Do Crazy Rich Asians only invest in real estate?

Property vs stocks: Is real estate a better investment?

Unless you've been living in a cave, it's probably safe to say that even if you haven't watched Crazy Rich Asians, you've heard about it. It's both a depiction of the life of the 0.1% and a marketing coup for the Singapore Tourism Board. The Youngs are absurdly rich, and one of the most opulent symbols of their wealth is the matriarch's family mansion at Tyersall Park in Singapore. It's an over-the-top, sprawling home in Peranakan style, and so secluded that it can't be found on Google Maps.

Owning real estate, or in this case, a mega-mansion, has always been a status symbol in Asia. It's heralded as the “best” way to grow your wealth, and if all else fails, it's a fixed asset and a roof over your head. Many real “Crazy Rich Asians” have indeed built their fortunes on real estate. But is it really better than investing in the financial markets?

What to know about property investing

You might think that Hong Kong real estate blew stocks out of the water, but this is a misconception.

We often hear enviable “get rich” stories on fabulous property purchases. However, investing in real estate is not always straightforward.

Here are some things to think about when investing in property, especially in an elevated interest rate environment:

1. Leverage

This is perhaps the largest driver of outsized equity returns in owning real estate, and also the biggest trigger for the 2008 Global Financial Crisis.

Let's say you make a S$250,000 down payment for a S$1 million property in Singapore, and the value subsequently goes up by 10% or $100,000 to S$1.1 million. You would have effectively made a return of 40% on your initial investment, excluding any interest costs and other costs involved.

But remember, leverage is a double-edged sword that will also amplify your losses in a downturn. In the same example, if the value of your property goes down by 10%, to S$900,000, you would have effectively made a 40% loss on that same investment. It is unlikely you will lever your investment portfolio 4x, but there are more complex investment products such as the “infamous” Lehman minibond accumulators that surprised many individual investors with amplified losses.

2. Liquidity

Investment products such as stocks, bonds, and unit trusts (also known as mutual funds) are far more liquid than real estate investments, and their prices are transparent. You can buy or sell stocks any time during market hours, and you can see the bid/offer spread on your screen. For unit trusts, there is a daily net asset value (NAV) on trading days — the NAV is the clearing price for any buy or sell transactions.

On the other hand, for real estate, you can list a property for months without any buyers, or perhaps the best "offer" for your property might turn out to be vastly different from the last transacted price or what you had expected.

That said, the ease of trading stocks also means that you are more prone to poor behaviour and the whims of your emotions. It's far easier to sell off your stocks in a panic — all you need is a few clicks. You can't really sell a property in five minutes.

3. Diversification

Adding real estate as an asset class to your overall investment portfolio can offer diversification benefits. However, unless you are in fact a Crazy Rich Asian who can afford properties in different cities around the world, it's difficult to diversify within your real estate investments.

For most of us, buying one property may already make up the majority of our net worth. It's much easier to diversify when you invest in stocks — you can buy shares of a globally diversified fund with thousands of holdings with just a small amount of cash.

Learn more: The power of diversification in investing

4. Income

Both stocks and real estate investments can generate steady income from dividends and rental income respectively. There are different risks involved: dividend payouts are not guaranteed, and the amounts are subject to the underlying company's discretion.

Rental yield, meanwhile, is subject to the supply and demand dynamics of the real estate market.  There can be periods when your property may not be rented out. Rental income from property investment is therefore not always guaranteed. For instance, a tenant may need to terminate the lease early if they’re suddenly moving out of town, which means the landlord will need to look for a new tenant. Or, when the overall rent levels in the neighbourhood are falling, the tenant may ask for a reduction in their rents. Repairs for unforeseen damage to the property can also add to the costs of being a landlord and may even render the property temporarily unlivable.

Read more: Passive investing in Singapore: ideas to generate more income

5. Holding and transaction costs

There is a cost to holding real estate — you have to pay maintenance fees, utility bills, insurance, property taxes, and more. It can also involve hands-on work — you may have to deal with leaking air-conditioning units, clogged bathrooms, or pest infestations in the garden. Transaction costs are also much higher for real estate as compared to the financial markets — Singapore property agents on average charge about 2% to broker transactions, and there are additional stamp duty costs to consider as well.

To be sure, investing in stocks, bonds, and funds also come with transaction costs. For unit trusts, the problem with the industry today is that traditional distribution channels such as banks still charge for subscription fees and receive implicit trailer fees (or sales commissions) from the product issuers. Brokerage platforms also have execution fees or platform fees. Such high fees can add up and eat into your investment returns.

Endowus, as your independent financial advisor, is therefore committed to offering our clients pricing that is low, transparent, and aligned with your interests. Our clients can invest at the lowest-achievable cost, as we help them access the "clean" share class of funds — the institutional share class, which is free from trailer fees. In cases where the institutional share-class is not accessible, we make available the retail share class while providing the industry-first 100% Cashback on trailer fee commissions.

Read more: Unit trust fees are a mystery — they shouldn't be

Finding the right investment mix for your financial and life goals

There are benefits to investing in real estate as part of your investment portfolio, such as further portfolio diversification. However, there are also pitfalls such as low liquidity and additional transaction costs.

There are often misconceptions, especially within Asia, that real estate investments are a “sure bet” and will always give stronger returns than stocks do, as investors expect to be compensated for the illiquidity and higher transaction costs. But that is not always the case.

Real estate and equities, as individual asset classes, actually offer similar annualised return profiles of 7% to 8% per annum over the long term, according to a research study, The Rate of Return on Everything, 1870-2025, which dug through decades of data. The researchers looked at 16 advanced economies over 145 years; they adjusted the returns for inflation, and included dividend income for equity returns and rental income for residential real estate returns.

There are real estate tycoons and stock market tycoons. Real estate forces you to behave as a "good investor" given its frictions. Imagine if you had the same frictions when it came to investing in the stock market!

All in all, both real estate and publicly traded securities are better investments than keeping your cash idle in a bank savings account. You just have to understand how both can have a place in your investment portfolio and in your life. Owning properties may be the Asian dream, but there are alternatives to think about before diving in.

To get started with Endowus, click here.

Read more about Singapore property and property investing:

• With rising interest rates, should housing loans be repaid early?
• Facing up to rising mortgage rates
• Planning your finances before applying for a HDB BTO flat

<divider><divider>

This article is for information purposes only and should not be considered as an offer, solicitation or advice for the purchase or sale of any investment products. It is recommended that you seek financial advice as to the suitability of any investment. Whilst Endowus Singapore Pte. Ltd. (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.

Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Opinions expressed herein are subject to change without notice.  

Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance.

Please note that the above information does not purport to be all-inclusive or to contain all the information that you may need in order to make an informed decision. The information contained herein is not intended, and should not be construed, as legal, tax, regulatory, accounting or financial advice.