Performance of Malaysian Property Investment Vehicles NG POOI LENG JANICE YM LEE* MAIMUNAH SAPRI Centre for Real Estate Studies Universiti Teknologi Malaysia 81310 UTM, Johor Bahru *corresponding author:
[email protected]
Abstract Comparative performance analysis on all property investment vehicles is necessary for investment decision-making. However, published studies have yet to evaluate the performance of direct commercial properties against the other available property investment vehicles in Malaysia. This paper addresses the research gap by analyzing the performance of all direct property and indirect property investment vehicles in Malaysia from 2001-2010. Direct property vehicles are benchmarked by Malaysia House Price Indices (terraced, highrise, detached and semi-detached houses), while commercial properties represented by Retail Index and Office Index. Indirect property vehicles are proxied by Kuala Lumpur Property Index (KLPI) and Malaysia Real Estate Investment Trust Index (M-REIT). The sample period is further categorized into pre-crisis, crisis and post-crisis according to Malaysian economic cycle. Vehicle performance is based on risk-adjusted return calculated using Sharpe Ratio. The results show that KLPI had highest average quarterly return and risk characteristics throughout the entire timeframe. In terms of risk-adjusted return, Retail Index outperformed all property investment vehicles followed by semi-detached house investment throughout the entire sample period. Direct retail property investment would be the best choice for crisis and non-crisis period. It is also recommended to invest in M-REIT during crisis to minimize the impact of the downturn.
Keywords: Direct Property Investment, Malaysia Real Estate Investment Trust, Retail Index, Office Index, Sharpe Index
1.0
INTRODUCTION
The performance of Malaysian direct and indirect property investment vehicles are addressed by many studies (e.g. Chai, 2011; Lee, 2008; Ong et al 2008; Sipan et al., 2005; Ting, 2002). However, their researches were mainly based on direct residential properties and excluded commercial properties, which makes up a significant portion of the property market. Until today, there is no comparative performance analysis that takes into account direct commercial property investment (office and retail). In addition, most studies on M-REIT were conducted prior to 2005 and generally found poor risk-adjusted performance (see e.g. Kok and Khoo, 1995; Newell et al., 2002; Ooi, et al.,
2006; Ting, 2002). After 2005 however, interest in M-REIT grew where by 2012, the number of M-REIT increased from 4 to 15. This is attributed to liberalised guidelines on MREIT which includes granting tax transparency status and increased borrowing (debt) limits to 35% of total asset value. Besides, undistributed net income is tax-exempted if 90% of net income is distributed to shareholders (Securities Commission, 2005).
This study attempts to fill this knowledge gap by comparing the performance of all direct property and indirect property investment vehicles in Malaysia from 2001-2010. Direct property vehicles are benchmarked by Malaysia House Price Indices (terraced, high-rise, detached and semi-detached houses) for residential properties as well as Retail Index and Office Index for commercial properties. Indirect property vehicles are proxied by Kuala Lumpur Property Index (KLPI) and Malaysia Real Estate Investment Trust Index (M-REIT). The sample period is further categorized into pre-crisis, crisis and post-crisis according to Malaysian economic cycle. The Euro Zone Crisis has caused global investors to shift their capital to Asia countries and Malaysia is one of the preferred countries for investment (FPL Advisory Group, 2012). Thus, the results from this study can assist investors further in their decision-making. 2.0
MALAYSIAN PROPERTY INVESTMENT VEHICLES
2.1 Direct Property Investment Direct property investment is direct partial or complete ownership of properties such as houses, offices or retail buildings. The possible benefits are cash flow from operations and capital appreciation from property value changes over time (Hines, 2001). The types of properties focused in this study are residential and commercial (retail and office). 2.1.1 Malaysia House Price Index (MHPI) Residential properties are major assets in any investment portfolio particularly in East and Southeast-Asian countries (Roehner, 2001) including in Malaysia as well (Ting, 2003). The MHPI monitors the movement and trend of house prices in Malaysia. In addition, it also contains subindices on different types of residential properties (terrace, high rise, detach and semi-detach houses) that are used in this study. The residential properties price indices are shown in Figure 1. Prices have increased approximately 50% within the sample timeframe.
Price Index
Malaysia House Price Index (Q12001 to Q42010) 180 170 160 150 140 130 120 110 100 90 80
MHPI High Rise Terrace Detach Semidetach
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 1 Malaysia House Price Index (Quarterly) From Year 2001 to 2010 (Source: National Property Information Centre, 2011) 2.1.2 Office and Retail Indices The Office Index represents Grade A office market in Kuala Lumpur City, which consists of both the Golden Triangle and the Centre Business District. The Retail Index represents prime retail centers in Kuala Lumpur. This includes schemes in and close to Bukit Bintang Precinct, Central Business District and Golden Triangle (area surrounded by Jalan Pudu, Jalan Ampang, Jalan Imbi and Jalan Tun Razak). Figure 2 shows that retail property price index increased almost quadruple while office price index is depicting a trend that is more constant.
