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Tuesday, January 22, 2008

Relative returns by asset class - Outlook of REITs market in 2008

The spectacular performance by REITs from 2000-2006 was largely due to the property boom in the US. The property boom was largely ignited by the “invention” of REITs itself. The availability of REIT allowed many commercial property owners to unlock cash from their long-term hold type asset.

(Refer to table) The table clearly depicts the shifts in performance of different asset class. It is a very useful table to decipher the macro developments and how capital is being allocated to chase after various asset classes.

The unlocking of cash also helped charge up the rise and rise of private equity and hedge funds (where most of these excess cash went to). This is the absolute rate of returns year by year for REITs – 2000-31%; 2001-12%; 2002-3.6%; 2003-36%; 2004-33%; 2005-14%; 2006-36% and 2007-17%. Needless to say and it continues to unravel even now, the sub prime mess and the beginning of the property correction in the US contributed to the negative 17% returns for 2007.

Safe to say that there may be quite some distance to go for the excesses to be unwound from the US property market after such a prolonged run. With that, 2008 is expected to post negative returns as well.

Run on commodities

Commodities had a wonderful run with the exception in 2001. The continued weakening of the USD coupled with the new middle class emerging in BRIC (Brazil, Russia, India and China) countries will ensure a more sustained run for commodities. The bull cycle does not appear to be over by any means.

Emerging markets (including Malaysia) were still reeling from the liquidity contraction and correction from the excesses of the 90s from 2000 to 2002 (2000: -32%; 2001: -4.7%; 2002: -8%). However, the last four years were boom time Charlie days for emerging markets (2003: 51%; 2004: 22%; 2005: 30%; 2006: 29%; 2007: 36%). Naturally, if a single emerging market were to post those kinds of returns, we will be looking at a ridiculous compounded growth rate. Though the returns were explosive for emerging markets, there were a lot more rotational plays among them.

Malaysia only got into the groove in 2005-2007 after being largely ignored in 2003-2004. Colombia, China and India were the stars for the last 4 years.

Going forward, we may see investors drifting to Vietnam and some smaller African markets. What is important to note is that despite the massive rotational plays, most emerging markets managed to keep most of their gains even when they were not among the top performers year in year out.

Foreign (non-US) developed markets stocks also shared a similar pattern with emerging markets, in that they posted negative returns from 2000-2003 (2000: -14%; 2001: -21%; 2003: -16%). They posted above average returns from 2004-2007 as they basically obtained great impetus from the enlarged outsourcing into BRIC countries, which helped establish companies to save enormous costs: at the same time the rise of BRIC inhabitants as a new consumption middle class provided plenty of opportunities for all concerned.

It created a wonderful win-win situation and a real positive from the globalisation perspective. It also brought about a high correlation between developed and emerging markets. Save to say, the trend is likely to continue into 2008. Owing to higher volatility, the emerging markets as an asset class usually outperform the developed markets during bullish phases.

Investing paradigm shift

US stocks have largely underperformed the foreign developed markets from 2003-2007 (Foreign/US 2003: 38%/31%; 2004: 20%/12%; 2005: 13%/6%; 2006: 26%/15%; 2007: 11%/5%). This can be explained by the complete shift in investing paradigm and global economics.

One can say that while the US may still be retaining global business leadership, it has had to share out a lot more “equity/economic power” to other developed markets and emerging markets over the last 5 years.

The various bonds asset class' performance over the last 5 years was largely due to the shifts in global currencies realignment. Non-US bonds outperformed US bonds significantly. Can we use the relative returns table to predict 2008 and beyond? Maybe with some confidence for 2008, but beyond that would be difficult as there are too many uncertainties to make any calls with assurance. Emerging markets posted strong returns of 29% and 36% for 2006 and 2007 respectively.

While the economic structure has changed sufficiently to provide a stronger framework for emerging markets going forward, it is unlikely to reap similar returns in 2008. It will be a lot tougher for emerging markets as a whole to end the year on a positive note, not least due to the inflation factor, the weakness in US and the commodities price outlook.

