Investment Recommendation for Mr. Jack - Fundamentals of Investing

This document provides investment recommendation for Mr. Jack based on his risk tolerance, investment horizon, and the current state of the local economy of Singapore. It evaluates various investment options including Associated Land Limited, Regal Property Limited, I-REIT, L-REIT, residential condominium, and commercial office. It recommends a portfolio of investments for Mr. Jack.

FUNDAMENTALS OF INVESTING

Investment recommendation for Mr. Jack
Risk tolerance of Mr. Jack
Mr. Jack is an ultra-high net worth individual. His net investible assets amount to SGD 500
million. Therefore his risk tolerance is high; his liquidity needs are not high. So he can invest in
real estate assets. Real estate assets such as real property investments do not have high liquidity
(Chandra, 2017). So they are suitable for investors whose risk tolerance is high and who have
long term investment horizon.
Investment horizon of Jack
Jack wants to invest in real estate. So this means that his investment horizon is a long term one.
Real estate investments are avoided by investors whose investment horizon is of short term
(Pandey, 2017).
Risk willingness
Both risk tolerance and the willingness to take risk of Mr. Jack are high.
Current state of the local economy of Singapore
GDP growth rate of Singapore currently is around 3.6% (Blanchard, 2018). The country has a
low and stable inflation rate. Due to the limited geographical size of the country and the high
economic development that it has seen in recent years, real estate prices are high in the country.
Real estate is so valuable in the country that many investors have started considering it as a safe
haven in times of crisis (Samuelson & Nordhaus, 2018). Singapore has one of the highest per
capita incomes in the world (Blanchard, 2018). Standard of living in the country is generally
high. There is therefore strong demand for luxury or premium real estate.

Evaluation of the various investment options
Associated Land Limited : This is the stock of a real estate company. The stock has an average
daily trading volume of 23 million. Its 52 weeks price range is $7.20 - $14.60. It is currently
trading at the price of $8.80. So it is trading at the lower end of its 52 weeks price range. Gearing
level of the company is 25%. This is very low debt usage for a real estate company. Net book
value of the stock is 7.90. So market value –to – net book value ratio is 1.11. The stock pays
dividends, with a dividend yield of 1.1%. The current P/E ratio of the stock is 22.6. This
indicates that the market expects the company to post high growth in earnings (Gitman, Joehnk,
& Smart, 2011).
Regal Property Limited (RPL) : This stock has a much less average daily trading volume than
the stock of Associated Land Limited. Therefore this stock lesser liquidity. The higher the
liquidity the better is price discovery. It is trading near the middle point of its 52 week range.
Price-to-earnings ratio of the stock is 9.22. This indicates that the market expects the company to
post not as high growth in earnings as that of Associated Land Limited. Dividend yield at 2.5%
of this stock is higher than that of Associated. 71% of its total assets are financed by debt.
Therefore financial risk for the company is high (Pandey, 2017). It is trading at a discount to its
net book value per share. Its market price per share is lower than its book value per share. This
stock is less suitable for Jack than the stock of Associated Land Limited.
I – REIT : This is a real estate investment trust. Its earnings come from the rentals that it gets for
its industrial factories and warehouses. Liquidity of its shares is low. It has a high dividend yield
of 3.5%. And it is trading at a discount to its net book value per share of $3.30. Leverage is also
low at 23%.

L – REIT : This real estate investment trust has investments in retail malls and Grade A office
and commercial space in prime Central Business District (CBD) areas. In terms of average daily
trading volume this share has much higher liquidity than that of I – REIT. But the use of debt in
its capital structure is much higher than that of I- REIT.
Residential condominium with freehold title
Size in square feet: 1700
Selling price per square feet: S$ 2800
Total price to be paid = 1700 * S$ 2800 = S$ 4760000
Expected monthly rental average : (8500 + 9800) / 2 = 9150
Annual cash inflow from rentals = 9150* 12 = 109800
Weighted average cost of capital of Jack = Risk free rate or local bank fixed deposit rate +
inflation rate + property mortgage rate = 1% + 3% + 2.5% = 6.5%.
Present value of the annual cash inflows from rentals = 109800 *(1+inflation rate) / Weighted
average cost of capital of Jack = 109800 *( 1+ 3%) / 6.5% = S$ 1739907.69 (We are assuming
that cash inflows will continue till perpetuity).
Net present value of this option = Present value of cash inflows – Total purchase price =
$1739907.69 - $ 4760000 = - 3020092.307.
Negative NPV means this investment will be loss making. Jack should not invest in it.
Commercial office with balance of 92 years lease left

Size in square feet: 1700
Selling price per square feet: S$ 2800
Total price to be paid = 1700 * S$ 2800 = S$ 4760000
Average expected monthly rent : (9500 + 12500)/2 = 11000
Annual cash inflow from rentals = 11000 * 12 = 132000
Weighted average cost of capital of Jack = Risk free rate or local bank fixed deposit rate +
inflation rate + property mortgage rate = 1% + 3% + 2.5% = 6.5%.
Present value of the annual cash inflows from rentals = 132000 *(1+inflation rate) / Weighted
average cost of capital of Jack = 132000 *( 1+ 3%) / 6.5% = S$ 2091692.307 (We are assuming
that cash inflows will continue till perpetuity.)
Now NPV in this case = Present value of cash inflows – Total purchase price = S$ 2091692.307
- $ 4760000 = - 2668307.692.
Now actually this property has a lease term of 92 years. So present value of cash inflows will be
less than what they will be in perpetuity. So NPV of this property is also negative. It will be a
loss making investment for Jack.
Recommended investments for Jack
Jack should invest 30% of his SGD $10 million portfolio in Associated Land Limited’s stock.
10% of the portfolio should be invested in the stock of Regal Property limited. 40% of the
portfolio should be invested in I- REIT and 20% should be invested in L- REIT.

Investment in the stock of Associated would give Jack exposure to hotel operations and mixed
development assets including substantial local real estate operations. Investment in Regal
Property Limited will give Jack exposure to residential projects in Singapore. Investment in I –
REIT would give Jack exposure to industrial warehouses and factories in Singapore. Investment
in L – REIT will give Jack exposure to retail mall and Grade – A office spaces. No investments
should be made in the two real property projects as they have negative NPVs. This portfolio will
be a holistic one. It will give Jack exposure to all the segments of real estate market in Singapore.
30%
10%
40%
20%
Recommended investment portfolio
Associated Limited's Stock Regal Property Ltd
I - REIT L-REIT

References
Blanchard, O. (2018). Macroeconomics. New York: Pearson, pg. 207.
Chandra, P. (2017). Investment Analysis and Portfolio Management. New York: Pearson. pg 55.
Gitman, L., Joehnk, M., & Smart, S. (2011). Fundamentals of Investing. Pearson, pg 76.
Jonathan, B., & Peter, D. (2017). Corporate Finance (3rd Edition). Pearson, pg 55.
Pandey, I. (2017). Financial Management. New Delhi: Vikas, pg 77.
Samuelson, P., & Nordhaus, W. (2018). Economics. Prentice-Hall, pg 79.