Global Property Group

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Global Property Group
Karl H.K. Lung, CFA Global Property
Securities Head of Far East Property Tel (852)
2533 0068 E-mail Karl.lung_at_hk.abnamro.com
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Investing in Property The Indirect Approach

• Direct vs Indirect Property Investment
• Type of Indirect Property Investments
• REIT Characteristics
• Progress in REIT Developments
• Valuation Equity Drivers

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Direct vs Indirect Property Investment

• Direct Property Investment
• Direct holding of physical properties
• Indirect Property Investment
• Ownership through tradable shares such as real
  estate investment trusts (REITs, e.g. Equity
  Office Property Trust) or ordinary property
  companies (e.g. SHKP)

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Direct vs Indirect Property Investment

• Source Merrill Lynch, HK Government

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Direct vs Indirect Property Investment

• Why Indirect Property Investment?
• Diversified and Scalable
• Liquidity
• Free of Administration
• Access to Management Expertise
• Access to Quality Properties
• Low Transaction Cost
• Economy of Scale

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Direct vs Indirect Property Investment

• Why NOT Indirect Property Investments?
• Lack of focus and customisation
• High and Duplicate Management Fee
• Management has Different Objective
• Move Ahead of Direct Market
• Lack Transparency

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Direct vs Indirect Property Investment

• The Undetermined Factors
• Return on Investment
• Leverage / Cost of Borrowing
• Valuation Volatility
• Taxation

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Type of Indirect Property Investments
Fixed Income Investment

• Securitisation!?

Mortgage Backed
Special Purpose Company (SPC) Corporate
Restructuring REIT
Equity Property Company
Real Estate Investment Trusts (REIT) Listed
Property Trust (LPT)
Property Investment
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REIT Characteristics

• Focus on Property Investment
• Tax Concession
• Minimum Payout Ratio
• Better Investor Protection
• Better Disclosure Requirement
• Restricted to Property Related Activities
• Restriction on Development Activities
• Limit on Gearing

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REIT Characteristics

• US REIT vs Australia LPT
• US REIT Australia LPT
• Market Cap (USbn) 170 20
• Weight in Index 1 of SP500 5 of ASX100
• No of Companies gt175 36
• Investment Restriction 75 in Real Estate Primary
  in Property Investment
• Dividend Restriction 90 of Taxable Income 100
  of Taxable Income
• Management Structure Mostly Internal Should be
  External
• Borrowing Restriction None max. 60
• Property Valuation Depreciated Annual Revaluation

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Progress in REIT Developments

• Source UBS Warburg

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Progress in REIT Developments

• Source UBS Warburg

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Progress in REIT Developments

• Source UBS Warburg

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Progress in REIT Developments

• Source UBS Warburg

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Progress in REIT Developments

• Source Bloomberg

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Progress in REIT Developments

• Source Bloomberg

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Progress in REIT Developments

• REITs in Japan
• First J-REIT listed on Sep 10, 2001
• Currently 6 J-REITs listed, market cap of around
  US4bn
• Several more in the pipe line
• Based on Australian LPT model
• Japanese Investors are still adjusting to the
  high dividend yield

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Progress in REIT Developments

• REITs in Singapore
• First attempt to list S-REIT in Nov 2001 failed
  due to poor response
• Repackaged and successfully listed on July 17,
  2002
• Still just one S-REIT listed, market cap about
  USD0.5bn, second one currently on IPO
• Narrow yield spread and poor outlook in property
  market discourage more listings
• Recent approval as CPF investment may offer some
  incentives

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Progress in REIT Developments

• REITs in Korea
• 2 Corporate Restructuring REITs listed in Jan and
  May this year
• No tax concession
• No plan for introduction of ordinary REITs

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Progress in REIT Developments

• REITs in Taiwan
• Regulatory framework expected to be ready by 1Q03
• Not clear whether it will be SPC or REIT

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Progress in REIT Developments

• REITs in Hong Kong
• Formal consultation will begin in 4Q02
• Unlikely to have tax concession
• Quality assets may not be available at reasonable
  price

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Valuation Equity Drivers

• Valuation Methods
• Net Asset Value (NAV) / Net Tangible Asset (NTA)
  - Used mainly in Asia
• Net Present Value (NPV) - Discount cash income
  over the next 5 years and then apply a terminal
  value on the properties. Used mainly in
  Australia
• Earnings Per Unit (EPU) - Equivalent to
  DPU/EPS/DPS. Used mainly in Australia to
  supplement NPV
• Funds From Operation (FFO) - Measures recurrent
  cash income. Used mainly in the US to remove the
  impact from depreciation charges

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Valuation Equity Drivers

• Valuation only tells how an individual stock is
  valued relative to other references. There is no
  implication whether a stock is cheap or
  expensive, or should it be a BUY or SELL.
• Choice of valuation method depends on market
  structure, such as information available,
  transaction volume, activities involved,
  accounting method, lease structure etc.
• It is important to isolate the impact of property
  price fluctuation from income generated from
  normal property activities.

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Valuation Equity Drivers

• Top-Down Equity Drivers Bottom-Up Equity Drivers
• Government Policy Geographic and Sector focus
• Demographic Reputation and Brand Name
• GDP Growth Unique Value-Added Ability
• Unemployment Quality of Earning
• Affordability Leverage
• Sentiment Corporate Governance
• Question Which drives the market at the moment?

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Valuation Equity Drivers

• Sharing some of my ideas
• Government is always an important factor
• Land is a call option with no expiration
• Direct market is inefficient with loose
  regulation
• Beware of the Affordability illusion
• Know what you are investing
• Stock selection is critical