Friday, June 1, 2018

Physical Property in The Bedokian Portfolio?

I had mentioned about property briefly in my ebook1, which I stated that it should not be in The Bedokian Portfolio due to its huge capital outlay. One of my acquaintances suggested that I relook into this. Let us look at physical property as an asset class.

Real and Physical Asset

Unlike equities and bonds, properties are real and physical assets, meaning you can see it and touch it. The main argument for properties over the other financial instruments is that it will never go down to zero value (end-of-lease assumptions aside). Even if a house is demolished, the land that it once sat on is still worth something.

Passive Income from Rental

The main income stream generated from an investment property is rental. Be it a residential or commercial property, there will be people who would prefer to rent rather than to outright buy it for their stay or business needs.

Capital Appreciation

Like equities, properties benefit from capital appreciation, in which their values may rise with time. You may have heard of properties appreciating many times more than its original value over the course of years, beating inflation along the way. And to top it all off, the prospect of an enbloc would make a property owner potentially rich.

Sounds great? It is. However, for The Bedokian Portfolio, I would still not recommend properties to be inside. Here are the reasons:

Longer Time To Buy or Sell

Unlike REITs, where you could just buy or sell it off with a touch of a button through the financial market, for a physical property it takes weeks, months or even years to purchase or sell it. When a property is transacted, it will have to go through a conveyance process that may last for weeks, not to mention some time used for meeting the agents, lawyers and the other transacting party.

Cashflow Risk

When the rental market is down, there might be a chance where your property is not rented out, and cashflow is affected. If the mortgage loan payment is dependent on the rental income, you may have to dig into your other funds or investments to cover. Even if it is rented out in a down market, the rental may not cover the loan payment fully.

Lopsided Effect on The Bedokian Portfolio

The Bedokian Portfolio is modelled as a liquid, income generating and non-leveraged portfolio. By introducing physical property into The Bedokian Portfolio, it will create a lopsided effect in which the income stream could be disrupted to deal with the cashflow risk as described in the previous paragraph. Also, it is impractical and pound-foolish to conduct valuation on physical property just to get the value for rebalancing purposes.

So does that mean physical property is not a suitable investment?

Not really. Just take it out of The Bedokian Portfolio and treat it separately. In fact, physical property, other investments that are not suitable for The Bedokian Portfolio, and The Bedokian Portfolio itself, could be combined together to form the “portfolio multiverse”, a concept which I am working on at the moment.

1 – The Bedokian Portfolio p13

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