Whither 2008?

REITs is an easy call. As an asset class, it would probably record negative returns in 2008. Of course foreign REITs may experience better returns owing to better fundamentals. However, the sheer size of US REITs is likely to skew the curve.

US stocks will continue to under perform foreign developed markets in 2008 as its returns are now weighted as a significant percentage of foreign markets vibrancy. Owing to the uncertain domestic economy, the US stock markets is likely to stand in the shadows of foreign developed markets in 2008 and even 2009, but that may not be a bad thing.

The best performing asset class for 2008, based on the demand and supply factor, is likely to be commodities (it is not easy to simply increase supply by ramping up production).

The time lag is still in favour of sellers. For example, oil. World consumption will rise to 87.8 million barrels a day this year, 2.1 million more than last year, or about the amount that Nigeria supplies. Demand from China alone will rise 5.7% to 8 million barrels a day as imports expand to support an economy that is likely to grow 10.5% in 2008.

Oil suppliers are straining to increase production. Brazil's Tupi field, the second largest find of the past 20 years, is more than eight kilometres below the ocean surface and will take at least five years to develop. Mexico's state oil monopoly, Petroleos Mexicanos, suffered a three-year 40% decline at its Cantarell field, the world's third largest. Since December 2005, fighting in Nigeria has reduced production 11% to 2.18 million barrels a day.

It's the same for agriculture products. According to Bloomberg, agriculture products were among the best performing commodities for the past 13 months where palm oil has gained 56%, soybean 75% and soybean oil 62%.

Of reality and fairy tale

Once upon a time, the world was an island with a million inhabitants and resources to feed and supply a million people. Suddenly, 300,000 new inhabitants came to the island from nowhere, who were willing to work for a lot less and produce at a higher rate. The 1 million inhabitants enjoyed cost savings and a better life style. Suppliers ramped up production for everything to meet the new demand that arose from the additional 300,000 consumers. Prices rose to rebalance the equation. The council of advisors decided to print more money into the system bringing about simmering inflationary pressures.

The present economic reality is akin to the fairy tale. The commodities upcycle this time may not be all hot air or even just cyclical in nature. Demographics and consumption patterns have changed, owing to globalisation. But how sure are we that this shift will result in a fairy tale outcome a few years down the yellow brick road?

The scourge of inflation

The one big danger which could rein in equity returns in 2008 is inflation. Food prices are 18% higher in China from a year ago, and Beijing fears that runaway inflation could ignite social unrest.

The price of pork, which forms the core of most Chinese diets, was up a staggering 56%. China has become a victim of its own phenomenal success. China's economy expanded at a blistering 11.5% last year, but was plagued with a 7% inflation rate, largely linked to the country's voracious appetite for global commodities. Even with a more subdued growth rate in 2008 of around 10%, the inflationary pressures will take a lot longer to work off.

In the US, producer prices were 7.7% higher in November from a year ago, the highest in 34 years. Consumer prices rose at an annual rate of 4.2% through the first 11-months of 2007, the highest in 17 years due to soaring food and energy prices. The same scene can be replayed in almost all countries, especially in emerging markets.

Having said that, such factors serve to fuel the commodities upcycle.

The sub prime fallout has started a more widespread correction in real estate, and may crimp consumption in the US. In Britain, a similar pattern, albeit less severe, is being played out. The danger is clear as many emerging markets still rely on the US for their exports. A pullback will keep most emerging markets' run up in check in 2008.

The pendulum

The pendulum has swung. Now, emerging markets will have to contend with strong local currency, enlarged capacities, inflationary pressures, higher prices, demanding valuations plus a weakening US economy. The US economy have settled for low growth, some inflation, weak USD (to make their assets more attractive): thus shielding themselves somewhat from excessive money supply growth repercussions, now unwinding right before our very eyes.

