Saturday, February 02, 2008

To Buy Or Not To Buy?

On Friday I had a look at a potential property investment. Having crunched the numbers the proposal looks attractive as either a buy, renovate and sell proposition or as a buy, renovate and lease proposition. The asking price (before negotiation) is also at or slightly below the two bank valuations I obtained. In the current bullish market, finding a property at bank valuation is not easy and usually indicates a bargain.

However, there are some issues with the property. Specifically, the age of the building. At 41 years, this is old by Hong Kong standards and will deter some potential buyers. If banks revert to the lending policies they had in the 1990s, a future buyer might have difficulty financing the purchase. In terms of managing my downside, in less boyant market conditions, I could anticipate that the property would be difficult to sell.

The second issue is the exterior of the building and the common areas. The building is run down and very unattractive. All of this is factored into the price. Again, the issue is managing the downside. If the property market reverted to being a tenant's market, I could anticipate difficulties in leasing the property as tenants prefer properties with a more attractive appearance. There is some prospect of the owners spending money on an upgrade of the common areas and the exterior. Several units have recently been renovated, showing that people are willing to spend money on their units in the building. However, I would not want to rely on such an uncertain prospect.

The other factor weighing on my mind is my personal liquidity. We have the vast majority of our wealth in illiquid assets. I currently have very little cash and would have to sell some of my funds to make this investment. After doing so, I would have very little cash build up for 3 or 4 months as I fund the refurbishment and the holding costs. Put differently, at a time of considerable economic and some personal uncertainty, I would put myself in a position where I had reduced my liquidity and tied myself to an illiquid and cash draining project for several months.

I am still debating whether to put an offer in, but current thinking is to pass. I will feel more comfortable looking for opportunites in a few months when I will have built up the means to fund a purchase without selling other assets.

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