Guide in Commercial Dispute Resolution

The commercial disputes in UAE are generally resolved through litigation or arbitration. Wherein arbitration is nowadays the most common and widespread medium for resolving such disputes. The country follows the civil law system with an inquisitive approach of the court. The Corporate Lawyers of Dubai in this article have provided complete information regarding the dispute resolution process in UAE with regards to commercial disputes.The lawyers of Dubai have made it simpler for international and domestic investors to understand the legal framework and the UAE court structure to resolve commercial disputes:1. What are the primary dispute resolution mediums used for resolving the commercial dispute?The legal system of UAE is derived from the Constitution where Shariah and civil law are the main sources of legislation. There are several mediums available for investors to resolve commercial disputes as follows:A. Litigation
The disputing parties can refer the matter before the courts specifically Court of First Instance of the respected Emirate. The country (except for some free zones) follows a civil law system wherein each case is decided on the basis of its facts and merits. Court proceedings are in Arabic through a UAE National lawyer. All the documents submitted before the court must be in translated in Arabic bearing legal attestations (if required by courts). Proceedings before UAE courts are through written pleadings supported by documents.All the Emirates except Abu Dhabi and Ras Al Khaimah (RAK) are a part of the Federal Judicial system. The foregoing Emirates have an independent judicial system. However, each Emirate follows the similar structure as below:
• Court of First Instance;
• Court of Appeal;
• Court of Cassation (RAK does not have Court of Cassation and all the appeals are presented before the Supreme Court of Abu Dhabi.)B. Dubai International Financial Centre (DIFC)
Apart from the civil courts, the Emirate of Dubai has its own financial free zone that is DIFC which has its own laws and regulations and an independent judiciary to deal with cases arising within DIFC. It is a common law jurisdiction, and all the proceedings and documents are submitted in English. The jurisdiction of DIFC Courts is established by virtue of Dubai Law Number 16 of 2011 which empowers the DIFC Courts to entertain local and international cases and resolve commercial disputes, upon mutual consent of the parties.Recently, DIFC courts have held that they have jurisdiction to enforce foreign and domestic arbitral awards as they are a signatory to the New York Convention. The court of Appeal of DIFC opined that DIFC court has jurisdiction to enforce foreign financial judgments. However, this had recently caught the attention of Dubai Courts when Dubai Court of First Instance nullified the judgment passed by DIFC courts ratifying an arbitral award, due to lack of jurisdiction. Thus, the question regarding DIFC courts’ authority over approving foreign arbitral awards is still in conflict, and in order to resolve this conflict, Dubai Courts through Decree Number 19 of 2016 incorporated a Joint Judicial Tribunal. So far, if there is a conflict between jurisdictions, Dubai courts will be favoured over DIFC Courts.C. Abu Dhabi Global Market (ADGM) Courts
ADGM is a financial free zone situated in Abu Dhabi established by virtue of Federal Law Number 8 of 2004, Federal Decree 15 of 2013 and Abu Dhabi Law Number 4 of 2013, having its own separate rules and regulations and its independent court and an arbitration centre. The courts in ADGM only entertain matters arising within ADGM or between the companies registered with ADGM authority. Common Law system is the foundation for civil and commercial law in ADGM which is based on English Law Regulations of 2015. Further, ADGM has well-established English statutes which can govern civil and commercial matters. ADGM courts have categories and divisions such as Employment divisions, civil claim division, Enforcement courts enforcing judgments of Abu Dhabi Judicial Department.ADGM provides digital court services, wherein the cases and other documents are filed electronically, and the cases are managed through an online portal system. ADGM is the first institution to provide completely digitalized courtroom platform.2. What is a structure for UAE courts where commercial disputes are referred?
There are no particular courts for resolving commercial disputes, and all the commercial cases are tried by the civil courts in the following structure:
a. Court of First Instance:
b. Court of Appeal;
c. Court of Cassation.
The judges in the aforementioned courts may not have special expertise in trying these commercial matters. However, they hold the authority to appoint a third [arty expert, if required. Further, it is pertinent to note that any commercial dispute prior to being referred before the civil courts, is registered before the Reconciliation and Settlement Committee (the Committee) which is appointed by the Ministry of Justice in lieu of Federal Law Number 26 of 1999 concerning the Establishment of Reconciliation Committee in Federal Courts. The Committee tries the matter and provides a settlement opportunity to the parties which can avoid the litigation process. However, should the parties’ fails to settle the issue amicably, the matter will be registered before the Court of First Instance. Nevertheless, if the parties resolved the case before the Committee, the decision will be recorded and signed by both the parties, which is binding and enforceable.Whereas a different picture can be witnessed in Dubai and RAK courts as under Dubai Law Number 16 of 2009, Dubai courts have established a Centre for Amicable Settlement (the Centre). The Centre has the authority to hear the following type of disputes:
