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Monday, April 7, 2008

Perak’s wealth creation

An artist’s impression of a redevelopment project at Jalan 225, Petaling Jaya, by Axis Reit

The Perak state government would issue permanent land titles to about 10,000 holders of temporary occupation licences (TOL) in 134 new villages, its Mentri Besar Mohammed Nizar Jamaluddin said last week.

This will bring about a sea change to these new villages where the residents have been living since just after the Second World War. Although the new villagers will continue to live where they are, land titles will give them ownership of their houses.

That will create a measure of wealth for these 10,000 families. If we assume that ownership represents a value of about RM50,000 per property, a total value of RM500mil will be granted to these families.

In addition, it will produce a major multiplier effect. The new villagers will be more ready to renovate their houses if they have land titles, and they can use their houses as collateral for bank loans, which are important for those who are small businessmen and petty traders.

Such a figure may not amount to much in the Klang Valley, but it would mean a lot to the local economies in Perak.

In this wealth creation process, not a square foot of land is created, but it makes a big difference in transferring latent state land to a large number of “squatters”.

This is the model advocated by Peruvian economist Hernando de Soto who has advised many governments. His line of reasoning was that the poor who “squat” on state land in Third World countries had houses to live in or farms to work on, but did not own them – land titles would enable them to sell the property or use them as collateral for bank loans.

Such a programme would unlock the values of squatters' land, which to de Soto's estimate, total more than US$9 trillion worldwide. This creation of capital for “squatters” is of crucial consequence in a capitalist system.

It would also narrow the disparity in income and assets between poor “squatters” and those in the towns and suburbs, an important endeavour in any economic policy.

De Soto's model is applicable, of course, only where state land, and not privately owned land, is involved and where the “squatters” have lived or worked the land for many years or decades.

Thailand, under former prime minister Thaksin Shinawatra, implemented a Capital Creation Scheme in 2003, following de Soto's advice. Bill Clinton had told Thaksin about de Soto's views when the former US president visited Thailand in 2002, according to Internet reports. The effects of the scheme in Thailand are not known.

Civil affluence
Amid the uncertainties over the strength of consumer demand, one sector that still has drive in demand is the civil servants' group.

One indicator of this is Bank Kerjasama Rakyat Malaysia Bhd's target to achieve a pre-tax profit of RM1bil this year from RM829mil last year. These are large profit figures, bigger than those of even the mid-sized commercial banks.

It shows the strength of demand in the Government sector as Bank Rakyat mainly gives personal loans to civil servants.

RCE Capital Bhd, which is engaged in the same business, is also tapping that demand. Its loans receivables grew to RM565mil at the end of last year from RM418mil six months ago and RM349mil a year ago.

Thus the company's earnings are secure for the next few years in view of this sizeable loan book. The level of non-performing loans is very low as repayment from borrowers is made by deductions against their salaries.

Developers have also reported brisk demand from the civil service sector. In Glomac Bhd, for instance, one of the biggest portions of unbilled sales in its books was contributed by its Bandar Saujana Utama project in Sungai Buloh, Selangor.

Those who do not even know where that township is located would wonder if houses there would sell. Although that's far out in the suburbs, it is understood that Saujana Utama is selling well, with many of its buyers being civil servants.

RB Land Holdings Bhd is also understood to have found firm demand from civil servants for its houses in its Shah Alam 2 township.

The upbeat demand in this sector would have arisen from the hefty pay rise for civil servants in July last year.

REITs on the rise
Prices of real estate investment trusts (REITs) have declined everywhere, including those on Bursa Malaysia. The effect is that dividend yields have risen as unit prices of the trusts declined.

In some cases, yields have increased to over 8%, and as the business model of REITs is to purchase properties with yields above its own yield, it has become much more difficult for the trusts to expand.

REITs can also purchase properties with yields above that of borrowing costs, but some of the REITs have borrowed up to the regulated maximum of 50% their equity.

Axis REIT adopted a good approach to continue on its expansion path. It created 50 million new units, which it placed out at RM1.80 each in January. That raised RM90mil cash and expanded its capital base and borrowing capacity.

A day after the placement, Axis announced the purchase of two properties in Johor for a total of RM27mil, and last week, it proposed to buy another two buildings in Johor, also for a total of RM27mil. All these properties offer a yield higher than Axis' borrowing cost.

After the share placement in January, Axis' net gearing is about 35%, which gives it space to finance further purchases with debt.

AmFirst REIT announced last week it completed its purchase of Summit Subang USJ, a combination of a retail mall, office tower and hotel. The acquisition will raise its dividend per unit (DPU) by 2 sen, giving a forecast total DPU of 9.3 sen, AmFirst said in a statement.

AmFirst offers a yield of 10.6% on that forecast yield, which is unusually high for any asset class. That also shows the market fear of an economic slowdown.

By The Star (by C.S.Tan)

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