How to bottom fish for property deals

As property prices continue to chart a downward trajectory, Warren Buffett’s investment mantra — be greedy when others are fearful — has been cited recklessly to seduce investors to part with their money. Given that prices of private non-landed homes have fallen some 8% from their last peak in 3Q2013, now is definitely a better time to enter the market compared with 2013. But now is not necessarily a better time than next year.
New headwinds from China and the eurozone’s unconvincing economic recovery are cues that the property market has yet to bottom. Separately, vacancy rates of non-landed homes could hit a historical high in 2016. At best, the current pace of price decline of around 1% per quarter will continue into 2016.
Against this backdrop, bottom fishing for beaten-down assets is a more accurate exposition of value investing than picking any asset simply because its price is not toppish.
Automating the search process
Bottom fishing is simple in principle, but challenging in execution. For the man on the street, the search for value deals typically begins with flipping through the classifieds or combing property portals and shortlisting deals based on a hunch. He must then gather market information to estimate the market value of the property and establish if there is indeed a discount. Third, he must assess whether the discount is sufficient or he should just wait for general prices to decline further.
Today, technology can streamline the search process. TheEdgeProperty.com can pick out undervalued listings by comparing the property’s asking price against its fair value. In addition, the map search tool, which was rolled out recently, allows users to identify undervalued listings within a preset radius of a certain landmark.
A property listing will be flagged as undervalued when the asking price falls below the Edge Fair Value — a valuation tool developed in collaboration with licensed valuers. The fair value methodology takes into account factors such as comparable transactions, floor level, size and outliers.
However, technology comes with limitations and investors must continue to exercise judgement and conduct due diligence. A lack of recent comparable transactions, for example, increases the fair value’s margin of error, which in turn, changes the discount margin of the so-called undervalued listing. Ground-floor units with a large patio or private enclosed space may also be flagged as undervalued as their large floor area would mark down the per square foot...