a. Dispute regarding the partition of common property;
b. Disputes where parties mutually agree to settle through the Centre;
c. Disputes are pertaining to outstanding debt worth AED 100,000.
In the aforementioned cases, the matter should be initially referred to the Centre. Whereas, employment and family matters cannot be referred to the Centre.3. What is the limitation period within which the commercial disputes shall be presented before the courts?UAE Federal Law Number 5 of 1985 on the Civil Transactions Law (the Civil Code) provides for the general rules regarding the statutory limitation imposed on civil and commercial cases. Generally, a civil claim is barred by limitation after 15 years from the date the claim arose, unless otherwise specified by a statute. Notwithstanding the foregoing, there are numerous exceptions to the general rule of law, as there are certain statutes which provide a different time limitation for different disputes.
Further, Federal Law Number 18 of 1993 pertaining to Commercial Law (the Commercial Code) provides for limitation period in certain cases mentioned below:
• Contract disputes are time-barred for 15 years;
• Matters related to bounced cheque must be filed within 3 years;
• Insurance disputes should be registered within 3 years;
• Any claim arising out of Tort must be referred within 3 years;
• Any claim due to defects in the architecture of a building must be registered within 10 years;
• The agreement for the carriage of goods by sea must be in 1 year;
• Employment matters to be recorded within 1 year.4. What are the different stages followed by UAE courts in any court proceeding?Stage I: Registration of Case
Any proceeding initiated in the Court of First Instance in the relevant Emirate must be through a pleading/plaint followed by respective court fees, depending upon the amount of the claim. The court fees in all the Emirates vary from 3-6% with a maximum cap of AED 40,000 which must be paid by the claimant. In several jurisdictions court upon passing an unfavourable judgment against the defendant, can order the defendant to reimburse the court fees to the claimant. Any claim registered before the courts must meet all the requirements and must contain all relevant information regarding the claimant and the defendant and the dispute.
Upon registering the claim, the court issues summons (the claim and supportive documents submitted by the claimant) to be served on the defendant along with a hearing date.
Stage II: Service of Summons
The summons or notice for registration of a case is through by court in various steps that are either by courier, email, or a court officer. It is important for the defendant to acknowledge the receipt of summons, However, if the court officer is unable to deliver the summons to defendant and defendant fails to attend the hearing the court will adjourn the matter for another hearing. Also, if the personal service was not possible, the service should be made by affixing the summons on the defendant’s property or through publication in two local newspapers (Arabic and English).
If the defendant resides outside the country, the summons will be served through diplomatic channels, including Ministry of Foreign Affairs and UAE Embassy in the country of Defendant. It can also be through electronic means.Stage III: Hearing
Once a response is submitted by the Defendant, the court will adjourn the hearing for claimant’s reply on another date. Further hearing dates will be issued; until both, the parties submit the memorandums and documents to support their claim. However, if the defendant post several attempts failed to attend the hearing, the court will pass an ex-parte judgment. Also, the court can appoint a third party expert, should the matter require technical knowledge and assistance.5. Do the courts in UAE allow for interim reliefs? If yes, on what groups can such application be brought before the court?
Generally, interim reliefs are not granted to the claimant. However, the competent court will grant the following:
a. Summary judgment
The court is empowered under the Civil Code to pass a summary judgment if:
• A creditor confirms in writing his debt;
• If the claim is based on a specific amount;
• The claim was against the guarantor.The demand to seek such claim was raised at least 5 days prior to submitting the application for summary judgment. If the court orders a summary judgment, in favour of either party the order along with application should be served to the defendant who then has 15 days from the date of judgment to set aside the order on reasonable grounds.b. Preliminary attachment orders
The court upon being satisfied that there is a prima facie case against the defendant or if the order for attachment of property is not granted the Claimant even after receiving the favourable order will not be able to enforce the judgment will pass provisional orders for attachment of the property.
The party filing an application for attachment of property must provide supporting documents and specify the assets which need to be attached. Interim relief for attachment of property completely depends upon the discretion of the court. Nevertheless, parties must submit evidence proving an imminent danger to the property which is the very basis of the claim.
Further, if it is proven in the court that the interim relief was sought on malicious grounds or with the intention of causing harm or delay in the proceedings, the claimant will be liable to pay damages decided by the court. In addition, the court may require from the applicant to submit a bank guarantee or a letter of indemnity along with the application for interim relief.c. Special cases
