GROWING INVESTOR INTEREST
by Lim Lay Ying
Property Times, New Straits Times
05th February 2005

Cheer up: 2005 will be a better year than 2004 for the real estate industry – at least according to housing developers who responded to the Malaysian Institute of Economic Research (MIER)’s fourth quarter 2004 industry poll.

Survey findings which were disclosed last month, reflected their upbeat mood – a total of 47 per cent of the respondents anticipated better sales in the first quarter of this year. During the last quarter (Q4 2004), there were already more of them expressing strong showings in the number of new bookings: some 40 per cent reckoned that they received more new bookings compared with 26 per cent in the third quarter of 2004.

On the back of a business cycle upswing and sustained economic growth, 34 per cent of the respondents had planned to up prices of residential properties soon. The push to do so was driven partly by higher costs of construction which had resulted because of the rise in the prices of steel, aluminium, cement, and fuel.

Moreover, inflation rate which usually pushes up labour costs and etc., had been rising – from 1.6 per cent last year, it is expected to move up to 2.5 per cent this year, and may even exceed 3 or 4 per cent in 2007 if the ringgit peg stays till then, according to MIER.

Wave of foreign capital

Signs of this early stage of recovery in the country’s physical property market have not escaped foreign investors who have been on the look out for better returns on their capital. With both the housing and retail sectors continuing their sturdy growth path, a wave of foreign institutional investor capital has begun moving into the market over recent years.

GIC Real Estate Pte Ltd. (GIC RE), the real estate investment company of the Government of Singapore Investment Corporation Pte. Ltd., appears to be leading the pack. The company did not stop at its investments in Sunway Pyramid Mall, Sunway City Berhad, Menara Standard Chartered (formerly Menara Shahzan Insas), and RB Land Sdn Bhd.

In June 2004, it bought a 70 per cent stake in Johor Bharu City Square Shopping Centre for RM465 million. Seven months later, the company announced its plans to purchase the entire shares of Swiss Advanced Technology Institute (M) Sdn. Bhd. (SATI) from RB Land Holdings Bhd (RBLH) for RM95 million. This constitutes the second business deal with the latter since 2002 when it (GIC RE) acquired a 30 per cent stake in RB Land.

While RB Land’s flagship development is Seremban 2, a 1520-hectare land in Seremban, SATI is currently developing a three-storey shopping complex in the said township. The retail centre has already secured its tenant Aeon Co (M) Bhd, which will operate a Jusco department store.

GIC RE is a global real estate investment company with investments spread throughout North America, Europe, Asia, and Australia. Its investments include a vast range of property types – office, retail, industrial, residential, and hospitality in different forms such as direct real estate, private and public companies, or debts (distressed debt, mezzanine debt).

Major driving forces

Global property investors like GIC RE are growing in numbers – and at an unprecedented rate too. While in the past, the majority tend to be primarily from fairly rich countries such as certain Middle Eastern nations, the Netherlands, and Singapore, recent years have witnessed growing participation from larger nations like the United States and those in Europe (especially Germany).

Several reasons for this surge in focus on direct real estate in Asia have been cited as follows:

· Attractive returns

One of the major driving forces is the huge pool of surplus capital looking for attractive returns. Between 2000 and 2004, deposits gave rather meagre returns averaging at 4.1 per cent per annum compared with 12.9 per cent for equity, 6.6 per cent for corporate bonds, and 3.5 per cent for government securities.

Property offers a preferred investment choice as it offers high returns despite it being more illiquid. At the same time, it is a sector that promises a longer-term outlook and relatively greater stability than stocks. Moreover, the property market had consistently outperformed the equity market over the past few years.

· More avenues for property investment

Another significant factor driving foreign capital into the real estate market in the region is the substantial increase in the avenues for international property investment in recent years.

There are currently many more property funds catering to a wider range of niche sectors and markets, including hotels, logistic centres, offices, and shopping centres. Coupled with the rapid growth of securitized real estate, namely the publicly-traded real estate investment trusts (REITs), these vehicles provide both retail and institutional investors with increased access to foreign property markets. Investments in these funds/trusts are attractive because no property management commitments are required and due diligence and transaction costs are lower.

According to Global Property Research (GPR), Asian property was the star performer, giving a return of 18.2 per cent against 14.8 per cent for Europe and 6.1 per cent for North America, in the first half of last year. The main reason for Asia’s stellar performance was the rebounding of the physical property market from a six-year slide.

· Better information

The rise in international investor activity is also due to better information and more reliable research on foreign real estate markets. Investors have so far been extremely concerned about the lack of transparency and local market expertise.

More and more global institutional investors like GIC RE, the Dutch pension funds, and many German funds, which usually have lower risk/return requirements and longer time frames for return on investments, are gearing up to tap into the growth potential of countries such as Malaysia and its neighbours in anticipation of an increase in intra-Asian trade.

With many fund managers indicating their plans to increase their allocation to real estate over the next few years, one thing is for sure for the Malaysian property sector in 2005: it’s not going to be dull.