The US still have to contend with sliding house prices, a decline in consumer spending, rising credit costs, and a significant slowdown; lowering interest rates may not provide that big a help.

In other words, it’s going to be a difficult 2008.

  • S Dali is a pseudonym. He is an ex- analyst/fund manager and active blogger. ( who says he is too young, too old, too sarcastic, too dark, too funny, too charismatic, too poor, too Cantonese, too Malaysian, too frank, ... too bad.

    For perspective, this piece was written on Sunday prior to the correction across most major markets over the week

    Investment Scents post by The Star - (by S.Dali)

  • Glomac buys land in Cyberjaya Flagship Zone

    KUALA LUMPUR: Glomac Bhd subsidiary Glomac Jaya Sdn Bhd is buying a 3.29-hectare parcel of freehold land, which forms part of Cyberjaya Flagship Zone, in Sepang for RM21.24 million.

    In a statement yesterday, Glomac said Glomac Jaya had signed a sale and purchase agreement on Jan 18 with the land owner, Cyberview Sdn Bhd, and the developer, Setia Haruman Sdn Bhd, for the proposed acquisition.

    Glomac said it would finance the acquisition via internal funds and bank borrowings. It said the lot had immediate development potential due to its strategic location in the Cyberjaya Enterprise Zone.

    “Fronting the main road, the lot shares its neighbourhood with other prestigious buildings such as HSBC, IBM, DHL, BMW, Ericsson, NTT, Fujitsu and MDeC HQ.

    “It is situated within a stone’s throw away from the Multimedia University and is adjacent to Putrajaya. The surrounding area is a popular address for international IT companies and local MSC status companies,” it said.


    6th quarterly distribution for ING Global Real Estate

    KUALA LUMPUR: ING Funds Bhd (ING Funds) has declared another 0.5 sen income distribution for its ING Global Real Estate fund for the quarter ended December, 2007, the sixth quarterly income distribution.

    In a statement yesterday, ING Funds said the distribution represented a yield of 1% based on the par value of 50 sen.
    The fund has given out a total of 3.5 sen since its launch in July 2006, representing a 7% yield.

    ING Funds chief executive officer Steve Ong said: “Although banks and mortgage companies in the global financial sector have cut their dividends, we continue to deliver our annual target of 4-5% distribution yield for the fund.”

    Registered unitholders as at Jan 21, 2008 are entitled to the distribution. Those who opted for reinvestment of distribution had their units credited into their account yesterday.


    Yeoh Tiong Lay conferred award by Emperor of Japan

    KUALA LUMPUR: Prominent business and corporate figure Tan Sri Dr Yeoh Tiong Lay has been bestowed with the Order of the Rising Sun, Goldrays with Neck Ribbon by the Emperor of Japan in recognition for its efforts in promoting economic cooperation between Malaysia and Japan.

    Yeoh is a well-known business figure and prominent leader in the Malaysian and regional construction industry, said Japan’s Ambassador to Malaysia Masahiko Horie at a ceremony to bestow the award last Friday.

    Masahiko Horie presenting the award to Tan Sri Dr Yeoh Tiong Lay. - Bernama

    He also described Yeoh as a very humble and generous philanthropist, tireless in his effort to contribute to the good causes of society.

    Yeoh is the founder of YTL group, which was the first Malaysian company to be listed in the Tokyo Stock Market in 1996, thus inviting Japanese investors not only to YTL, but indirectly exposing them to other Malaysian companies listed on Bursa Malaysia.

    Yeoh is also an active member of the Malaysia Japan Economic Association.

    By Bernama

    TTDI selling tower to Felda

    KUALA LUMPUR: TTDI Development Sdn Bhd (a member of the Naza group) will sell a 50-storey office tower to the Federal Land Development Authority (Felda) for RM640.7mil.

    The proposed tower to be called Menara Felda is the tallest of seven iconic towers in TTDI Development’s RM3.5bil Platinum Park, a world-class high-end integrated residential and commercial development in the prestigious Kuala Lumpur City Centre (KLCC).

