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The GOOD. The BAD. The UGLY. How to assess the strength and validity of investment opportunities By Colin Chu

The world of investments is represented by a myriad of asset classes from property to equities and commodities like gold, oil, wine or even alternatives such as land and plantations. Just as the Chinese have found ways to gamble on any and every thing, vendors of investment schemes have figured that as long as there is a way to organise investors and attract them with the potential of a profit higher than your usual deposit interest, they got a game for you.

Every salesperson you speak to has a story crafted about the background of the asset, the potential returns and the assurance that your money will be safe. Some will go as far as to say that their high return investments are risk-free.

Sadly, many of these investments end up as disappointments. Just ask anyone who participated in EcoHouse, Gold Guarantee, CTL, Sunshine Empire, EdgeWorth, Profitable plots, Suisse International etc. In fact, I have personally paid my school fees with a wine investment scheme in 2012. And I suspect there will be many more to come with investments from bird nest to ostriches, coal mines to fishing boats.

To be fair, there are good operators who truly look after their clients’ interests and help people achieve their wealth goals. But they are few and far in between.

So then, how can investors distinguish between good or bad operators? Or specifically, what are the factors an investor should consider before making a decision to invest.

Let me go briefly into three main factors that we at RunningStream use to assess investment opportunities, and hopefully that will help you along your investment journey.

1. OWNERSHIP

Simply put, do you own the asset? And by ownership we mean are you in control or can control be exerted at will and with ease on the asset? As simple it may sound, many have fallen to schemes with shaky ownership structures. Do you own the legal rights? Can the legal rights be enforced? Without the ability to enforce, the ownership is but a toothless tiger. Also note that the right to enforce can be

PROPERTYINSIGHT

Abandoned buildings across UK presented to Asian investors as undervalued, heritage properties to be refurbished into luxury real estate. Most never did happen and investors are left with derelict buildings of little value.

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obstructed in many ways such as company structure, legal framework, costs of enforcement and time to enforce. Not to mention other issues such as the culture of the land and people.

The key weakness often lies in the structure of the investments. The simpler it is being represented to the investor and the more assured it is, chances are it will be more complex in structure. This allows the vendor to slip a lot of unknowns into it, leaving investors to carry the risks.

2. PROFIT

Since we are talking about investments, naturally profit is key. But what kind of profit are we talking about here? The ones that the vendor is promising? Or the market is delivering?

There is obviously a significant difference. We find that investors are often more inclined to believe the illusion that vendors are promising (be it yield or growth) instead of the reality that the market is actually delivering.

Always know the different between Return on Asset (RoA) and Return on Capital (RoC). For example, a S$120k product with a 10% yield without leverage will actually get you half the money that a $600k product with 4% yield and 80% leverage. If you can’t figure that out, you should really go sit in a corner and think about it. Or you can give us a call.

And by the way, we always tell investors to look beyond yield. For the simple reason that we have not yet met any property investor who got rich through yield. It is always about capital growth.

But don’t you find it strange that Singapore investors always look for guaranteed yield but spare no regard (or research) for the growth story? Not that its wrong, but is that the right strategy for you?

3. MANAGEABILITY

Now this is one factor that always gets neglected. Property assets are often for long term and directly managed. That means it requires active participation from the investor. If it is challenging to manage or there is a lack of professional management assistance then frustration almost always lead to the asset being abandoned before it flourishes. And there goes the potential profits.

That said, there are times where exiting is the right move. But more importantly, buying right is often an even better move.

CONCLUSION

Working here at RunningStream, we often meet people who share with us their frustrating stories of investments gone wrong. It is rather sad hearing them as there's not much they can do when an investment goes south. Most vendors would have covered themselves well.

Investment is something that you defend from the start. It is seldom defensible when it goes sour. That is why knowledge and diligence are critical. I hope through this article we have helped you a little more, and perhaps save you from becoming another heartbreaking statistic.

“…what kind of profit are we talking about here? The ones that the vendor is promising? Or the market is delivering?… we find that investors are often more inclined to believe the illusion that vendors are promising (be it yield or growth) instead of the reality that market is delivering. - Colin Chu

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Recently we have had quite some inquiries from clients on the Japanese market, which explains our recent event where we brought in a Japanese expert to share with our investors about the present situation and forecast. We do have our reservations about investing in the Japanese market and surprisingly the expert does share our perspective and agrees that Japan is a unique market which may not be suitable for everyone.

