Presented by Ishak Chandra

101

PROPERTYINVESTMENT

Sinar Mas Land Financial Workshop

Q &

A

Investment Alternatives

Return vs RiskHighlight

WHAT YOU WILL GET TODAY • Understand Alternative of

Investment• Understand what is Risk and

why we need to consider Investment Risk beside the Return

• Understand why Property is one of the Best Alternative for Investment

What is

investing?

Investing is a method of purchasing

assets to gain profit in the form of

reasonably predictable income (dividend, interest or rentals) and / or

appreciation over the long term

Burton G Malkiel – A Random Walk Down

Wall Street

What is investing?

A process of sacrificing NOWfor the prospect of Gaining

something later

TIME TODAY SACRIFICE

PROSPECTIVE GAIN

Preparing for a Career, such for going to College

Saving for major Purchase (first Home, Car, etc)

Preparing a “Rainy Day” fund for EMERGENCY (job lay off, etc)

Developing Personal Financial / Investment Plan

Starting Saving and Investment Program

Expected Return: the profit you think you will receive from an investment, in the form of Income from interest or dividends Increased value (capital gains)

Risk: the amount of uncertainty about the expected return, including the possibility that the investment may lose money or value, or become worthless

Liquidity: the ability to sell the investment quickly and at a fair price

Dividend (Stock)

Interest Income (Bank Saving / Private Lending, Bond)

Rental Income (Property)

Capital Gain (Stock)

Capital Appreciation (Property)

Inflation & Saving

INFLATION make your Value of the money

DECREASE over the year

WHICH ONE YOU PREFER ?

US$ 120 now Us$ 10 per month for 12 month

1.

US$ 1,000 now US$ 1,100 Next Year

2.

• Persistent INCREASE in the COST of GOODS & SERVICES• Persistent DECREASE in BUYING POWER of Money

Interest rate from saving usually is higher

than Inflation Rate

Interest Rate Inflation + Premium Risk =

4% 1%Big & Good Bank.

5% +=

Medium class bank

4% 2.5%6.5% +=

Small bank

4% 4%8% +=

Your value of Money is reduced if you are putting your money in the bank with current inflation rate

SO WE HAVE ANOTHER REASON WHY WE NEED TO DO INVESTING NOT ONLY DO SAVING

Power of

Compounding…

Power of Compounding?

• Your MONEY INVESTED will get RETURN

• Your RETURN will GAIN RETURN

• MORE MONEY you INVEST, the MORE you will get

An amount of Rp 1,000,000 which compounds @

15% after 30 years is worth, …………….. ????

The power of compounding can be expressed using the

following time value of money expression

FV= (PV) *(1+k)^n

Investing ….

FV = future value

PV = present value

K = rate of compounding

n = no. of years

Guess for Prize..

Power of Compounding it works…

Year InflationBank

SavingInv. A Inv. B Inv. C Inv. D

Return 5% 6% 9% 15% 20% 25%

0 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000

1 1,050,000 1,060,000 1,090,000 1,150,000 1,200,000 1,250,000

2 1,102,500 1,123,600 1,188,100 1,322,500 1,440,000 1,562,500

3 1,157,625 1,191,016 1,295,029 1,520,875 1,728,000 1,953,125

4 1,215,506 1,262,477 1,411,582 1,749,006 2,073,600 2,441,406

5 1,276,282 1,338,226 1,538,624 2,011,357 2,488,320 3,051,758

10 1,628,895 1,790,848 2,367,364 4,045,558 6,191,736 9,313,226

15 2,078,928 2,396,558 3,642,482 8,137,062 15,407,022 28,421,709

20 2,653,298 3,207,135 5,604,411 16,366,537 38,337,600 86,736,174

25 3,386,355 4,291,871 8,623,081 32,918,953 95,396,217 264,697,796

30 4,321,942 5,743,491 13,267,678 66,211,772 237,376,314 807,793,567

An amount of Rp 1,000,000 which compounds @ 15% after 30 years

is worth Rp. 66,211,772

Investment Alternatives

A. Paper Assets:• Stocks

• Bank Account

• Certificates of deposit

• Bonds

B. Tangible Assets:• Gold & Silver

• Art

• Real Estate

• Land

Cash Equivalent Saving (Saving Account, CD) – Safe & Liquid

Equity (Stocks) - offer dividend & capital appreciation.

Fixed Income Bonds -offer safe return.

Real estate, Land - offers rent & capital appreciation.