Malaysia Commercial Property Indices (Q12001 to Q42010) Price Index
500.0 400.0 300.0 200.0
Retail Index
100.0
Office index
0.0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 2 Commercial Property Indices Malaysia (Quarterly) From Year 2001 to 2010 (Source: Jones Lang Wotton Malaysia, 2011)
2.2 Indirect Property Investment In Malaysia, the indirect property investment market consists of listed property companies shares (property stock) and Real Estate Investment Trusts (CBRE, 2007). At end 2011, there are 111 property companies and 15 REITs listed on Bursa Malaysia. 2.2.1 FBM Kuala Lumpur Property Index (FBM KLPI) The performance of property stock can be monitored using Bursa Malaysia’s property index where it is derived according to the total property companies listed in Bursa Malaysia and weighted by market capitalisation as follows:-
FBM Kuala Lumpur Property Index (Q12001 to Q42010) 1200 Price Index
1000 800 600 400 200 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 3 FBM Kuala Lumpur Property Index (Quarterly) From Year 2001 to 2010 (Source: Bursa Malaysia, 2011) 2.2.2 Malaysia Real Estate Investment Trust Index (M-REIT Index) Bursa Malaysia does not have an index to represent M-REITs. For the purpose of this study, a M-REIT index (2000-2010) is constructed based on Bursa Malaysia Index Series methodology. A base value of 100 and 1st January 2000 is the base date. The resulting index is show in Figure 4.
Price Index
Malaysia Real Estate Investment Trust Index (Q12001 to Q42010) 3000.00 2500.00 2000.00 1500.00 1000.00 500.00 0.00 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 4 Malaysia Real Estate Investment Trust Index (Quarterly) From Year 2001 to 2010 (Source: Constructed using data from DataStream) 3.0
METHODOLOGY
The study timeframe is from 2000-2010 and will be further categorized into pre-crisis (2001Q1-2008Q3), crisis (2008Q4-2009Q3) and post-crisis period (2009Q4-2010Q4) according to Malaysian economic cycle as described in Athukorala (2010). Since MHPI is based on quarterly capital return, all investment returns are measured likewise. Quarterly return for each investment vehicle is obtained from the closing value of the last trading day of each quarter and calculated as follows:
= Index return for quarter t Index t = Closing Index value at last trading day of quarter t Index t-1 = Closing Index value at last trading day of quarter t-1 The quarterly returns are annualized. FTSE KLCI was used as benchmark for market portfolio and 3-month Malaysia Treasury Bills used as benchmark for risk-free rate. Data for FTSE KLCI is obtained from Bursa Malaysia and Treasury Bills from Bank Negara Malaysia. Sharpe Index is used to analyse the performance of both direct and indirect investment vehicles. It measures the ratio of return to volatility and defined as the ratio of risk premium (rate of return net of riskless rate) to position of total risk (standard deviation of returns of an investment vehicle). The higher the Sharpe Index, the higher the return for each unit of risk is achieved (Sharpe, 1994).
4.0 RESULTS The performance of investment vehicles will be discussed from the aspect of return, risk and risk-adjusted return.
4.1
Property Investment Returns
Figure 5 depicts the Annualised Annual Return of Direct and Indirect Property Investment Vehicles during pre-crisis, crisis and post-crisis period. KLPI index had the highest returns fluctuation where it reached its peak at 0.56% in 2007 and its lowest point at -0.49% on 2008Q1-Q3. During the pre-crisis period, KLPI and Retail Index were the property investment vehicles that had the highest annual return at 0.56% and 0.32%. Office Index had the lowest average annual return not exceeding 0.06%. During the crisis, KLPI achieved the highest annual return at 0.36% while Office Index hit the lowest annual return at -0.03%. Retail Index and Terrace House Price Index showed upward trend during the crisis when the other indices were declining. At the post-crisis period, KLPI had the highest annual return at 0.21% while office property appeared to be the investment vehicle with the lowest annual return at -0.02%.
Property Investment Vehicles - Annualised Return
0.800 0.600 0.400 0.200
Pre-Crisis
KLCI MHPI Detach House Commercial Index (Retail)
KLPI Terrace house Semi-detach
2009Q4-2010
-0.600
2008Q4-2009Q3
-0.400
2008Q1-Q3
2007
2006
2005
2004
2003
2002
-0.200
2001
0.000
Crisis
Post-
M-REIT Crisis High rise Commercial Index (office)
Figure 5 Annualised Return of Property Investment Vehicles in Pre-Crisis, Crisis and Post Crisis
4.2
Property Investment Risk
Figure 6 shows the annual risks of property investment vehicles in pre-crisis, crisis and post crisis period. KLPI was the riskiest throughout the sample period. This can be seen when the index reached its peak at 50.21% in 2009 during crisis period and its lowest point at 10.04% in 2005.
