Asmah Mohd Nasir National Institute of Valuation (INSPEN), Valuation and Property Services Department (JPPH), MINISTRY OF FINANCE, MALAYSIA. European Real Estate Society (ERES) Conference 2009, Stockholm. 24 – 27 June Diversification Effects of Indirect Real Estate in a Mixed Asset Portfolio: The Malaysian Experience

REITS IN MALAYSIA ANALYSIS OF REITS MARKET - AS AT JUN 2008 MalaysiaUSUK Total Number of REITs Market Capitalisation (in USD million)1,520294,61241,437 Market Capitalisation - per REIT (in USD million)1171,9912,302 Dividend Yield Rate of Return one year-2.68%-21.94%-41.65% Gearing25%64%42% 2 Source: Ernst & Young, 2008

PORTFOLIO INVESTING IN A PORTFOLIO OF BONDS, CASH, STOCKS AND REITS/PROPERTY SHARE MEANS VARIANCE CRITERION OPTIMAL PORTFOLIO – EQUAL INVESTMENTS AND HIGHEST SHARPE RATIO PORTFOLIO SELECTION BASED ON: -RETURNS – higher returns -RISK - lower risk -CORRELATIONS - low or negative 3

ASSETS IN THE MIXED ASSET PORTFOLIO CASH – Fixed Deposit Rate (6 months) BONDS – RAM Quantamshop MGS All Index SHARES – KLCI index REITS – simple price index of 13 REITs PROPERTY SHARES – Property sector index 4

RETURN AND RISK OF SECURITISED REAL ESTATES 5 A Monthly B Quarterly C Annual CountryPeriodAsset ClassMeanStd Dev.MeanStd Dev.MeanStd Dev.Reference Securitised Real Estate0.59%2.96% 7.31%10.25%Hoesli and Moreno (2007) Australia Indirect real estate5.13%13.84%22.15%27.68%Stevenson (2001) Domestic R. Estate Stocks16.00%10.20%Hoesli, Lekander and Witkiewicz (2004) France Securitised Real Estate0.40%3.69% 4.91%12.78%Hoesli and Moreno (2007) Indirect real estate2.34%16.18%9.69%32.36%Stevenson (2001) Domestic R. Estate Stocks5.20%17.00%Hoesli, Lekander and Witkiewicz (2004) Hong Kong Securitised Real Estate1.19%11.44% 15.25%39.63%Hoesli and Moreno (2007) Indirect real estate5.19%22.78%22.43%45.56%Stevenson (2001) Japan Securitised Real Estate-0.20%8.43% -2.37%29.20%Hoesli and Moreno (2007) Indirect real estate1.37%16.11%5.59%32.22%Stevenson (2001) UK Securitised Real Estate0.29%5.25% 3.54%18.19%Hoesli and Moreno (2007) Indirect real estate3.58%10.84%15.11%21.68%Stevenson (2001) Domestic R. Estate Stocks11.70%28.70%Hoesli, Lekander &Witkiewicz (2004) US Securitised Real Estate0.66%4% 8.21%13.86%Hoesli and Moreno (2007) EREITs3.94%6.62%16.72%13.24%Stevenson (2001) 1/ /1993NAREIT Equity1.46%3.85%19.00%13.34%Mueller, Pauley and Morrill (1994) EREITs12.40%18.00%Waggle & Moon (2006) REITs0.9875%3.5737%12.52%12.38%Lee & Stevenson (2005) Domestic R. Estate Stocks10.60%20.00%Hoesli, Lekander and Witkiewicz (2004) Singapore Securitised Real Estate0.81%12% 10.16%39.94%Hoesli and Moreno (2007) Indirect real estate3.51%19.83%14.80%39.66%Stevenson (2001) Malaysia LPT23.61%114.67%Hishamuddin et al (2003) 1/91-12/06Property Share %37.07%Lee & Ting (2008) REITs equal weighted %75.52% REITs value weighted %22.17%

RETURNS AND STD DEVIATIONS OF OTHER ASSETS CLASS US DataAustralian Data Asset ClassReturns Standard Deviations Cash4.23%1.88% U.S. Bonds7.50%5.61% Non U.S. Bonds8.13%10.62% U.S. Large Cap Stocks11.95%17.89% U.S Small Cap Stocks12.32%19.72% Non U.S. Stocks6.82%19.37% Global Real Estate11.36%24.77% North American Real Estate16.97%20.44% European Real Estate9.53%23.81% Asian Real Estate11.58%32.56% Source: Idzorek, Barad & Meier (2007) Asset ClassReturns Standard Deviation LPTs13.65%8.09% Shares12.58%10.91% Bonds7.51%1.32% Source: Newell and Wen (2007) 6