The resurgence of the Japanese market is something I am very familiar with. It was the biggest market event in 2013 while I was working in a private bank. So I had front row seats watching it happen. It started in December 2012 with the re-election of Prime Minister Shinzo Abe with promises to revive Japan’s ailing economy. This led markets to coin the infamous term Abenomics. With the advantage of hindsight, we can see that Abenomics had significant positive impact on the economy, with weaker yen and quantitative easing measures.

This spotlight on Japan, has led to strong foreign investment interest from many institutions and individuals hoping for the revival of the market. Entering through both stocks and real estate, many early investors have seen strong capital gains. Sadly these gains were muted by the greatly depreciated yen.

Analysing markets and looking at the myriad of factors affecting real estate prices is one of my responsibility in the company. What greatly concerns me about Japan is the severe ageing population. 1 in 4 are over 65. Present population of 127mil looks to fall to 107mil by 2040 and 97mil in 2050. This is something which affects the country’s overall GDP growth and housing demand. Already current national vacancy rate (May 2015) stands at 14% with more than 8mil homes standing empty.

That said, we still see people entering the market. Largely due to reasons which we will address as follows.

We see a rather bullish sentiment from investors towards Tokyo due to its relatively cheap historical prices. However if we were to take a page out of the history books on the Japanese property market, one of the worst property

crashes in modern times actually occurred in the 1980s. It was a frenzy of demand within the city’s limited physical terrain seeing residential land prices rise 45% between 1985 and 1986. Incredibly, prices more than doubled again over the next 12 months. Over three blazing years, the price of Tokyo residential land rose 299%. It was fuelled by largely credit provided by banks which in turn borrowed against their own growing stock market valuations, all of which led to an apocalyptic crash leaving many saddled with mortgages nearly twice the value of their property.

To many foreign investors the crash is but a distant memory. To many Japanese however, the pain runs deep. Many remain skeptical about buying and therefore choose to rent, resulting in a market driven by foreign investors.

The present cheap Yen is another reason. However property may not be the best platform to take advantage of it. Instead, consider one of the many FX platforms out there on the market and buy into Yen directly. Such is faster, cleaner, tax-free and low maintenance. To buy into property because of currency upside without potential growth is silly and more trouble than it is worth in my opinion.

Lastly - the upcoming Olympics. Honestly, if the past is any indicator, the Olympics has rarely benefitted its host cities. It usually causes disruptions to daily business and over-taxes the city’s transportation system and infrastructure, reducing overall productivity. The number of apartments being build in the vicinity of the Olympics venue leaves no doubt that oversupply definitely rise like the sun as well.

Japan was the first Asian country to reach developed country status, does have a special place in everyone’s heart with its unique culture, cuisine and people. That however can cloud investment decisions. Sadly, Japan is facing a lot of head winds, largely from its social customs, ageing population and closed society. To expect the tremendous growth once seen would be to discount the growing position of China and other major economies in the region. Investors do have to realise that the playing field is no longer what it used to be, and the growth might take a lot longer and rather anaemic in the years ahead.

An Insider Look Into Japan By Donovan Khoo

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CONTACT US For more information about what we do and if you would like to get in touch with our portfolio managers for a personal discussion on how you can too build a significant property portfolio for consistent passive income, contact us at:

Phone : +65 62249245 Email : portfolio@runningstream.com

UPCOMING EVENTS

Educational Events Join us in our various educational events where we constantly empower you with knowledge to become an effective investor.

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ABOUT RUNNINGSTREAM RunningStream started in 2006 from a passion for real estate investing. Being convinced with how well it works as an instrument to build long term wealth, our group of dynamic and like-minded professionals transformed this passion into a niche and efficient practice to help clients achieve their financial aspirations through real estate. With an unique concept that integrates real estate investments with the rigorous discipline and structure of financial planning, we created a company that has the right program, people, partners and projects to make investment success a certainty.

Recognising that the purpose of attaining prosperity must translate into sustainable quality living, the name RunningStream and the logo where we feature a tree prospering beside a flowing stream epitomises our mission to be a partner to the financial success of our clients so that they may enjoy the fruits in their lives.

Our ambition is to grow the company Asia-wide and be a dominant force in the market, elevating real estate investing from its current speculative and hype driven nature to become a structured practice to growing sustainable wealth.

Colin Chu, Senior Portfolio Manager

Donovan Khoo Portfolio Manager

Date Title

21 May 2015 6:30pm-9:00pm

RYRS Evening Networking : The Good. The Bad. The Ugly. Of Investing Overseas

28 May 2015 6:30pm-9:00pm

RYRS Evening Networking : The Good. The Bad. The Ugly. Of Investing Overseas

To find out more about events please visit our website at http://www.runningstream.com/events

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