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Asmah Mohd Nasir National Institute of Valuation (INSPEN), Valuation and Property Services Department (JPPH), MINISTRY OF FINANCE,

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Presentation on theme: "Asmah Mohd Nasir National Institute of Valuation (INSPEN), Valuation and Property Services Department (JPPH), MINISTRY OF FINANCE,"— Presentation transcript:

1 Asmah Mohd Nasir asmah@inspen.gov.my 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 09 http://www.eres.org 1 Diversification Effects of Indirect Real Estate in a Mixed Asset Portfolio: The Malaysian Experience

2 REITS IN MALAYSIA www.inspen.gov.my ANALYSIS OF REITS MARKET - AS AT JUN 2008 MalaysiaUSUK Total Number of REITs1314819 Market Capitalisation (in USD million)1,520294,61241,437 Market Capitalisation - per REIT (in USD million)1171,9912,302 Dividend Yield6.155.273.57 Rate of Return one year-2.68%-21.94%-41.65% Gearing25%64%42% 2 Source: Ernst & Young, 2008

3 PORTFOLIO www.inspen.gov.my 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

4 ASSETS IN THE MIXED ASSET PORTFOLIO www.inspen.gov.my 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

5 RETURN AND RISK OF SECURITISED REAL ESTATES www.inspen.gov.my 5 A Monthly B Quarterly C Annual CountryPeriodAsset ClassMeanStd Dev.MeanStd Dev.MeanStd Dev.Reference 1990-2004Securitised Real Estate0.59%2.96% 7.31%10.25%Hoesli and Moreno (2007) Australia1976-1998Indirect real estate5.13%13.84%22.15%27.68%Stevenson (2001) 1986-2001Domestic R. Estate Stocks16.00%10.20%Hoesli, Lekander and Witkiewicz (2004) France1990-2004Securitised Real Estate0.40%3.69% 4.91%12.78%Hoesli and Moreno (2007) 1976-1998Indirect real estate2.34%16.18%9.69%32.36%Stevenson (2001) 1986-2001Domestic R. Estate Stocks5.20%17.00%Hoesli, Lekander and Witkiewicz (2004) Hong Kong 1990-2004Securitised Real Estate1.19%11.44% 15.25%39.63%Hoesli and Moreno (2007) 1976-1998Indirect real estate5.19%22.78%22.43%45.56%Stevenson (2001) Japan1990-2004Securitised Real Estate-0.20%8.43% -2.37%29.20%Hoesli and Moreno (2007) 1976-1998Indirect real estate1.37%16.11%5.59%32.22%Stevenson (2001) UK1990-2004Securitised Real Estate0.29%5.25% 3.54%18.19%Hoesli and Moreno (2007) 1976-1998Indirect real estate3.58%10.84%15.11%21.68%Stevenson (2001) 1986-2001Domestic R. Estate Stocks11.70%28.70%Hoesli, Lekander &Witkiewicz (2004) US1990-2004Securitised Real Estate0.66%4% 8.21%13.86%Hoesli and Moreno (2007) 1976-1998EREITs3.94%6.62%16.72%13.24%Stevenson (2001) 1/1976 - 6/1993NAREIT Equity1.46%3.85%19.00%13.34%Mueller, Pauley and Morrill (1994) 1972-2002EREITs12.40%18.00%Waggle & Moon (2006) 1980-2002REITs0.9875%3.5737%12.52%12.38%Lee & Stevenson (2005) 1986-2001Domestic R. Estate Stocks10.60%20.00%Hoesli, Lekander and Witkiewicz (2004) Singapore1990-2004Securitised Real Estate0.81%12% 10.16%39.94%Hoesli and Moreno (2007) 1976-1998Indirect real estate3.51%19.83%14.80%39.66%Stevenson (2001) Malaysia1992-2002LPT23.61%114.67%Hishamuddin et al (2003) 1/91-12/06Property Share0.0030.1073.66%37.07%Lee & Ting (2008) REITs equal weighted0.0130.21816.77%75.52% REITs value weighted0.0040.0644.91%22.17%

6 RETURNS AND STD DEVIATIONS OF OTHER ASSETS CLASS www.inspen.gov.my 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