Precious metals (Gold, Silver) -appreciate over time and are a hedge against uncertainties.

Art work - appreciate over time.

Insurance - used as security against risk of uncertainties.

Saving Investment

OBJECTIVE Short Term need or Emergencies

Long Term growth

PRODUCTS Saving account, CD Stock, Bond, Mutual Fund, Gold, Property.

RISKS None as long as guaranteed by Government

Varies, depending on Investment product

SOURCE OF RETURN Interest income Interest, Dividend, RentalIncome, Capital Gain, Capital Value Appreciation

KEY BENEFITS Safe, accessible & Liquid Return > Inflation over the long term

KEY DRAWBACK Low rate of Return Risk of losing money the investment decline in value

Investment returns

The rate of return on an investment can be calculated as follows:

(Amount received – Amount invested)

Return = _________________________________

Amount invested

For example, if US$ 1,000 is invested and US$ 1,100 is returned after one year, the rate of return for this investment is:

(1,100 – 1,000) / 1,000 = 10%.

In case if we adjust the return obtained from above for inflation we arrive at the real return in the investment

What is investment risk?

Investment risk is related to the

probability of earning a low or

negative actual return.

The greater the chance of lower

than expected or negative returns,

the riskier the investment.

Risk Taker

Risk Adverse

RET

UR

NRISK

Low

Hig

h

Low High

Gov. Bond

Corp. Bond

CD Gold

MFFixed Inc.

Property

MFMix

MF Equity

Equity

DON’T INVEST HERE

Annual Compounded

Return

Years to Double

Risk

Fixed Deposit 4-5 % 14.5 years Low

Gold 7-8% 9.5 years Low

Bonds 6.4% 11.25 years Medium

Property 15% 4.8 years Medium

Jakarta Stock (15 year history)

17.67% 4.07 years High

Do your own exercise… !! Long term or short term

Liquid or non liquid

Expected Return vs Risk can be managed

Risk Taker or Risk Adverse

Cash Flow vs Capital Appreciation

Investment product knowledge & skill level

Available fund and expected future fund

A. Paper Assets:• Stocks

• Bank Account

• Certificates of deposit

• Bonds

The ALTERNATIVE Investment..

B. Tangible Assets:• Gold & Silver

• Art

• Real Estate

• Land

Residential Landed house (Land & House)

Vertical (condominium)

Commercial & Industrial Shop house (Include Rukan, Business loft)

Strata office (include SOHO)

Warehouse

Industrial (Land, Standard Factory Building /SFB, Factory)

Retail Strata Retail (Trade Center)

Rural Land – Farm Land

Timesharing is not property Investment

Why Property is the IDEAL Investment ?

Property is one asset class that does both, rising in value and generating income It is often referred to as the “IDEAL”

investment

“IDEAL” is a simple acronym that highlights

just some of the key benefits of owning real estate

Benefit #1:

Income

Ability to generate passive income

When investing in property the key thing is to focus on net income

Many real estate agents will quote gross yield figures i.e. the

annual rent as a percentage of the property price

Potential return on investment, to focus on net yield or net

income

Absolutely must have net positive cash-flow otherwise you haven’t

got an investment on your hands but a burdensome liability

The challenge in property investment is to minimise the down

payment (which will maximise your mortgage) whilst at the same time

generating positive cash flow each month

PRICE =

Property value 1,000,000,000

Net Rental Yield 3%

Gross Rental 30,000,000 3%

Benefit #2:

Depreciation

A rental home is seen as a depreciable asset just like a car or

piece of factory machinery

Rental properties with positive cash flow can show an

accounting loss, granting the owner a tax deduction,

Depreciation is an accounting loss and only shows up on paper

It can result in you being able to turn a small economic profit

into a small tax loss

Property value 1,000,000,000

Depreciation rate 5%

Net Rental Yield 3%

P&L Cash Flow

Gross Rental 30,000,000 3%

Cash In from Rental

Income 30,000,000 3%

Depreciation 50,000,000 5% Depreciation - 5%

Net profit (Loss) (20,000,000) -2% Net Cash Flow 30,000,000 3%

Even though we could be “loosing” money on paper we could actually be making a monthly cash profit

Benefit #3:

Equity Build Up & Expenses

As you pay down the principle of the mortgage loan you are

gradually building up your equity stake in the property

So, even if there is no increase in the value of the property over

the term of the loan you still end up with an asset with 100%

equity at the end of the mortgage loan term

Expenses such as property management fees, maintenance,

insurance, mortgage interest and so on are deductible from the

rental income, thereby reducing your tax liability

Interest rate = 9%Property Value

Loan Principle

(Liabilities)

