Fundamentals of Investing Bonds and Real Estate

Question: Discuss about theFundamentals of Investingfor Bonds and Real Estate. Answer: Introduction The investment decisions involve sensitive matters; therefore, the investors need to be attentive while analyzing different alternatives for investment. There are different investment alternatives available in the market such as stocks, bonds, real estate, trust units, and bank term deposits (Swedroe Kizer, 2010). The different alternatives differ in regard to risk and return profile. The equity stock is considered to be riskier as compared to bond; however, equity stock also has potential to provide return greater than bonds. Thus, if the risk is high then return will also be high. It is the approach of the investor which decides the investment alternative. A risk-averse investor would like to invest in less risky alternatives disregarding that the return will be low while a risk taking investor would like to invest in high return alternatives disregarding that the risk will be high (Markowitz Blay, 2013). Thus, the investment analysis covers the analysis of risk and return and the choice of investment depends upon the approach of the investor towards risk and return. In this context, the report presented here covers the analysis of different investment alternatives for Mr. R who is a high net worth individual. Analysis of Available Investment Options In the current case Mr. R, a high net worth investor, is considering investing SGD 5 million in the real estate in Singapore. For this purpose, he has identified six alternatives such as two property stocks, two REITs, and two real properties. There are two companies from real estate property sector namely Prosper Ltd. (PL) and Mega Ltd. (ML). The prosper Ltd is an established company as depicted form the large market cap of $13.50 billion while Mega Ltd is small cap company with total market cap of $085 billion (Appendix-1). The earnings per share of Prosper Ltd are $0.75 which is higher than that of Mega Ltd of $0.15. This indicates that the financial performance and position of Prosper Ltd appears to be better than Mega Ltd. However, the performance in the stock market of the both the companies is opposite of each others financial performance. The analysis of 52 weeks price range shows that Mega Ltd possesses more potential to provide higher returns than Prosper Ltd. The percentage changes in 52 weeks have been found to be 67% ($10.50-6.30/6.30) and 280% ($3.80-1/1) for Prosper Ltd and Mega Ltd, which is indicative of higher return potential of Mega Ltd (Schlichting, 2013). Further, the dividend yield of Mega Ltd is also higher than Prosper Ltd by a good margin. Mega Ltd provided a dividend yield of 2.25% whereas Prosper could maintain only 1.75% (Appendix-1). In addition to this, the stock of Mega Ltd also seems to be undervalued depicted from the low PE ratio. Mega Ltd has the PE ratio of 7.30 times whereas Prosper Ltd has the PE ratio of 12 times. Further, the price to book value ratio of Mega Ltd is also lower than Prosper Ltd, which also confirms that the stock of Mega Ltd is undervalued (Schlichting, 2013). The price to book valued ratio has been found to be 0.79 times ($1.1/1.4) and 1.15 times ($9/7.80) for Mega Ltd and Prosper Ltd respectively. The undervaluation of stock depicts a prospect to buy the stock (Reilly, 2013). Further, there are two REITs namely A-REIT and B-REIT being considered for investment. B-REIT has investments in the malls and office blocks while A-REIT has invested in industrial factories and warehouses. B-REIT is a large cap real estate trust with $12.50 billion as against $2.50 billion of A-REIT (Appendix-1). Further, the dividend yield of B-REIT is 5.50% which is greater than that of A-REIT. Moreover, the analysis of 52 weeks range depicts that the percentage changes are 190% ($2.90-1/1) and 92% ($2.50-1.30/1.30) for B-REIT and A-REIT. The higher percentage change depicts more potential for return (Schlichting, 2013). Another option available for investment to Mr. R is real properties in Singapore. There is residential condominium located at Orchard/Tanglin Roads with an asking price of S$2,200 per square feet for a total area of 1200 sq. feet. The expected monthly rental on this property is $6,500 to 9,000. Further, there is another property referred as commercial office in Tanjong Pagar/Robinson Road area with price of S$2,600 per square feet for total area of 1000 feet. The monthly rentals on this property are expected to be $7000 to $9,500. Considering the rentals and cost of purchase, the percentage annual return on both the properties is arrived at as under: Property Location Purchase cost Average Annual Rent % P.a. return Residential Condominium Orchard/Tanglin Roads 2,640,000 7,750 0.29% Commercial Office Tanjong Pagar/Robinson Road 2,600,000 8,250 0.32% It could be observed that the return on investment in case of commercial office is greater than the return of residential condominium. However, it is further observed that both the properties analyzed above are providing lower return than the interest on fixed deposit which is 1%. Thus, the return from the annual rental is lower on the properties, but there exists opportunities for capital returns in the form increased prices of the properties in future. In this regard, it has been found out that the prices of residential properties in Singapore are falling down as depicted in the chart given below: Figure 1: Housing Prices in Singapore (Source: https://www.globalpropertyguide.com/Asia/Singapore/Price-History) The falling prices in the residential properties in the Singapore make it less preferable choice for investment. Further, prices of the commercial properties are also decreasing (Delmendo, 2016). Recommendations From the analysis conducted above, it is recommended to Mr. R that he should select more than one investment options. The analysis of risk and return depicts that investment in real properties in Singapore might not be worthy. Thus, there remain two choices such as real estate stocks and the REITs. In this regard, it is further recommended that investment should be made in both the alternatives i.e. the stocks and the REITs. In regard to stock, the stock of Mega Ltd is preferable for investment because it has more potential for return than the stock of Prosper Ltd. Further, the stock of Mega Ltd is also undervalued showing the potential for capital gains later on. In regard to REITs, it is recommended that Mr. R should opt for B-REIT for investment as it has higher dividend yield (5.50%) and it also has higher return potential. However, the risk might also be higher in this case, but considering the risk appetite of Mr. R it recommendable option to invest in B-REIT (Glassman, 2010). References Markowitz, H.M. Blay, K. 2013. Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume One). McGraw Hill Professional. Reilly, F.K. Brown, K.C. 2011. Investment Analysis and Portfolio Management. Cengage Learning. Schlichting, T. 2013. Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market. GRIN Verlag. Delmendo, L.C. 2016. Singapores house prices continue to fall. Retrieved 21 February 2017, from https://www.globalpropertyguide.com/Asia/Singapore/Price-History Glassman, S.A. 2010. The Best Investment Advice Is Sometimes About What Not to Do. Pearson Education.