The idea of investing in property to many is the actual acquisition of a property under one’s own personal name. This however, is just one of the ways whereby an investor can get invested in property. The word investment would thus mean that the individual was looking to grow his or her monies by purchasing a certain asset class for a certain price and then selling it off at a higher price at a later date. Alternatively the asset could be yielding good dividends to the investor and thus his initial investment would be slowly repaid as the asset pays the investor dividends over time. In short, investors are looking to make money and property investment is just one of the ways which they can make money over time.
Another common way to invest is to invest in the shares of a company. (Commonly known as stocks on the stock exchanges for those companies that are listed) This gives investors a percentage share of this particular company. Investors then hope that over time, through good management, the value of the company which they have invested would have risen. Then they can sell off the shares which they have previously bought to another willing investor for a higher price as compared to what they had previously purchased.
So then what happens if investors are not familiar with investing in the stock market but they have cash sitting idle in their bank account? They can hire someone who is familiar with investing to invest on their behalf. These individuals are called fund managers. They are usually experienced investors with the relevant knowledge when it comes to investing in stocks. These fund managers come up with funds whereby they will pool investors’ monies together and make investments in stocks for these investors. These fund managers will spend time analysing the stocks available for purchase and make purchases on behalf of the investors. The investors, on most occasions barring any large market collapse, gets potentially healthier returns than if they were to leave their monies in the bank. Also, with pooled resources, the fund manager can then diversify and buy a large basket of stocks, thereby lowering the risk of losing a large amount of money on just a few stocks.
How then is this applicable to real estate? It is very much the same situation. Investors with large amounts of monies sitting in their account can also invest in funds managed by fund managers but instead these fund managers will use their monies to invest in properties. These fund managers are usually people with vast experience in investing in real estate. They will develop a fund and get investors to pool monies into a particular fund. The fund managers will then use these monies to buy multiple properties, thus diversifying the risk as compared to an investor purchasing a single property by himself. Property funds are not new products but the concept of investing in them, for one reason or another, has not caught on in our local context yet. Property funds allow investors the chance to invest in real estate classes that otherwise would not be available to them if they did not pool their monies into a fund. For example, investing in a hotel might be out of reach for a single investor. However, if there were a pool of investors, their collective efforts might just be enough to purchase a hotel. If the fund is large enough (i.e. there is a large enough pool of investors in a fund), the fund manager may be able to purchase multiple buildings to further diversify the fund’s portfolio.
Are property funds a new concept? Apparently not. In Singapore, many people are aware of investing in unit trust. Our CPF savings can be used to purchase certain approved unit trusts under the CPF Investment Scheme. These CPF invest-able unit trusts are generally funds with a fund managers pooling investors’ monies and investing in the stock market or in bonds. Think of property funds as the same structure. Instead of investing in stocks and bonds, the monies are invested in properties.
Remember, property investment is not always a sure win investment. There are many people who do lose money purchasing the wrong property at the wrong time. Psychologically speaking the people who lose money are less vocal than those who make money and this would explain why it seems like everyone is making money through property investment.
“When unsure, ask. When very unsure, hire someone else to do it for you.”
Yours Sincerely,
Daryl Lum
