I met up with a couple of friends recently and one of them shared that he was thinking of buying a residential lot in one of the new developments down south. Asked why he wanted to relocate, he explained that the purchase was an investment and he had no intentions of living there. My other friend questioned his logic, arguing that stocks are better, especially given how they have performed and the prospects. From there, a long discussion ensued.
Though financial assets such as stocks and bonds come to mind when we talk about investments, the reality is many of us still favor owning tangible investments. Tangible investments are “physical” assets such as precious metals, gemstones, jewelry and, in my friend’s case, real property. They also include things such as artwork, antiques, rare stamps and coins, and even collectibles (think twice before giving away that 30-year-old Barbie collection of yours). Investing in physical assets has an appeal because, well, they are tangible—things you can actually see and feel. And for some reason, this gives us just a little bit more security than investing in a financial ‘concept’ such as ownership of a company via stocks or a claim from a creditor via bonds.
Ok, they make us feel better because we can see them but how do they rack up in terms of returns? Some would argue that investing in tangible assets gives better returns than financial assets in the long run. Let’s consider the most commonly cited and the most popular tangible asset around—real property.
There are numerous examples of how much more expensive owning a condo or a house and lot is compared to a few years ago. Some would cite how the price of land in a particular area has quadrupled or quintupled over the past decades. The problem though is that since we normally have a longer time horizon with these types of assets, we tend to have a distorted view in terms of their returns. Take for example that residential lot you bought 10 years ago for P20,000 per square meter (sqm). It’s now worth 40,000 per sqm. Astounding returns! Well yes, but if we put it in percentage terms that’s just a little more than 7 percent return a year. And that doesn’t take into account the taxes and other maintenance costs you paid out all those years which would reduce your returns. If you were shown a financial asset that paid 7-percent annually you probably won’t get too excited, all other things being equal.
Also since we consider tangible investments like real estate as long-term investments, we are usually a lot more patient with them than we would be with financial assets. How often do you normally call your stockbroker or investment counselor about how your stocks or funds are doing? Every week? Maybe everyday? If you did the same to your property broker, he would probably change his phone number.
There is also the issue of volatility Just because we don’t have the prices of these assets in a sliding ticker we can watch everyday, doesn’t mean we are not exposed to price risk. As we have recently seen in the US, one can be hurt quite badly if he buys property at the wrong time, especially if leveraged. Even for assets that have appreciated in value, the capital appreciation is not a straight line but occurs in a discrete manner. Gold, for example, despite its stellar performance of late, was pretty stagnant for the whole of the 1980s to 1990s. Anecdotally, I know of a friend of mine who held on to a piece of property for 10 years before deciding to sell it at barely above breakeven, only to see its price ramp up 40 percent a year later. As they say, timing is everything.
Taking the tangible investment argument to an extreme, I had an interesting discussion about how some women nowadays consider their collection of luxury bags as investments (you guessed it, I was talking to a lady). As an alternative they’ll be happy to know that luxury brands such as Prada and Coach are planning to list in the Hong Kong Stock Exchange. Also, instead of buying the actual goods, maybe they should have bought shares of Milan Station, a Hong Kong company which sells pre-owned luxury bags, which was up 77 percent on its listing date.
Well, that’s if they could have gotten any allocation—the initial public offering was more than 2,000 times oversubscribed. But then again, they wouldn’t look as pretty carrying around a stock certificate as they would handbag in tote.
(The author is the investment director for fixed income at ATR KimEng Asset Management. For comments, you may e-mail him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .)