7 Malaysia’s LPTs Performance Data IntervalPeriodMeasuresProperty TrustKLCIMHPIReference AHPAMFPTFMPTAverage Weekly 1/1991- 11/1993Sharpe Index0.0250.0460.1270.0660.282-Kok & Khoo (1995) 1/1991- 3/1994Sharpe Index0.1410.1180.1470.1350.176- Annual 1991- 1998Sharpe Index0.2250.0300.201-0.0440.187Ting (1999) Annual Return52.8709.27036.130-9.179.27 Annual Risk218.8870.46155.13-43.3610.63 3/1991- 3/2000Annual Return24.685.387.40-15.03-Newell, Ting & Annual Risk85.8036.6041.52-39.12-Acheampong (2002) LPTFDTBKLCIMGS Annual 1992- 2002 Annual Return 23.615.734.757.365.24 Hishamuddin et al (2003) Annual Risk 114.672.241.6236.870.02 Monthly 1/91 – 12/06 Value Weighted REITs Equal Weighted REits Prop. ShareStocksBondsLee & Ting (2008) Means0.0040.0130.0030.0070.004 Std Deviation0.0640.2180.107.0800.002 7 LPT – Listed Property Trust FD – Fixed Deposit TB – Treasury Bill KLCI – Kuala Lumpur Composite Index MGS – Malaysian Government Securities

8 Correlations between Asset Classes CountryPeriodAssets correlatedCorr. Coeff.Reference US and world1990-2005Global 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 Australia1/1990 - 6/1997Securitised real estate and stocks0.56Hoesli & Moreno (2007) 7/1997 - 12/2004Securitised real estate and stocks0.47 “ Hong Kong1/1990 - 6/1997Securitised real estate and stocks0.95 “ 7/1997 - 12/2004Securitised real estate and stocks0.87 “ Japan1/1990 - 6/1997Securitised real estate and stocks0.87 “ 7/1997 - 12/2004Securitised real estate and stocks0.47 “ Singapore1/1990 - 6/1997Securitised real estate and stocks0.83 “ 7/1997 - 12/2004Securitised real estate and stocks0.86 “ UK1/1990 - 6/1997Securitised real estate and stocks0.77 “ 7/1997 - 12/2004Securitised real estate and stocks0.47 “ US1/1990 - 6/1997Securitised real estate and stocks0.51 “ 7/1997 - 12/2004Securitised real estate and stocks0.27 “ US1980-2002REITs and Treasury Bill-0.030Lee & REITs and S&P5000.4524Stevenson(2005) REITs and US Government Bonds 5-7 years0.1697 8

9 INDIRECT REAL ESTATE IN A MIXED ASSET PORTFOLIO www.inspen.gov.my 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, 2008 9

10 Returns at Different Intervals and Period of Study Annual Returns for Various Asset Classes Based on Different Return Intervals for Period 12/1995-12/2007 Annual Returns for Various Asset Classes Based on Different Return Intervals for Period 12/1998-12/2007 10

11 Std. Devs.at Different Intervals and Period of Study Standard Deviations of Various Asset Classes Based on Different Return Intervals for Period 12/1995-12/2007 Standard Deviations of Various Asset Classes Based on Different Return Intervals for Period 12/1998 - 12/2007 11

12 Correlations with other Asset Class REITs with Stocks AnnualSemi annualQuarterlyMonthly Whole period (12/95-12/07)0.4820.610.6450.492 Post Crisis period(12/98-12/07)0.0080.3510.560.258 REITs with Bonds AnnualSemi annualQuarterlyMonthly Whole period (12/95-12/07)0.090.3060.2670.1 Post Crisis period (12/98-12/07)-0.2510.160.1540.014 REITs with Cash AnnualSemi annualQuarterlyMonthly Whole period (12/95-12/07)-0.542-0.399-0.306-0.234 Post Crisis period (12/98-12/07)0.2680.5010.2460.037 12

13 Benefits of REITs in a Mixed-Asset Portfolio 13

14 CONCLUSIONS www.inspen.gov.my 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

15 LIMITATIONS www.inspen.gov.my 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 16 THANK YOU Asmah Mohd Nasir asmah@inspen.gov.my

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