Real Estate - an alternative investment

?? ??ê÷ê￠  By Roy Phua????Asia's all enduring preoccupation with real estate is undergoing a reality check as a conse-quence of the economiccrisis. Private residen-tial property prices in Singapore, have collapsed by over 45% from its peak in for example, 1996. The shock and dismay of die-hard real estate believersis not surprising. For many, however, the rationale that underpinned that real estate investment is showing surprising flaws. Arguments such as "land is finite" persuade in boom years, but are now denounced by some as intellectual garbage. The long-term prospects of real estateinvestment, while not entirely mis-placed, are subject to investment cycles, interest rates and changes in government policies, like all other forms of investments. Putting all of one's investment eggs in the property basket, as many Asians have been inclined to do in recent years, is unlikely to hatch a balanced invest-ment strategy. This article examines the possi-bilities.????Real estate investments are very long term in nature andpossess two important characte-ristics that are often less than understood: leverage and illiquidity. These factors accen-tuate the capital gains on real estate in boom times and magnify the loss on the downturn. If one were to invest $200,000 (borrowing $500,000) to purchase a $700,000 property for example, a simple 10% rise in property price a year would translate into about a 21% return on the originalinvestment, net of interest expense assumed at 5.5% p.a.. With that same interest assumption, a 10% fall in property price how-ever would translate into a loss of about 48% on that same $200,000 investment, the tragic con-sequence of leverage working in reverse. The illiquidity of real estate is another important factor for consideration. Exiting a real estate in-vestment often requires time and patience, par-ticularly so in a less favourable environment. The average investor needs to consider the sheer amount of the financial investment and the uni-queness of each property asset. The illiquidity limits the flexibility investors havewhen they need to realign their investments in accordance with changing market conditions or changes in investment needs.????The long-term nature of real estate in-vesting requires it to be matched with stable, long-term cash flows. Assumptions on income growth, interest rate trend and rentalyields are important, and when they do not materialise as planned (or hoped for), the investment goes awry. In addition, the size of the upfront capital commitment in realestate investing makes di-versification within the asset class difficult to achieve. The real estate investor has the bulk of his investments locked into a few properties. Seen from this perspective, real estate investing can be a high risk ve