    Deputy Prime Minister Datuk Seri Najib Tun Razak, who will perform the ground-breaking ceremony at the project site at the corner of Jalan Stonor and Jalan Kuda today, will also witness the signing of an agreement between TTDI Development and Felda on Menara Felda.

    From left: Datuk Johan Ariffin, Naza group chairman and CEO Tan Sri S.M. Nasimuddin S. M Amin and Hud Abu Bakar, the project's architect and principal of RSP Akitek

    Menara Felda will have a nett lettable area of 689,000 sq ft and a floor plate of 15,000 sq ft. It will have, among others, a large banquet hall that can seat 1,500 people at the basement level.

    Platinum Park, sited on a 3.68ha freehold land, is surrounded by new high-end condominiums like The Avare, Binjai, Stonor Park and Suria Stonor.

    It will be the biggest luxury development to be undertaken by a bumiputra company in the vicinity of the Petronas Twin Towers and Suria KLCC shopping centre.

    Platinum Park comprises three high-end condos with a total of 287 units, three Grade A office towers and a five-star serviced apartment tower.

    Set within a lush landscaped “haven with a city” concept around a RM20mil, private 1.5-acre park, the project offers residents a chance to live, work and play within an exclusive domain.

    A “necklace” of niche lifestyle retail offerings will complement this one-of-its kind development in the capital. The outlets will feature products and services of international appeal never before seen in Kuala Lumpur.

    The super condominiums will be priced from about RM2,000 to RM2,500 per sq ft with sizes ranging from 2,200 to 5,500 sq ft and penthouses of 8,000 to 13,000 sq ft. There will be a 30-storey condominium tower with 123 units and two 42-storey condominium towers with a total 164 units. The first condominium block would be launched later this year or early next year.

    Platinum Park will be developed in five phases over the next eight years.

    TTDI Development group managing director Datuk Johan Ariffin said that besides its prime location, Platinum Park’s other unique selling points were its size and concept.

    Apart from KLCC, there were no other developments either within or on the fringes of the KLCC with the size of Platinum Park, he said at the project's media preview yesterday.

    “This size (3.68ha) gives us the opportunity to create something iconic. We were able to put together 10 bungalow lots over the past four to five years and create a seamlessly integrated development of seven towers.

    ”Current condominium developments in the KLCC area all comprise either one or two blocks. Ours is the only one that has an integrated concept.

    ”What Hyde Park is to London park-front apartments and Central Park is to New York condominiums, so it shall be with our Platinum Park properties. The potential is tremendous,” Johan said.

    By The Star (by S.C. Cheah)

    SDB set to make its mark on Batu Ferringi

    PETALING JAYA: In its maiden venture into Penang, Selangor Dredging Bhd (SDB) is looking to develop boutique serviced apartments along the tourist belt of Batu Ferringi, Penang said SDB
    managing director Teh Lip Kim (pix).

    “We may look into boutique serviced apartments and villas complimented by hotel and resort facilities, but this depends on what we find is best suited for the land. This is the last parcel of land on this stretch that has Batu Feringgi beach frontage, thus it has excellent potential,” said Teh.

    Teh added that Batu Feringgi is popular with locals and foreigners and the purchase matches the company’s strategy of obtaining land in locations that will add value for future developments.

    SDB, through its wholly-owned subsidiary Crescent Consortium Sdn Bhd had recently entered into a sale and purchase agreement with Alpine Accord Sdn Bhd to acquire three freehold parcels of land measuring a total of 4.7-acres for RM24.5 million or about RM120 psf.

    The three parcels are situated on Batu Feringgi, with Jalan Batu Feringgi on one side and the Batu Feringgi beach on the other. It is also between two hotels — the Grand Plaza Parkroyal Penang and Bayview Beach Resort. Work on the land is slated to commence mid-2009 onwards.