The interim relief in special cases involve an application for a travel ban, where the claimant has a strong apprehension that the defendant might leave the country without settling the claim, the claimant may file an application to seek the following remedy:
a. Travel ban until the final judgment;
b. An order to seize defendant’s passport. If the defendant fails to offer his passport, he must submit a bank guarantee equal to the amount of the claim.
Further, in some circumstances, if the court is of the opinion that the evidence in the subject matter can be destroyed, they may appoint an expert to examine the situation and draft a report relying on which the court may grant interim relief.6. What is the role of an expert in any court proceeding?
The appointment of third-party experts in the courts of law is through Federal Law Number 7 of 2012 regarding the Expert Evidence before UAE Courts. Further, Federal Law Number 10 of 1992 concerning the Evidence Law governs the appointment of Expert. The experts are usually appointed in for seeking opinion on several matters which require appropriate knowledge and skills such as in financial or technical matter. All the courts have a list of experts through which the experts are appointed. The court does not allow the parties to decide an expert due to issues of biases mutually.
The expert so appointed must comply with the rules and regulations set out by the Evidence Law, which includes arranging meetings with parties or their legal representatives and maintaining the minutes of the meeting and more. Once a report is drafted and submitted to the court, the court will issue a hearing date for both parties to comment on the report. The post is receiving both parties’ comments; if the court is of the opinion that further investigations are required, the matter can be again referred to the same or new expert.
It is important to highlight that claimant is usually required to pay for expert fees, which can be reimbursed, should he receive a favourable judgment.7. What are the rules pertaining to appeals in a court proceeding?
Any party aggrieved from the judgment of the Court of First Instance can file the case before the Court of Appeal. The appeal can be filed on the grounds of fact and law. Patties also have the right to present further submissions and evidence. All the appeals must be filed within 30 days from the date of receiving the judgment from Court of First Instance. However, the time frame may be extended in some circumstances.The appellant filing appeal has to submit the grounds for filing the appeal along with documentary evidence supporting the claim. Upon receiving the appeal, the court will notify the other party and will provide a hearing date for the respondent’s submission. Subsequent hearing dates will be provided for submissions, and once the court is satisfied that the matter is pleaded, the court will order for judgment.
Parties have further right to file an appeal before the Court of Cassation within 60 days from receiving the judgment from Court of Appeal on the grounds of law.
8. What procedures are followed to enforce a local or a foreign judgment in UAE?
Enforcing Local Judgment
Either party upon receiving the judgment form a competent court may file for execution after 30 days from the date of judgment. The execution court will notify the other party to submit the claim amount, however, if he fails to the court can execute the judgment through:
a. Sale of debtor’s property;
b. Sale of his shares in the market;
c. Arrest warrant against the debtor.
Enforcing Foreign Judgment
UAE is a signatory to several bilateral treaties and judicial co-operation to recognize and enforce arbitral awards. Under Riyadh Convention to which UAE is a signatory, all other signatory countries can enforce the judgment passed from their courts in UAE.
Whereas, for countries where UAE has not signed any treaty, the requirements mentioned in the Civil Code must be satisfied which are highlighted as below:
• Courts of UAE must have jurisdiction to try that matter;
• Judgment should be issued by a competent foreign court;
• The foreign court should have summoned the defendant;
• The foreign court judgment should be binding and enforceable;
• Judgment should be in line with the laws.9. What are the main Alternative Dispute Resolution methods available in UAE for resolving commercial disputes?
Alternative dispute resolution methods involve arbitration, mediation and conciliation. For arbitration, the Chamber of Commerce has their rules and regulations and authority which can undertake cases filed to resolve through ADR such as Dubai International Arbitration Centre, Abu Dhabi Commercial Conciliation and Arbitration Centre. Apart from the government recognized, the two financial free zones, DIAC and ADGM also have their own arbitration Centre that is DIFC-LCIA. Further, UAE has passed Federal Law Number 6 of 2018 on Arbitration in UAE, which sets out guidelines for undertaking arbitration.
For conciliation and mediation, the courts in different cases offer amicable settlement which is discussed in question 1.10. What are the primary organisations which offer ADR for commercial disputes?
There are numerous ADR organizations resolving commercial disputes between the parties through a mutual consent which are as follows:
• Dubai International Arbitration Centre;
• Abu Dhabi Commercial Conciliation and Arbitration Centre;
• Dubai International Financial Centre- London Court of International Arbitration;
• Reconciliation and Settlement committee;
• Amicable Dispute Settlement Centre.
Each arbitration centre has their own rules and regulations governing the disputes and the procedure for referring disputes before them.