Property Investment Vehicles - Annualised Risk 60.00 50.00 40.00 30.00 20.00 10.00
Crisis
Figure 6 Annualised Risks of Property Investment Vehicles in Pre-Crisis, Crisis Crisis
2009Q4-2010
KLPI MHPI High rise Semi-detach Commercial Index (Retail)
2008Q4-2009Q3
2007
2006
2005
Pre-Crisis
2008Q1-Q3
KLCI M-REIT Terrace house Detach House Commercial Index (office)
2004
2003
2002
2001
0.00
PostCrisis and Post
During the pre-crisis period, MHPI index had lower annual risk. This could be seen as MHPI index did not exceeded 3.21% during the period. However, KLPI and KLCI had highest annual risk at that time, which is 50.21% and 31.98% accordingly. In this period, Retail Index had the lowest annual risk at 0.41%. In the post-crisis period, KLPI and M-REIT had highest annual risk, which was 16.58% and 14.18% accordingly, while the semi-detached properties appeared to be the investment vehicle with lowest annual risk at 0.02%. Overall, it was found that KLPI has higher risk as compared to all the other property investment vehicles, even higher than the market portfolio benchmark, KLCI. 4.3
Risk-adjusted Return
Table 2 illustrates the average quarterly risk-adjusted performance of direct and indirect property investment vehicles. It can be seen that Retail Index outperformed other investment vehicles in all periods. Meanwhile, Office Index was the worst performer in crisis and postcrisis period. In pre-crisis, KLPI was the worst performer with Sharpe Ratio of -8.7684. Table 2 Sharpe Ratio for Property Investment Vehicles in Pre-Crisis (2001Q1-2008Q1-Q3), Crisis (2008Q4-2009Q3), Post Crisis (2009Q4-2010Q4) Time Period Vehicles Pre-crisis Rank INDIRECT REAL ESTATE VEHICLES KLCI 0.0023 5 KLPI -8.7684 10 M-REIT 0.0006 7 DIRECT REAL ESTATE VEHICLES MHPI 0.0024 4 Terrace house 0.0009 6 High rise 0.0002 8 Detach House 0.0035 2 Semi-detach 0.0026 3 Commercial Index (office) -0.0026 9 Commercial Index (Retail) 0.0306 1
Crisis
Rank
Post -crisis
Rank
2001-2010
Rank
0.0062 0.0067 0.0071
4 3 2
0.0213 0.0137 -0.0013
5 6 9
0.1817 0.0852 0.0616
4 7 8
-0.0029 -0.0020 -0.0034 -0.0028 -0.0016
8 6 9 7 5
0.0357 0.0233 0.0106 0.0053 0.0273
2 4 7 8 3
0.2286 0.1493 0.0448 0.1537 0.2031
2 6 9 5 3
-0.0168
10
-0.0174
10
-0.2564
10
0.1755
1
0.0574
1
1.4710
1
During non-crisis periods, indirect property investment vehicles underperformed direct investment vehicle where the top four performers consists of direct investment vehicles. On the contrary, indirect investment perform better than direct investment vehicles during crisis in which Retail Index, M-REIT and KLPI were best performers overall. Overall, Retail Index, MHPI and Semi-detach index had highest risk-adjusted return with Sharpe Ratio of 1.4710, 0.2286 and 0.2031 accordingly. Meanwhile, Office Index retained its position as the worst performer with a ratio of -0.2564. Office Index performed badly especially in 2009-2010 due to large supply, stringent regulation to curb speculation, gloomy market prospect (attributable to emerging market inflationary concern, United States
Economic growth and Europe’s sovereign debt crisis). These factors caused office properties to encounter lower occupancy rate and falling rental yields (The Star, 2011). Direct retail property had the best overall performance of all property investment vehicles throughout 2001-2010. Although M-REIT had performed well in crisis period, it underperformed in other periods in which negative Sharpe Ratio was observed. This result is consistent with the findings of Chai (2011), Hamzah et al (2010) and Tan (2009). 5.0 CONCLUSION This study assessed the risk, return and risk-adjusted return of direct and indirect property investment vehicles from year 2001-2010, which was further categorized into pre-crisis, crisis and post-crisis periods. In terms of return, Retail Index and Terrace House Price Index showed upward trend during crisis period while others were declining. KLPI displayed higher risk characteristic compared to other property investment vehicles. MHPI was found to be a low risk property investment vehicle. From the aspect of risk-adjusted performance, direct retail property represented by retail index had outperformed all other property investment vehicles in pre-crisis, crisis, postcrisis periods throughout 2001-2010. Although M-REIT performed well in the crisis period, it underperformed in non-crisis periods. All in all, choosing direct retail property investment, particularly those located in Centre Business District would be the most prudent choice in crisis and non-crisis period. At the same time, it is also recommended for investors to invest in M-REIT during crisis period so as to avoid being impacted by the downturn of economy crisis.
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