Social Responsibility Reduces Risk in Property Investment

 

In the venture of property investment, we closely observe what is happening around us in both local and global economies for the reason to stay informed of the latest changes in aspects such as finance, legal, market, etc. The most important thing we want to know is if these changes will affect our money!

Social responsibility? Who cares?!

This is a very typical misunderstanding of public – social responsibility costs money..

Not many people know that, in fact, being socially responsible when we invest our money significantly reduces the potential risk, particularly in property investment. Renowned investors like Robert Kiyosaki and Warrant Buffet know it very well. It is not easy to explain the reasons behind it thus for many years it remains as one of the secrets of success in investing.

Here we will try to use some examples in property investment to show you how it is so.

Old Property or New Property

It is a known fact that investing in a property that is currently generating cash flow has relatively lower risk than investing in a new property. The main reason is investing in an old property has less uncertainty in factors affecting return on investment, such as neighbourhood, competition for rent/sale, rental demand, quality of maintenance, valuation, etc. However, many investors are constantly attracted by new properties because they can expect a potentially higher return with the same amount of capital, even though they have to wait for a longer time to see the return materialised. So do they really have a bigger stomach for higher risk? In real life we can always see many cases around us that show otherwise. When a new project goes wrong, most of the buyers turn panicked especially those who overstretched themselves financially.

When people place money as their very first priority in property investment, they easily lose sight of their own risk appetite. If we put the concern of money aside first, while we evaluate from a different angle, say social responsibility, we will find that the decision made is consequentially prone to the side of lower risk.

How?

Let’s look at the choice between old and new properties again, but this time we assess the effects of the choice to property market.

An Ideal Case

Ideally a new house is for a home buyer to own it as a home. Imagine an ideal market where only home buyers are buying new houses while investors with extra capital invest in old properties. In this market, developers or builders would build new houses according to the demand of home buyers only. So there would be less chance to have an oversupplied problem in the market. This enhances the stability of home prices and prevents prices from skyrocketing because home buyers buy houses merely for their essential needs. Builders would also have the least motivation to take higher risk but concentrate on the delivery of existing on-going projects. In long term, builders would enjoy lower overall costs (especially marketing cost) and suffer insignificant numbers of unsold units. This leads to a healthy and robust market supply. We would hardly see any unsold unit left deserted and run down in our neighbourhood.

On the other hand, when investors invest only in old properties, more properties in poor condition would receive attention and stand a chance to go back to the pool of supply in the market. Other properties could benefit from constant maintenance since the overall demand on old properties is supported largely by investors. Prices of old houses might then become higher than new houses but such situation is in favour of first time home buyers who are generally not so loaded but yet most in need of the new properties.

In this ideal market everyone is a winner. Whether we are a home buyer, a property investor, a builder or other personnel in the supporting industries of real estate, we take the lowest risk in a stable market where everyone finds it affordable and comfortable to get what he/she wants, be it a home, an investment property, a deal or a sustainable profit of sale.

A real life example very close to the above model is the public housing in Singapore implemented by Housing Development Board (HDB) since 1960s. Today, as much as 82% of Singaporeans live in public housing provided by the HDB. The success story of Singapore’s public housing attracted countries like China sending their leaders to the small city state to learn how to resolve housing problems in big cities. One of the HDB’s policies restricts purchase of new flats to first- and second-time home buyers only.

Why is it just an ideal?

In a world where democracy has becoming more and more available, everyone enjoys the right to pursue wealth and happiness. But are we doing it in a manner that at the same time hindering others from doing so? In a democratic system, authorities and governments have intrinsically very limited control to avoid people from pursuing wealth and happiness at the expense of others, which has been one of the typical reasons why disparity between rich and poor keeps widening. And we all know that the width of this gap is proportional to other social conflicts and problems, such as the crime rate, which in return risk our property. So it has become pathetically (or prestigiously?) a kind of social responsibilities to us who are in the game to reduce that risk level.

A society is like a human body and each individual is like a body cell, closely connected to and supported by each other. Social responsibility is thus held by each of us regardless of what we are doing because all actions come with consequences. A butterfly flipping its wing may eventually cause a climate change at the other side of the world, in a matter of time. What about individual’s action in a world where it is now totally flat[1]?

 

[1]“The world is flat” described by Thomas L. Friedman in his international bestselling book The World Is Flat: A Brief History of the Twenty-First Century (publisher : Farrar, Straus and Giroux, 2005), that globalization has changed the world into a level playing field in terms of commerce, where all competitors and individuals have an equal opportunity and the perceptual shift required for countries, companies, and individuals to remain competitive in a global market where historical and geographical divisions are becoming increasingly irrelevant.

 

GoFinance

This article was co-written with KCLau of KCLau.com and published in November 2014 issue of Property Insight magazine as “CSR in Property Investment.”

About The Author

ongkl

Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore – a conurbation with 6.49 million still fast growing population – since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.

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