment committee of Maybank ATR KimEng Capital Partners Inc.—Trust, a part of the ATR KimEng Asset Management Group. The opinion expressed in this article is the author’s and may not necessarily reflect the views of ATR KimEng Asset Management. For comments, you may e-mail him at julian.tarrobago@atram.com.ph.
By: Julian P. Tarrobago Jr. / Bull Session
Business Mirror
Sunday, September 16, 2012
BusinessMirror.com.ph
