See also owning property^simple REIT

I often hear people say “if as you said this investment scores high on so many aspects and without serious low scores, then price must be high“. Basically they don’t believe there are bargains. But there are bargains!

One of the (possibly biggest) underlying factors is the combination of “unfamiliar uncertainty + mind share”, which is a form of financial risk. Uncertainty by itself is common — credit risk and market risk are all uncertainties but better understood.

Indeed, if all attractive assets are well known to all investors, then yes they would be expensive. In reality, there’s highly uneven distribution of information, so some good assets get very low mind-share. The lesser known assets and locations are seen as less reliable, less understood, less researched, less predictable and significantly more risky.

For an example of well understood, front page, uncertainty (rather than unfamiliar uncertainty), consider USD before rate hike. Is the prospect of rate hike fully priced into USD? I doubt it. You say “if people are so sure about the rate hike, then USD must be expensive already”. On the day of rate hike, USD still shoots up. Before the rate hike, there was significant uncertainty about the rate hike, depressing the price. This uncertainty is Not unfamiliar.

Now let’s look at unfamiliar uncertainties.

A simple example is Jill Lim’s real estate products with guaranteed returns + principal protection. Credit risk is the only risk. The debtor is unfamiliar, so pricing isn’t expensive in terms of guaranteed return. (Some investors would still say pricing is too high. They ignore that a bank product would give 2% p.a. guaranteed return over 2Y, rather than 12%.)

Now Consider a property in a remote part of Cambodia. We know the country is politically stable and on an upward trajectory, not yet taking off. A lot of upward potential in valuation. But this good part is not priced in. The uncertainty is very high — we have no confidence about the promised take-off, esp. in this remote location.

Now consider downtown Phnom Penh. You see the development under way — Less uncertainty, but still the number of people who can see the positive signs is a fraction compared to that of Singapore. This location is not seen as a safe bet compared to other countries. Therefore demand is significantly lower.

Now consider the Phnom Penh shop unit with rental guarantee — Less uncertainty, but many people still question the reliability of the guarantee, due to unfamiliarity of the developer. Also, there’s very high uncertainty if this location can reach 25% of Beijing’s valuation. Once again, attractive, but price depressed by unfamiliarity and uncertainty and very poor mind-share.

Now consider the Philippines esp. BGC — 20 years more developed than Phnom Penh, similar to Singapore CBD — lower uncertainty. Developer is a more familiar name. BGC condos are attractive to many, so bid mind-share. Some people say the price is already inflated, but still the uncertainty and unfamiliarity are both high. Investors who see the positive signs are willing but most casual observers aren’t — mind-share issue.

Now what if the asset is denominated in USD? One uncertainty removed, but essentially the same situation.

If a property/asset is familiar to many, and likely to appreciate, then i agree the price will be very high — consider  HK, Shanghai, Ldn. The determined skeptic would still find uncertainties in these locations. Nothing is 100% sure to appreciate. A 90%-sure-thing would be pushed very high until there’s very little upward potential.

Illustration — Consider a fictitious stock with consistent dividend history + growth potential. The price would be high. See my post about dividend and growth potential

Illustration — unfamiliarity and uncertainty keeps the demand lower in emerging property markets. Very few investors bother to research on these locations. Most property investors prefer the familiar market in home country. Familiarity is one of the biggest driving forces behind property demand. As a result, Singapore, HK, Shanghai, Beijing… have too many affluent investors drawn to properties. They know the local market so well they bid up the prices beyond global cities like London, New York, Sydney, Toronto.