Is property investing stifling enterprise here?

8 October 2012
Richard Hartung

Property investment has become so attractive to so many people here, it seems, that it may actually have reached the point where it is increasing risk and crowding out other investments that could be better for the Singapore economy.

In many countries, income from investment in residential property is a blip in overall economic indicators and a small percentage of GDP. Deutsche Bank noted in its Real Assets report, many private households in other regions "mainly hold residential property for owner-occupation".

While home ownership is high here too, residential property investment is so large that it has its own line on GDP data from SingStat called "ownership of dwellings" and individual investors' returns from those investments account for more than 4 per cent of GDP.

Even at that high level, there's a thirst for more. The latest Asia Property Market Sentiment Report last month - prior to last Friday's property market cooling measures - showed that 62 per cent of Singaporeans polled want to buy another property in the next six to 12 months.

As one blogger on Singapore Watch put it, many people will buy an HDB flat as their first property and then slowly save up for their second property. Friends talk about properties they are investing in and the gains they expect, so owning a second property starts to seem like the norm. Many investors, then, aspire to investing in property rather than in the next Google or LinkedIn.

LESS MONEY FOR INNOVATION?

Investing in real estate is not necessarily bad. Research by University of Sydney Professor Maurice Peat, for example, showed that including residential real estate in a well-diversified portfolio can generate significant diversification benefits.

As Prof Peat also found, however, too much focus on real estate and a relatively undiversified set of investments can create additional risk.

One challenge of the focus on property, then, is that a large swathe of Singaporeans may become too dependent on residential property for their financial security. If anything negative happens in the Singapore property market, that security is at risk. The aftermath of the housing bubble in the US shows how severe the risk can be.

Putting so much money into residential property investment may also stifle entrepreneurship and innovation.

Private investors may prefer to put their money into property rather than new ventures. One economist here noted, although data is limited, that capital may be diverted into being landlords rather than business owners or inventors. Private capital that could fund start-ups or business growth may go into real estate instead.

What funding there is for new ventures often comes from younger investors, who may have less money for investment in the first place.

Angel investors in Singapore tend to be younger than in other locations, the Angel Investment Network (AIN)here noted, with the majority being 25-34 years old. And young or old, AIN noted, Singaporean business angels tend to invest more often in the retail and hospitality sectors than in technology.

TWO NECESSARY SHIFTS

For Singapore to be able to grow into the entrepreneurial hub of technology innovation that it aspires to, a shift in focus by investors may be needed. Making that shift happen may involve at least two fundamental changes to shift investors' aspirations.

One change is to orient investors towards a more diversified portfolio. Education could help make this shift occur. Organisations like SIAS or the Singapore Exchange, for example, could do more to educate investors about diversification or provide new avenues for investments other than property.
Given the long-ingrained focus on real estate, however, less popular options like policy shifts to reduce the attractiveness of property investments may be a more viable option.

A second change is then to shift some of the money that would have gone into property into funding new ventures or business growth. It is not necessarily easy to create the buzz about investing in start-ups or business expansion that exists in Silicon Valley. Education could again be a first step, with organisations educating investors on investing in new ventures. Again, though, policy or fiscal shifts may be more likely methods to make change happen.

While there is no harm in some property investments, it is the magnitude here that creates potential imbalances. Admittedly, shifting peoples' aspirations from owning a second or third property to becoming the next big investor in a business growth story like Google is not easy.

If nothing changes, though, Singapore could gradually move towards becoming a nation of landlords, especially at the upper end. It seems better to start shifting now than never, even if change may take a long time to happen.

Richard Hartung is a consultant who has lived in Singapore since 1992.