Property, Commodities, Derivatives & Alternative Assets
This chapter covers the investment assets beyond cash, bonds and shares: direct property, commodities such as gold and oil, derivatives (forwards, futures, options, warrants, swaps and CFDs), structured products, and other alternatives such as private equity, collectibles and infrastructure. Unit trusts use many of these assets and instruments, so the exam expects you to know how each one earns its return, what can go wrong, and how to do the arithmetic: rental yields, cap-rate valuations, geared returns, margin calls, option payoffs, roll yield and the option budget inside a capital-protected note.
9 sections·~5 min read
✓Checked against the SCI M8 syllabus (exam details page, Contents and Objectives), SGX Mainboard Rules chapter 5 (Structured Warrants), SGX-ST Rules chapter 19 (Marginable Futures Contracts), MoneySense (Understanding structured notes; Understanding structured deposits; Understanding contracts for difference), MAS Notice FAA-N11 (Dual Currency Investments, scope only), standard derivatives and real estate valuation theory (Hull, Options, Futures and Other Derivatives), checked 13 Sep 2026. Unofficial prep, not endorsed by MAS or SCI.
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Must-know for the exam
✓Gross rental yield = annual rent / price. Net rental yield = (annual rent - outgoings) / price. Net is always the lower figure.
✓Gearing magnifies both ways: return on equity = (net rent - interest + change in value) / cash equity. A 10% price fall on a 20% down payment wipes out 50% of equity.
✓Income capitalisation: value = net operating income / cap rate. Use NOI, not gross rent. A higher cap rate means a lower value.
✓Valuation approaches: comparable sales (recent similar transactions), income capitalisation (rented property), cost or replacement (special-purpose property with no market or rent).
✓Hard commodities are mined or extracted (metals, energy); soft commodities are grown or reared (wheat, coffee, sugar, palm oil).
✓Gold pays no income; bullion carries storage and insurance costs; producer shares are not pure gold exposure.
✓Contango: futures above spot, negative roll yield for a long rolling position. Backwardation: futures below spot, positive roll yield.
✓Forward: bilateral, customised, no premium, counterparty risk. Future: standardised, exchange-traded, central counterparty, daily mark-to-market with initial and maintenance margin.
✓Margin call when the balance falls below maintenance margin; under the usual convention the account is topped back up to initial margin.
✓Option holder pays the premium and has a right; writer receives the premium and has an obligation. Premium = intrinsic value + time value; intrinsic value is never negative.
✓Long call break-even = strike + premium. Long put break-even = strike - premium. Buyer's maximum loss = premium. Naked short call: unlimited loss.
✓Company warrants are issued by the company and create new shares on exercise. Structured warrants are issued by third-party financial institutions (SGX Mainboard Rules 501 and 502) and carry issuer credit risk and time decay.
✓Plain vanilla interest rate swap: fixed versus floating payments on a notional that is not exchanged; payments are netted.
✓CFD: no ownership or voting rights, margin-based, overnight financing, and losses can exceed the margin (MoneySense).
✓Capital-protected note = zero-coupon bond + option. Option budget = capital - capital / (1 + r)^n; S$100,000 over 5 years at 3% leaves S$13,739.
✓Alternatives: potentially low correlation with traditional assets, but illiquid, hard to value (appraisal smoothing understates risk), less transparent, higher fees and higher minimums.
Direct property: features, yields and gearing
•Direct property is tangible and can deliver two returns: rent and capital appreciation. The exam tests its drawbacks as often as its benefits.
•Illiquid: a sale takes months and you cannot sell part of a unit.
•Lumpy: one property needs a large outlay, so most individuals cannot diversify across buildings.
•High transaction costs: agent fees, legal fees and stamp duties on buying and selling.
•Management burden: tenants, repairs, vacancies and disputes.
•Concentration: one building, one location, one tenant base.
•Gearing: mortgages magnify returns on equity, in both directions.
•Gross rental yield = annual rent / price. Net rental yield = (annual rent - outgoings such as maintenance, repairs, insurance and agent fees) / price. Total return = (net income + change in value) / starting value.
•Worked example: Siti buys a unit for S$1,000,000 with S$300,000 cash and a S$700,000 interest-only loan at 3%. Net rent is S$40,000 and the value rises 5%. Return on equity = (S$40,000 - S$21,000 interest + S$50,000 gain) / S$300,000 = S$69,000 / S$300,000 = 23%.
•Direct versus indirect: listed property securities need a smaller outlay and can be sold quickly on an exchange, but their prices move with the stock market. Direct ownership gives control at the cost of concentration and illiquidity.
•Trap: examiners quote a gross yield and ask what the landlord earns, or quote a price fall and forget that the loan is still owed in full. With a 20% down payment, a 10% fall in value is a 50% loss of equity.
•Takeaway: Deduct outgoings for net yield. Measure geared returns on your own cash, and remember the loan does not share the losses.
Valuing property
•Three standard approaches are used, and the right one depends on the evidence available.
•Comparable sales (direct comparison): recent transacted prices of similar properties, adjusted for size, floor, age and condition.
•Income capitalisation: value = net operating income (NOI) / capitalisation rate. Suited to rented commercial property.
•Cost (replacement): land value + cost of rebuilding an equivalent building - depreciation. Suited to special-purpose property with no sales evidence and no rent, such as a place of worship.
•The cap rate is the income yield buyers demand. Riskier or weaker income (single tenant, short lease, poor location) attracts a higher cap rate and therefore a lower value for the same NOI. Rearranged, cap rate = NOI / value.
•Worked example: gross rent S$240,000, operating expenses S$60,000, cap rate 4.5%. NOI = S$180,000. Value = S$180,000 / 0.045 = S$4,000,000. If market cap rates rise from 4% to 5% on NOI of S$500,000, value falls from S$12,500,000 to S$10,000,000, a 20% fall.
•Trap: capitalising gross rent instead of NOI (S$240,000 / 0.045 = S$5,333,333 overstates value), or thinking a higher cap rate raises value.
•Takeaway: Value = NOI / cap rate. Higher cap rate, lower value. Use cost where there is no market and no rent.
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