Real estate as a hedge against inflation

For the last year or more, I kept hearing and reading the word "deleveraging". Companies and individuals are all busy deleveraging. So, basically, people are saving more money, paying off their debts and spending less. Overall, it gives an impression that leveraging is undesirable and should be done away with.

Marc Faber famously said that, in Asia, the family run businesses in Hong Kong and Singapore have very little debt. Many rich families in Singapore don't have any mortgages. He thinks that Asian real estate will continue to do well. This gels with what Jim Rogers thinks about how we should own some real estate and he, in a recent interview in New York, actually said that he would buy some US real estate now if he were staying there.

In my posts on the subject of gold, I mentioned that I buy gold as a hedge against inflation and that I do not trade gold. We could also buy other tangible assets which would keep pace with or grow faster than inflation and protect or grow our wealth in the process. However, most of us are not in the same league as Marc Faber or the rich families he mentioned.

So, what are we to do if we want a piece of the action and own some Asian real estate? Do we work very hard to save money before we buy that piece of real estate? 100% cash upfront and without a housing loan? Or do we put down 20% and borrow 80%?

Quite simply, like any other investment, the answer lies in timing. Buy when the market is depressed or just turning up and hold for the long term. If you believe that the world is going to see extraordinary inflation in future, this is one thing we should do if we have the means. If we have the money, pay 100% cash upfront. If we only have 20% to <100% of the value, take a housing loan for the balance. As an example, I bought private real estate 6 years ago and took a loan for 80% of the price. The valuation is now 80% higher. If I were to rent it out, I would realise a yield of 7% p.a. This is much higher than the interest rate on the bank loan I'm servicing. Capital appreciation plus steady passive income. Sounds like a high yield stock? Sure does. Having said this, we have to keep an eye on the interest rates. If that goes up significantly and we do not have the means to pare down the outstanding loan amount drastically, it might be time to let go. If I had told myself 6 years ago that I should work harder and save more money before taking the plunge, I would have worked harder, saved more money but ended up poorer. The next time the property market has a correction in price, bear this in mind and take the plunge, if you have not done so already. Inflation is a powerful force. If we have the means, we must do all we can to protect ourselves against it. Buy Japanese real estate

Buy Japanese real estate

Marc Faber has been bullish on Japan for some time and recently in an interview with The Economic Times, he said, "I think as a contrarian, you really want the contrarian play. You should buy Japanese stocks and Japanese banks. This is the absolute contrarian play. Nobody is interested in Japan, all the funds have withdrawn money from Japan, they have given up on Japan."

Japanese real estate peaked in early 1991 and has been on a decline since. Believe it or not, the price of real estate in the 6 biggest cities in Japan have fallen by 50% or more while the decline in other parts of Japan is around 30%. Imagine buying a piece of real estate and almost 20 years later, you find that it's worth 50% less in NOMINAL terms. Imagine what's the REAL value lost. No wonder many Japanese do not want to buy real estate. However, it's precisely when everyone is so bearish that we should be interested.

Japanese land price fell from 1991 to 2005 unabated and rose in 2006 and 2007 before falling again. The Japanese real estate market is oversold and unloved. However, with Japan coming out of a recession and optimism returning, things are set to improve. If you could visualise this graphically, we might be getting a classic double bottom pattern!

From an article in Property Wire on 30 May 09:
There is growing speculation the Japanese property market has bottomed out with analysts forecasting an improvement in the economy. Credit Suisse Group AG said that property manager Nomura Real Estate Holdings operations are improving. Analysts said that the company's condominium, investment and brokerage operations are outperforming expectations.

From another article on 19 Jun 09:
The property market in Tokyo is set to rebound as easier credit and low prices entice overseas investors back to the Japanese capital, according to a leading banker. Kazuo Tanabe, president of Chuo Mitsui Trust Holdings, Japan's sixth largest bank, said that foreign buyers are showing a lot of interest in acquiring Japanese property. 'We are seeing more deals as prices bottom out and investors think that it's time to buy,' he said. Property transactions being negotiated now are up as much as 30% from last year, added Tanabe, as Japanese firms and individuals also seek to buy.

From an article on 18 Jul 09:
Giant investment funds are poised to start buying Japanese property in the first half of next year when prices are expected to be at rock bottom, it is claimed. Global investors including Carlyle Group, Blackstone Group and Lone Star Funds are still waiting for prices to drop a bit further, according to Ben Duncan, managing director of CB Richard Ellis Japan. 'The market is steering toward big, opportunistic funds. They're waiting for prices to fall further. At the moment they are not seeing as much distress as they hope for. But as the market starts to bottom out they'll probably start to buy,' he explained.

We have a chance to own Japanese real estate in Singapore at a bargain too. Yes, you guessed it, buy units in Saizen REIT! Buying Japanese real estate at this time is attractive because we are buying real estate with more than decent rental income on the cheap. Well, it's not as cheap as it was earlier this year but things are a lot clearer and there is much less risk now.

Although rents have declined since 1995, property prices dropped at a faster pace in the same period. From 1995 to 2008, rents fell by 11.2% while property prices slid 35%, according to JREI. With property prices falling, young people tend to prefer renting, while individuals migrating to urban areas from rural areas create another source of rental demand. (Source: Global Property Guide, 22 Oct 09)
Passive income with high yields: Saizen REIT

Real value of gold

To look at gold as a hedge against inflation, we have to look at the real value of gold over time. For example, if someone bought gold at the peak in 1980, he would still have lost money after taking inflation into consideration today.

If someone had bought gold in 1914, he would have gained about 200% in the course of the last century after taking inflation into consideration. It is not an amazing return.

Everything must be put in context. I am a buyer of gold today but I will be a seller of gold one day, I'm quite sure.

With US government printing money and with almost 0% interest rate, inflation is likely to become a serious problem in future. As mentioned by Jim Rogers many times over, gold will probably see US$2,000 an ounce again.

The following chart is taken from an article on inflation adjusted value of gold by Barry Ritholtz - October 7th, 2009, 11:30AM: