Safe Havens in Turbulent Times

By Ku Swee Yong

In the first half of August, a few days after Standard & Poor‟s downgraded US debt and caused a 600-point drop in the US stock market, a related entity S&P Equity Research published their stock recommendations which consisted of big names such as General Electric, PepsiCo, McDonalds, Abbott Laboratories, etc.

This list of high quality companies were selected based on S&P Equity‟s opinion that investors should stick to traditional matrices such as dividend, consistent profits, strong cash flow,minimal debt, large cash reserves, etc. Given the seesawing equities markets,they recommend that investors go back to basics and examine fundamentals. The thin ray of positive light coming from the US is for interest rates to remain low over the next two years, hopefully on the back of a US recovery. Let‟s not  forget that troubles in Europe and Japan may delay the US recovery by some more.

 
Are there safe havens in Singapore property?

Citibank analysts Wendy Koh and Tan Chun Keong published their views on the Singapore property sector and stated that in the current environment, they prefer “defensive” stocks, reiterating their preference for REITs which have outperformed the broader market. In that publication of 11 Aug 2011, they stated that Federal Reserve‟s pledge to keep US interest rate sat record lows until mid-2013 will benefit REITs through low interest costs which can possibly widen profit margins.  

Furthermore, since the Lehman Crisis 3 years ago,the Singapore REITs have maintained average debt-to-asset ratios which are a little above 30%, i.e. they have a lot more room to leverage for acquisitions if attractively prized assets could be found. Similar to the recommendations by S&P Equity Research for the US stocks, S-REITs are preferred by Citibank for their strong cash flow, dividend streams and low debt. There are investors who still want to invest in residential products because keeping cash is simply frustrating, when the cash is generating negative real returns. But turbulence and air pockets lie ahead. The rough patch may last

over the next 2 years, or even longer and we need to select products that can weather the storm.

What are the safer choices in physical real estate?

Therefore, if REITs are considered “safe haven stocks” in the equities world, what might be considered “safe haven properties” in physical real estate? I risk sounding like a broken record,  always recommending boring products but in my mind, the characteristics of “safe haven” properties translate to:

1.Freehold or 999-year leasehold properties

2. Trading at more than 10% discount relative to other projects within walking distance

3. Comes with a good quality tenancy contract of at least 3% gross rental yield With the prices rising faster in the outskirts of Singapore, and  prices of older freehold properties in D9, 10, 11 being stagnant, my choice targets are centered around properties in the CCR. Based on the above attributes, examples of properties that qualify might be: Aspen Heights, Valley Park, Mirage Tower, Palm Spring, Spanish Village, Holland Peak, etc.

And given the low interest rates over the next 2 or more years,investors can consider taking on some borrowings to boost the cash-on-cash returns.However, leaning on the side of conservatism and allowing some space for errors,an investor can borrow at between 50-70% of the property value and still sleep soundly even if the downpour should become a thunderstorm.

Recent GDP numbers for developed nations such as Japan, Germany and even Singapore are showing signs of weakness. There might be technical recessions in several countries, including the US. As one of my clients puts it succinctly, “For most global investors, it is back to basics again: food,energy and accommodation.”

No matter how heavy the rain is, we need to eat, we need basic utilities and we need a roof over our heads.

By Ku Swee Yong, founder of real estate agency International Property Advisor, which provides services to high net worth individuals.