Asset recorded in

Balance Sheet

Additional

Equity

Increase 15%

End of Year 0 1,000,000,000 1,000,000,000 1,000,000,000 -

End of Year 1 1,150,000,000 834,000,000 1,000,000,000 166,000,000

End of Year 2 1,322,500,000 652,700,000 1,000,000,000 347,300,000

End of Year 3 1,520,875,000 454,300,000 1,000,000,000 545,700,000

End of Year 4 1,749,006,250 237,300,000 1,000,000,000 762,700,000

End of Year 5 2,011,357,188 - 1,000,000,000 1,000,000,000

As you pay down the principle of the mortgage loan you are gradually

building up your equity stake in the property

So, even if there is no increase in the value of the property over the

term of the loan you still end up with an asset with 100% equity at the

end of the mortgage loan term

Expenses such as property management fees, maintenance, insurance,

mortgage interest and so on are deductible from the rental income,

thereby reducing your tax liability

Benefit #3: Equity Build Up & Expenses

Benefit #4: Appreciation

Your asset should appreciate in value over time

Often the largest part of a return on an investment in

real estate is in the appreciation in the value of the asset

and the resultant gain in equity

Property prices can sometimes reduce in the short term

due to changes in demand, access to finance and so on,

but over the long-term you will benefit from

appreciation

Benefit #5: Leverage

Leverage is the principle of using a small amount of

your own money to control a large value asset

One of the unique aspects of real estate over other

investment classes is your ability to borrow up to 80% or

90% of the purchase price of the asset

This is leverage i.e. using Other People’s Money (OPM)

By fully understanding and utilising these characteristics of

property investing you can take advantage of this

powerful investment asset to build wealth quickly and

get rich fast

Rental Yield Capital Appreciaton

Total Expected Return

Land 2-5% 15-25% 17-30%

House 2-5% +/- 15% 17-20%

Condominium 6-10% 5-15% 11-25%

Shop House 2-4% 18-20% 20-24%

Strata Office 6-10% 10-25% 16-35%

Warehouse 2- 5% 15-20% 17-25%

SFB 2-5% 15% 17-20%

Strata Retail 3-10% 0-25% 3-35%

Rural Land Based on negotiation

Based on negotiation

Based on negotiation

* Based on standard condition, not super-ordinary condition, average for 15 years

How to Start Investing in Property ?

1. Clear Goal & Strategy Target Return & Risk Managed or Direct Investment Cash Flow or Buy & Hold Financing Plan

2. Research…Research…. Research3. Shortlisted, Hunting, Selection &

quick DD

Managed or Direct Investment

Managed (Through listed / unlisted property Trusts)

Direct Investment (You are in control)

1

Buy and Hold• Land• Your personal home

PURPOSE of the Investment

Cash Flow or Buy & Hold?

Cash Flow• Rental producing

properties• Parking lots• Car washes

1

Financing Plan Exercise your Financial Status

Disposable Income available

Leverage or Un-leveraged Property value vs Financing given by bank (usually about

70% of the property value the loan amount will be given)

Monthly Installment (usually 25-30% of Total Income)

Amount of Down Payment (30-50% of property value)

Loan period Property Value Adjustment

1

Growing Area (city development, GDP per capita, Population)

Historical value & Investment Return of the property

Location and accessibility (Distance vs Time)

Developer name & reputation (late handover, portfolio, financial background, etc)

Main facilities & infrastructure (current & future)

Land banking available in the estate

2

Shortlisted (based on Research)

Hunting (available property with bargain price)

Available property

Primary vs Secondary

Ready property vs buying Off the Plan

Via Mediator or Direct

Payment scheme

Selection & DD Meet the criteria

Clean and Clear

Financing available

3

Tidak peduli seberapa banyak uang yang kamudapatkan, selalu ingat untuk membagiuangmu ke dalam 5 bagian yang proporsional. Selalu membuat dirimu berguna. – Li Ka-Shing

What is the

Solution

In our lifetime there has never beena better time to buy real estate…

… but it still needs to be the right real estate

Source: Cushman & Wakefield

Why bubble ? Criteria for bubble…1. Leveraged Investor > Un-leveraged Investor

2. Investor Expected Return is not achieved

3. Investor fundamental is not strong .. Low holding power

4. Force sale or Default condition

5. Property Loan vs Overall loan, NPL is big

6. Economic Fundamental is bad