Malaysia’s LPTs Performance Data IntervalPeriodMeasuresProperty TrustKLCIMHPIReference AHPAMFPTFMPTAverage Weekly 1/ /1993Sharpe Index Kok & Khoo (1995) 1/ /1994Sharpe Index Annual Sharpe Index Ting (1999) Annual Return Annual Risk / /2000Annual Return Newell, Ting & Annual Risk Acheampong (2002) LPTFDTBKLCIMGS Annual Annual Return Hishamuddin et al (2003) Annual Risk Monthly 1/91 – 12/06 Value Weighted REITs Equal Weighted REits Prop. ShareStocksBondsLee & Ting (2008) Means Std Deviation LPT – Listed Property Trust FD – Fixed Deposit TB – Treasury Bill KLCI – Kuala Lumpur Composite Index MGS – Malaysian Government Securities

Correlations between Asset Classes CountryPeriodAssets correlatedCorr. Coeff.Reference US and world Global real estate and Cash-0.48Idzorek, Barad & Meier (2007) Global real estate and US Bonds0.04 Global real estate and US Large Cap Stocks0.22 Global real estate and US Small Cap Stocks0.48 AustraliaQ3:1995 -Q4:2005LPTs and Shares0.22Newell & Wen (2007) LPTs and Bonds0.5 Bonds and Shares-0.22 Australia1/ /1997Securitised real estate and stocks0.56Hoesli & Moreno (2007) 7/ /2004Securitised real estate and stocks0.47 “ Hong Kong1/ /1997Securitised real estate and stocks0.95 “ 7/ /2004Securitised real estate and stocks0.87 “ Japan1/ /1997Securitised real estate and stocks0.87 “ 7/ /2004Securitised real estate and stocks0.47 “ Singapore1/ /1997Securitised real estate and stocks0.83 “ 7/ /2004Securitised real estate and stocks0.86 “ UK1/ /1997Securitised real estate and stocks0.77 “ 7/ /2004Securitised real estate and stocks0.47 “ US1/ /1997Securitised real estate and stocks0.51 “ 7/ /2004Securitised real estate and stocks0.27 “ US REITs and Treasury Bill-0.030Lee & REITs and S&P Stevenson(2005) REITs and US Government Bonds 5-7 years

INDIRECT REAL ESTATE IN A MIXED ASSET PORTFOLIO Increase the risk-adjusted returns – Mueller, 1994 Weights – 15-20% - Liang et al, 1996 Warrants inclusion in a mixed asset portfolio – Seiler, Webb and Myers, 1999 Provides higher returns – Hishamuddin et al, 2003 Do offer some diversifications benefits – Lee & Ting,

Returns at Different Intervals and Period of Study Annual Returns for Various Asset Classes Based on Different Return Intervals for Period 12/ /2007 Annual Returns for Various Asset Classes Based on Different Return Intervals for Period 12/ /

Std. Devs.at Different Intervals and Period of Study Standard Deviations of Various Asset Classes Based on Different Return Intervals for Period 12/ /2007 Standard Deviations of Various Asset Classes Based on Different Return Intervals for Period 12/ /

Correlations with other Asset Class REITs with Stocks AnnualSemi annualQuarterlyMonthly Whole period (12/95-12/07) Post Crisis period(12/98-12/07) REITs with Bonds AnnualSemi annualQuarterlyMonthly Whole period (12/95-12/07) Post Crisis period (12/98-12/07) REITs with Cash AnnualSemi annualQuarterlyMonthly Whole period (12/95-12/07) Post Crisis period (12/98-12/07)

Benefits of REITs in a Mixed-Asset Portfolio 13

CONCLUSIONS Different interval period results in varying returns, standard deviations & correlations coefficient of assets. For REITs, current period is best to describe its returns and risk characteristics. Generally, REITs and Property share are risky asset class, with larger variances compared to stocks, however its volatility is lower during post crisis period – better economic condition. As opposed to previous studies, including indirect real estates in a mixed-asset portfolio does not gain much diversification benefits: Returns – lower than stocks, but higher than bonds & cash negative during poor economic conditions Std Deviations – variance is largest Corr.Coeff. – with stocks – moderately strong positive - with bonds & cash – low positive and negatively correlated Outcome: Generally does not provide diversification benefits – low increase in portfolio returns, higher increase in portfolio risk. 14

LIMITATIONS LACK OF DATA - REIT INDEX – The current index based on simple price index is not normal distributed. Data is only available from 1990 onwards. OTHER REAL ESTATE INDEX - Data on direct real estate is limited to residential data only (only quarterly index is available). There is no commercial property index. 15

16 THANK YOU Asmah Mohd Nasir