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Investment and Growth Opportunities Emerging In Greece

Greece is a beautiful European country for vacations, but it is also an exciting place for investment and business expansion. The geographic location puts businesses in touch with an active European market ready for high quality products and services from around the world.This consumer market is growing steadily and is currently growing with upwards of 140 million buyers from the Eastern Mediterranean and Southeast Europe. There are no trade barriers to these consumers and Greece is a member of the Eurozone and the European Union. If you are interested in expanding your business to a new area of the world, you will find that some sectors of business have extremely competitive advantages in Greece.When the Olympic Games came to Athens in 2004, investments were made in the travel and communication infrastructures. This investment has benefitted the people of Greece and has made the country ripe for investment. The natural resources found within the country also contribute to its emergence as a hot investment destination.New Investment Legislation Affecting Real EstateIn order to maximize profit on the emerging Greece market, the country has adopted new investment legislation known as the Strategic Investments programme. The most recent legislations passed were designed to stimulate economic recovery within the country by offering incentives for “strategic investments.” One area that will be impacted by these incentives is residential permits for real estate.The Strategic Investments programme will allow select real estate investments to be fast tracked with administrative assistance, favourable conditions for planning, and other entitlements while proceeding through the permit process. In order to qualify for this entitlement, an investment needs to be deemed suitable by a government committee setup to evaluate investments.Another change is the offer of a long-term residence permit visa for third-country citizens who invest more than 250,000 Euros in real estate. This visa will allow the investors and their family members to travel freely between Greece and Schengen Area. This Fast Track legislation is something worth taking advantage of, especially since the real estate prices in Greece are currently bottoming out.Progress and Change Happening NowDecisions for global investment are typically made by weighing a variety of factors, including:

