WILL MALAYSIA ENCOUNTER ASSET BUBBLE? - AN 'ANALYSIS' BY NIK ZAFRI
Today, I am not going to write about Sub Prime Mortgage Crisis, REIT, Commercial Property Bubble etc as I've written enough. But today, I'm going to share some good articles that worth looking into.
I read Jagdev Singh Sidhu's brilliant article in the Star Thursday September 9, 2010 entitled
"Diffuse the property bubble before it is too late - Making a Point - By Jagdev Singh Sidhu"
(Nik Zafri's notes : I pray that we're not too late)
THE subject of property prices and financing has gathered momentum ever since news broke that Bank Negara is assessing the situation to determine if new measures should be instituted to cool down fast escalating property prices.
Lobby groups for the industry have been busy making their case heard, saying that any move to impose higher downpayments for houses would hurt the property market.
Their concerns come at a time as a growing number of people have complained that prices of houses, especially in the hotspots in the country such as the Klang Valley and Penang, are spiralling beyond affordability.
The last thing everybody needs is such speculation spreading to other areas where for the moment, speculative activity appears to be contained for the moment in the hotspots as 94% of houses sold in the country are priced below half a million ringgit and 85% of houses launched in the past nine months cost below RM500,000.
Dealing with speculation is tough and the last thing anyone should do is to make genuine buyers suffer, especially first time buyers.
Suggestions that houses costing below RM500,000 should not be subject to the new higher downpayment requirement makes sense.
Also first-time house buyers or owner occupied houses should be given the most ease of financing to allow them to fulfil the dream of owning a home.
It’s also hard to clamp down on speculative activity as the wealth creation process is an allure that developers, banks and policy makers might find hard to turn away.
After all, the money generated from flipping houses adds to the bottomlines of companies and the money in the hands of people could well filter down to other consumption activity that would go a long way to help spur economic activity.
But the profit from speculating activity, this time driven largely by cheap and ready financing, is unsustainable and history is full of examples of the dire consequences of a property bubble gone burst.
It’s then not surprising that the authorities in other countries in the region, where a property bubble has formed, are working hard to manage and diffuse the situation. Rules introduced in China, Hong Kong and Singapore are far more drastic that what the authorities here are reported to be contemplating.
In fact the new rules that are talked about are tame compared with what has been done in the past. In 1995, reports said that Bank Negara imposed a maximum 60% loan for residential properties priced above RM150,000 to put the brakes on the then fast rising house prices.
Furthermore, a real property gains tax of 30% was imposed on foreigners selling their properties irrespective of the holding period of the property.
Those measures were met with a huge hue and cry from the lobby groups, and developers who claimed that such draconian measures would maim the market. A couple of years later Malaysia entered its worst-ever recession, and as they say the rest is history.
The point is, just as the saying goes, those that fail to learn from history are doomed to repeat it, and for Malaysia, failing to deal with any property speculative bubble would spell trouble for the banks that have grown to rely more and more on households to drive their lending activity.
In the interest of financial stability and common sense, the move to act should be made soon.
Deputy news editor Jagdev Singh Sidhu is amazed just how much his house is “worth” in the secondary market.
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(Nik Zafri : Here's another from United States (It's old but the REIT players...you can consider the points GLG is making (but obviously it was a bit late) – BUT we in Malaysia can change it! Take Preventive Actions now!) :
if you like subprime, you'll love the commercial property bubble
August 29, 2007
Analysis by: GLG Expert Contributor
Analysis of: Commercial Real Estate, Come On Down
Published at: www.washingtonpost.com
Summary
It's fine to talk about gloom and doom, but it's an ill wind that blows no good. Counter cyclical investment is worth thinking about.
Analysis
If you like subprime...you'll just LOVE the commercial property bubble! Every day we hear about a new record price for commercial property. Great news... if you're selling.
Alright, you say, here comes another gloom and doom prophecy. Nothing new about that. But let me regale you with some ancient history.
There once was a gentleman by the name of Knuppe. He pioneered mini-storage. His rule of thumb was, 'Build to yield 12% on hard cost. Sell at a capitalization rate of 10%.'
Well a few years ago I bought a self-storage REIT to yield 8%. Considering I was paying for management and getting liquidity, thought that 8% was pretty fair.
Hoped to get some increase of value with increasing rents. Well, from time to time I checked in on the stock. When I had more than doubled my money and the yield was down to 4%, wondered what the upside could be. Maybe the yield could go down to 3%? I sold. At the time that Mr. Knuppe was in his prime, normal commercial vacancy rates were on the order of 5% and capitalization rates something like 10%.
At about that time there was a very smart gentleman by the name of Michael Young. He asked what made real estate so special that investment in it got such a premium over, say, bonds or equities. Then he proceeded to figure a way to parse out credit leases like a bond strip, selling periodic payments to one buyer and reversion of the property to another. Today the ratios are just about opposite, 10% vacancy and 5% cap rate, except you might have a hard time buying to yield 5%. Capitalization rates are trying to go down to half that. What happened? Briefly, finance discovered real estate
Recommended reading: "A Demon of Our Own Design" by Bookstaber, "The Black Swan" by Taleb and "The (Mis)Behavior of Markets" by Mandelbrot.
(Nik Zafri : here comes the best part!....read on...)
Some fairly smart folks figured ways to package and sell "asset based" products without a firm understanding of the underlying assets or their markets. It is fairly well accepted that at the moment the global economy has been awash in liquidity.
As most people in normal times would rather put money to work rather than stick it in the mattress, that means that various investments are likely to receive the bounty.
The problem, as always, is that supply being roughly equal, more money being bid means higher prices. This has trickled down to real estate through various investment vehicles.
Real estate investment trusts (REITs) are an old one. Mortgage backed securities (MBS) and collateralized debt obligations (CDOs) are newer. This doesn't mention synthetic leases, which are, at least priced, a lot like bonds, or Mr. Young's "lease strips".
At one time in the Paleolithic of real estate, forty or so years ago, a debate was current as to whether the tax advantaged status of limited partnerships inflated apartment prices. More recently there has been discussion of the inflationary aspects of tax advantaged, "1031", property exchanges.
Today, however, we are talking about REAL money, that which is under management in pension and other investment funds. If the fund managers can't find a way to invest, they don't make their bonuses. Every picture tells a story. The office complex in the aerial photo (http://www.charlesbwarren.com/aerial%20services.html) is of PacificShores.
Touted as being 2/3 leased before ground was broken in late 1999, its tenants evaporated in the dot-com meltdown the following spring. For years it represented a substantial part of the office vacancy in San MateoCounty. The picture was taken mid-day, midweek in Fall, 2004.
Recently it sold for upwards of $500 per square foot. It is now reported to be 91% leased. The parking lot is a bit more full than pictured, but not 91%.
At a ULI workshop in 2006 one of the speakers opined, "The fun is gone out of this cycle. A few years ago you could buy based on capitalization rate. Then you could justify an investment based on discounted cash flow. Now the only reason to buy is price per pound."
I think that price per pound for existing property is now getting high enough to "justify" new construction... if your expectation of investment returns is low, very low. So what? How does this help? Maybe I get "told-you-so" points in a few years?
If you are just a thrill seeker, invest on the momentum and hope to get out before the roller coaster goes over the top of the hill. Or maybe you sit on your money. Earn 5% short term. When the bubble pops maybe at least some real estate might get interesting again.
Otherwise, if you're adventurous, you might try shorting REITs. Charles B. Warren, ASA urban real property San Francisco http://www.charlesbwarren.com/
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
This author consults with leading institutions through GLG
