Hey guys,
I was having a discussion the other day with one of our Singapore clients who was asking what really makes property such a reliable investment.
Wei Chen is such a direct guy, I love it, he says to me, “Brett, without all the rubbish that these exhibition sales people are giving? Why should I invest in property, what makes it so much more reliable than say shares or other investments?”
So I took him back to real estate fundamentals 101: the investment guide real reasons behind why property is so great.
You've probably heard of supply and demand, you've probably heard of leveraging through a mortgage, you may have even heard of its inflation hedging quality but that's not really the story why property, all property, is such a good investment.
Here's my response to Wei, there are four basic fundamentals that make property great and why you should invest in property.
Fundamental 1 – Property is a long lasting asset
Arlene, my wife is an expert in food, she judges at the Quality Food awards and is a keynote speaker on food quality and safety in the UK. Her job deals in products that at best might have a shelf life of 5 years, and that's only if you cook it at high temperatures and package it in a can with 20 different chemicals and preservatives. Her ‘asset' is a very short term asset and therefore suffers from high levels of write-offs.
In fact most people wouldn't call food an asset because its such a short term thing, it would referred to as a consumable, only on the balance sheet can it share same column of asset with property but even then its called a ‘current asset' but most times its classified as stock and cost of ‘goods' sold.
Not property… only property and some machinery will go into the long-term asset category.
Property takes a long time to destroy or perish, take concrete for instance; the general time (if done properly) for it to last is over 100 years, wood, as long as its painted and kept in good condition will last 100 years, steel, tiles, iron, and the many other raw materials that go into property mean that some properties can last hundreds of years.
Take a walk down Amsterdam (not for that reason) look up at the year that each building was built and you'll see they have stood the test of time (hundreds of years).
So property's first fundamental is that its long lasting.
A footnote is all the builders who are saying “They don't build them like they used to.” you are exactly correct, we don't build like we used to nowadays the requirements for what people want changes with technology and various social issues such as divorce, downsizing and urbanisation and moves to city living. Regardless even the most pessimistic builder will agree that 50 years is totally acceptable. You can make a lot of money in 50 years in property.
Fundamental 2 – Land appreciates in value over time
This is probably the fundamental you are most familiar with, its touted from the hills by gurus everywhere and to a large degree they are correct. “Land: they aren't making anymore of it” one of my mentors used to say.
Its true though, economics by definition is the study of the allocation of scare resources against infinite needs.
Land is a finite resource, and although as we look around we see lots of spare ground we actually only want to live on a small portion of the land mass. This small portion is where the fundamentals are – the shops, schools, transport links, major employers and major investment.
Because the population is growing and because land with fundamentals is finite land appreciates over the long term.
This is fundamental number 2 – land appreciates over time.
Fundamental 3 – Labour costs increase over time and Fundamental 4 – Building materials cost increase over time
We'll deal with these together as the root of the fundamental is exactly the same thing.
These two fundamentals are probably the most overlooked and least understood. Unless you are a builder who are only too aware of the rising costs of materials and labour. In fact many newbie developers fail because they forget to account for the time factor between costing a project and actually paying for the goods.
We live in an inflationary society. Whether we like it or not all countries around the world have gone off the gold standard and this causes inflation. Well, governments' overspending and then printing money to pay for it actually causes inflation but that's another story.
Printing more money causes the prices of things to increase so the replacement value of your property-the building materials and the labour to build it-are going to increase in price.
So the replacement value increases it making it more expensive to build a new property than an old one. So more people want a second hand property and therefore the supply and demand issue begins to drive up the price on second hand property.
This will continue until it becomes better value to buy a new property and the cycle starts again.
Regardless, fundamentals three and four mean your property is assured of increasing in value over time.
These are textbook answers to the question and yet I would hazard a guess that most property experts would not know these. The industry perpetuates anything that helps sales and often these (what I think are simple concepts) are too complex to use for sales.
Yet they sit at the base of all property investments working away in silence moment by moment, year after year. There really has never been an asset that has created so much wealth for so many people.
Live with passion,
Brett Alegre-Wood