Stability

Timing

Location

Potential

Opportunity
Today’s investors are paying more attention to Greece due to the massive structural overhauls happening within the country. The people of Greece have demanded change and progress for many years, and today they are starting to benefit form those demands. The country is becoming friendlier to business, and many international investors are eager to get involved with the transformation of the country.The World Bank and the World Economic Forum have recently released studies indicating Greek progress in terms of eliminating structural barriers and overcoming regulatory shortcomings. These studies also highlighted positive changes made in the education system, technological preparedness and infrastructure throughout the country.When you combine these positive changes with the Fast Track legislation currently passed for strategic real estate investors, it is easy to understand why the country is seen as a hotspot for investment.Greek Growth In Other SectorsThe tourism has grown substantially in 2013, pulling in upwards of 17.5 million visitors by the start of 2014. This shows a dramatic boost in confidence on the part of tourists, and that is leading to even more interest from investors.As tourism and real estate investment boom, Greek is also becoming known as a geostrategic location for the logistics sector. Many large companies are moving their operations into the country, and that is only encouraging more growth and more investment due to favorable forecasts for the long term and impressive measurable benefits for businesses. Some of the well-known companies currently investing in Greece include:

COSCO

HP

Phillip Morris

ZTE Corporation
Why would these companies and many other consider moving their operations to Greece? They are investing in the reformation and progress being made and the promise for the future that comes along with the Greek transformation. Investors from America, China, Germany, France and many other countries are now confident in the country’s ability to emerge as a substantial world market, and they are showing their support in the form of major investments.Innovation In All SectorsIt is the tremendous promise and potential of Greece that continues to draw attention from the global investment community. With time, the country will fully reestablish trust with all major investing countries in the world due to the substantial opportunities for profitable investments within the reformed country.The long-term goal for Greece is to restore the economy through innovation in all sectors. The transition to an economy based on knowledge is underway, and the economy is being completely restructured in order to bring greater investments and as much profitable change as possible.For example, there is great excitement over the TAP pipeline. This pipeline was designed to bring natural gas through Greece and has started the era of energy within the country. There is also great excitement over the hydrocarbon deposit search which started with implementation of RES. The results of both of these projects are incredibly optimistic.Dedication to Business2013 was the year of reform, with 18% more reforms being passed by the end of the year. This is the second highest percentage of reforms achieved since the financial crisis erupted. That shows that the hard work dedicated to creating a friendly business environment is starting to pay off for Greece.Business was traditionally handicapped in this country due to regulations that worked against businesses and structural problems. As those issues are combatted with modern reforms, the culture of the country is coming back to life and businesses are thriving.The Doing Business report released by the World Bank each year ranked Greece number 72 in the world for 2014. That is an excellent improvement from the rank of 89 which Greek received for 2013. This ranking includes 189 countries and uses 10 measurements to determine how easy it is to set up and operate a business within those countries. The research includes start-up costs for new businesses and how long it takes to establish a new business with the countries.The report also ranks countries in terms of smaller categories. In the category of establishing a business, Greece ranked 147 for 2013 but jumped up to number 36 for 2014. Greece was also ranked number 52 in the category of trading across borders and 80 in the category of protecting investors. This reflects the substantial change occurring within the country and the business-friendly culture emerging from those changes.You can also see the reformation of Greece in the improved export performance. A national exports strategy has been adopted with a goal of improving the export of goods to 16% of GDP before 2015. There is hope that this can be accomplished despite the fiscal adjustment, overarching reform and devastating austerity that has occurred in recent years.Light on the HorizonAccording to all recent data, Greece is definitely emerging from the crisis with positive reformation. While the Greek people have gone through substantial strife and the country has been in a state of decline for many years, there is light on the horizon. There is hope for a profitable future as growth continues in all sectors and investment picks up.In order for the trends toward positive change to continue and a successful reformation to occur, international investment is needed in Greece. The privatization programme continues to unfold, and there are tremendous investment opportunities in all industries, including real estate, logistics, tourism and infrastructure.For example, the Port of Piraeus is destined to become a European world leader in the logistics and transportation hub. In the next several months alone, a long list of projects will begin due to the push for privatization occurring within the country.The mission trip of the Prime Minister of Greece, Antonis Samaras and his delegation of business leaders who traveled in May to China, can be considered as a sign of great things to come in the future for Greece. More than 450 business-to-business meetings occurred during this trip, and a tremendous show of support was given in the form of a long list of signed agreements. Chinese investors showed great support for and confidence in the Greek economy, and they have committed to both trade and investment.American investors have also shown interest in investing in the Greek economy, as was witnessed by the August meeting between the Prime Minister and United States President Barack Obama. Discussions on this trip covered a variety of concerns and American investors showed interest in exploring all sectors of business within Greece. This shows how wide-reaching the investment opportunities in this country currently are for international investors.Keep Your Eyes on the FutureThe next few months will be telling for the Greek economy. Interest from international investors will continue to mount, and many successes stemming from the reformation efforts should be witnessed. This will demonstrate how much confidence international investors actually have in this emerging economy.Greek was once a consumption economy, but it is now becoming an economy reliant on export and global investment. The economic reforms currently being made will push this economy beyond the devastation of recent financial crisis and help it overcome for the sake of the Greek people.Private wealth is increasing not only in Greece, but in many other emerging countries such as Brazil, Russia, India and China. These economies are becoming mobile and are emerging on the world market rapidly. This not only makes Greece a great place to invest your money and expand your business, but it also makes this country one of the best places to live.The Greek are happy, motivated and productive people because of the favorable climate that brings sunshine most of the year. The natural landscapes of the country are breathtaking, and the hygiene and health conditions of the country are favorable for all humans. The local residents love where they live, and they pleasantly coexist with the many tourists exploring this corner of the world.All trends point up for Greece, and that is why so many international investors are currently looking to this country for investment, business success and even migration.

