TODAY Online : The risks of investing

The risks of investing

Factors that may damp your return

05:55 AM Dec 05, 2009

by Tan Hui Leng

SINGAPORE - Tangible, stable and a hedge against inflation - the appeal of residential property investment is undeniable, particularly in Singapore. Its downside, however, is less often discussed.

In a world survey of 2,000 high-net-worth individuals commissioned by Barclays Wealth and conducted by the Economist Intelligence Unit in August and September this year, property is indeed an investment of choice, but the risks are apparent even among the rich in Singapore.

Of the 125 polled here, the cost of upkeep is the top disadvantage in holding a residential property, with 44 per cent of respondents giving the factor the thumbs down. In second place, with 35 per cent of the votes, are high transaction costs. Third place goes to the volatility of property prices, emotions getting in the way and volatility of tenant demand with each factor getting 26 per cent of votes.

While potential for rental income and capital gains are the top two reasons for investing in residential property, Barclays Wealth cautioned against being too bullish on the sector.

Barclays Wealth said this is because although residential property does offer some diversification possibilities, investors do not always think about this characteristic as systematically as they might with other assets - some investors, for example, would have a concentration of their portfolio in just one or two prestige properties.

The disposal and exit strategy for residential property is also more difficult.

"Residential property has a special place in private investors' hearts, as well as their portfolios," said Barclays Wealth in its report. "For a wealthy investor, residential property is seldom treated simply as an asset."

Savills research director Yolande Barnes, whom the Economist Intelligence Unit interviewed, said: "Clearly, it is an investment asset. And there is an element of utility as people live in these properties. But there are also elements of lifestyle, luxury and fashion that play a role in the decision. Buyers tend to have a strong, often intense, emotional connection with their houses, even if it is not their principal residence."

This means buyers may over-pay or fail to sell when there is a potentially-attractive return being offered in a sale.

"Vanity is a huge factor in the purchase of residential property, although buyer are reluctant to admit this," said Capricorn Investment Group partner Basil Demeroutis, who was quoted in the report.

"There are clearly so many other reasons that people buy property besides as an investment, although they may say that it is an investment."

Head of the Rey/Nouvion family office in Monaco, Laurent Nouvion, highlights the importance of getting appropriate advice, and taking the opinions with a pinch of salt. "You often find when your property is being sold that the agent tells you that the property is a mediocre one, but if you are on the buyer side, it's suddenly the world's best," he added in the report.


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Why they won't

According to a survey of 125 high-net-worth Singaporeans:

05:55 AM Dec 05, 2009

by Tan Hui Leng

44% Cost of upkeep

35% High transaction costs

26% Volatility of property prices

26% Emotions get in the way

26% Volatility of tenant demand

24% Asset is relatively illiquid