    On the purchase price, Henry Butcher Malaysia (Penang) chief executive officer Lim Ewe Tatt said it was a fair one. “SDB would have to build a highend development on the site to be able to recover the purchase cost. A highquality product with the right concept, preferably landed, would fare well.

    However, supply for upmarket properties has been constant in that area, so there might be a need to look abroad for purchasers,” Lim told theSun.

    ED Bid Properties Sdn Bhd executive director Edward Eow agreed, saying that the land was acquired at a reasonable price as a nearby plot of 32,000 sq ft was sold at RM150 psf. “SDB’s land is in a prime location with beach and mainroad frontage. It would be suitable for something tourism-related,” Eow said.

    SDB started off as a tin mining company and is now focused on property activities such as property management and leasing, hotel and property development.

    By theSun (by Allison Lee)

    First Residence planned for Kepong Baru

    SPECIALIST contractor-turned-developer TSI Holdings Sdn Bhd is planning to launch a mixed development called First Residence in Kepong Baru by the middle of this year.

    Located along the 6th mile, the shop-cum-apartment project sits on a 10-acre leasehold site that was formerly gazetted as an industrial site. According to the developer, the site has since been converted for the relevant use by the landowner. TSI purchased it in 2000.

    Its group managing director Lim Seng Kok, told PropertyPlus that First Residence will be developed over two phases. In all the project will offer 1,098 apartments, 58 shops and150,000 sq ft of commercial space.

    An artist's impression of First Residence

    Phase one will comprise 474 apartments and 58 shops, with a gross development value of M130 million.

    Of the apartments in phase one, the developer plans to launch 237 units housed within one block first. A standard 3-bedroom, 2-bathroom unit has a built-up of 1,000 sq ft and the average price is planned to be from RM190 psf.

    Each unit will come with at least one parking bay while additional bays will be sold. The maintenance fee, inclusive of contribution to the sinking fund, is expected to be between 15 and 18 sen psf.

    Targeting young families with a monthly household income of between RM5,000 and RM6,000, Lim admitted that its price point is on the premium end for its medium high end target market.

    Lim: We also have reputable property management companies to manage them

    “Apart from offering high-quality finishes as well as facilities in our projects, we also have reputable property management companies to manage them,” he said, adding that the project will be under the purview of the Housing Development (Control and Licensing) Act.

    The developer will also be constructing a 66ft road that will link its project, Segambut and Jinjang directly to Petaling Jaya via the LDP highway.

    Meanwhile, the project also offers a total of 58 shops that are located on the first two levels of the twin 16-storey project. These were launched last year and are 50% sold.

    With 29 units of shops on each level, those on the ground floor, with a standard lot size of 1,400 sq ft, are priced from RM680,000, or an average of RM450 psf. The 980 sq ft units on the first floor are priced from RM260,000 or an average of RM250 psf.

    There is also the option to purchase the shops on an enbloc basis, said Lim, adding that all the walk-up shops front the main road.

    The construction of the first phase, which will take three years, will begin in the first half of this year and the developer will be putting up a show unit. There will be more than 800 parking bays and amenities include a multipurpose hall, pools and landscaped areas.

    Expressing his confidence in First Residence, Lim felt that there is demand for such an offering in Kepong Baru.

    “Based on our past experience with D’Alamanda in Cheras, we launched it in October 2004 and received an overwhelming response through our purchasers’ word-ofmouth advertising. Many of them are also repeat buyers despite our premium prices,” he said.

    Located on a 4.4-acre leasehold site in Cheras’ 2nd mile, the first phase of the RM180 million D’Alamanda comprises a 22-storey serviced condominium with 50 shops and 390 residences, which were handed over last September.

    The second phase, to be completed by mid next year, was launched in October 2006 and comprises 67 shops and 320 condominiums.

    On the second phase of First Residence, Lim said, “The launch of phase two units will depend largely on the sales of the first phase… we will launch phase two units at a pace that the market can absorb. We also want our early purchasers to benefit so that they can enjoy some capital appreciation.”

    By theSun (by Loo Pik Kwan)