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An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

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There is an excessive amount of traffic coming from your Region.

#EANF#

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There is an excessive amount of traffic coming from your Region.

#EANF#

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An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

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An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

Posted in Uncategorized | Comments Off

An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

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An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

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Keep These 5 Rules in Mind for Successful Commercial Designing

Who doesn’t want an excellent commercial design? Excellent commercial design is important to maintain the reputation and brand image of the company. As it is said, the first impression is the last impression, a good impression always attracts potential customers. It’s obvious no one would ever love to walk in a congested environment with bad lighting.

Bad design and interiors deteriorate the productivity of the employees. It can be a confusing task when planning a commercial designing project for the first time, hiring expert Commercial Architects Melbourne can be the best option to know about the latest trends and perfect matching designs.

This blog is about some basic rules to consider for making the commercial project successful.
Keep structures versatile

When it comes to transforming any commercial space, focusing on convertibility and keeping office interior decor versatile can be the best option. It can be done by implementing a versatile structure to spaces such as cafeterias, offices, and many more. Everyone gives preference to comfort hence, focusing on spatial and versatile design will help to complete commercial designing projects in an optimal way.

Consider the latest technology implementations

Technology plays a supportive role to enhance the commercial designing project. Moving forward with the latest technology is important to execute any business smoothly because technologies make the work much easier and comfortable for the employee as well as organizations. Implementing centralized and decentralized digital control is much needed in any commercial design.

Keep office aesthetics updated

Good aesthetics and interiors impact the overall representation of the office and make the place functional and attractive. Hire a reputed designer for modern décor and furniture ideas. Hiring a designer reduces half of the project stress and helps to meet the contemporary fashion and latest trends. They can help to choose the perfect theme that blends well with the office decor, atmosphere, and colour.

Provide personalized space to prevent congestion

Majority of customer prefers personalized space such as different seating to seat comfortably and do the personal work. Personalized space is one of the crucial factors for customer-based service offices such as hotels and cafeterias to provide an ambient and comfortable place.

Always keep safety first

Safety is the central feature of every construction and designing project. Hence, it’s the high-priority factor to keep the aesthetic and functional safety at the working place. It can be compromised for interior decoration and design purposes but it’s not at all affordable to compromise for safety purposes.

Following the above useful ideas can easily help in the successful completion of a commercial designing project in a safe and pleasing way. In today’s, modern construction, reliability, and comfort is also an equally important factor.

Final words,

It’s important to hire the experienced Building designer Melbourne to make the commercial designing project worthy. Hope the above rules helped you to scale up your interior designing projects with a better outcome. Follow the above tips for any renovation or remodelling project and surely you will get award-winning and achieve a better office experience.

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