Global Financial Crisis and The Financial Performance of Public Listed

GLOBAL FINANCIAL CRISIS AND THE FINANCIAL PERFORMANCE OF PUBLIC LISTED COMPANIES AND PROPERTY FUNDS

(Project Leader)

Professor Dr. Abdul Rashid Abdul Aziz (USM)

&

Chan Toong Khuan (Melbourne)

Leong Boon Tik (Taylors)

Nurhafizah Yaakob (USM)

Abdullahi Umar Ahmed (ALHOSN)

ABSTRACT

The study was basically to examine the impact of the Global Financial Crisis (GFC) on public-listed property companies and property trusts of Malaysia, Singapore, Indonesia and Thailand. The chosen study period was 2004-2012 for the former, and a shorter duration of 2007-20012 for the latter due to smaller population. Ironically, though the origins of the GFC was heavily related to real estate, researches that connect the two have been limited. In its humble way, the study therefore tries to make up for the deficit.

In the run-up to the GFC, credit expansion fueled real estate booms in many developed economies. With the onslaught of the contagion, their housing bubbles collapsed. Four years after the meltdown (i.e. 2012 when the study period ended), the global house price index had yet to recover to the pre-GFC level. Disconcertingly, the V-shaped recovery from the crisis belies the still-intact mentality and institutions which triggered the worst economic crisis since the Great Depression. One noteworthy outcome of the GFC was the change in mindset of Asian leaders to foster financial cooperation. Unlike Singapore, Malaysia and Thailand, Indonesia endured a more attenuated effect from the GFC, thank to less external linkages and fiscal reforms imposed by the World Bank during the Asian Financial Crisis. But the GFC was not the only shock experienced by the studied nations. Singapore and to a lesser extent Malaysia had to confront the Eurozone Crisis towards the end of the study period. Indonesia faced mini-crisis in 2005 largely due to soaring global oil prices and Thailand suffered from the worst floods in 70 years in 2011. Each country rapidly came up with its own policy response to counteract the GFC. One observation drawn from Singapore, Indonesia and even Thailand is that the less prominent the real estate sector is in the general economy, the more overlooked it will be by policy-makers. Business confidence in the studies countries were concomitantly dented by these shocks as well as the ensuing policy responses.

The Asian Financial Crisis (AFC) of 1997 was more catastrophic to the four studies countries than the GFC. Their real estate sector were also affected, though Singapore’s suffered the least because it had fortuitously put in place the year before remedial measures to cool down the market. As the study found there were public listed companies that were still reeling from the AFC when they were hit by the GFC.

Economic shocks and policy responses affecting the performance of listed property companies and trusts were not the only aspects different between the four studied nations. The economic, social, political and geographical fabric also differed. Singapore is already a high income nation. It has long used foreign liquidity to stabilise the real estate market. It also escalates population growth through liberalised immigration policy since 2006 for sustained economic growth. Indonesian cities are mired with urban slums. Regular change in political leadership was a feature of Thailand, as was flooding. The main parties to property development also differed. Unlike in Malaysia and Thailand where they operate across the entire range of housing types, Singaporean and Indonesian developers concentrate on the higher end market segment. Property investment was the most common diversification activity of the Singaporean, Indonesian and Thai developers. Even though property trusts are a fairly new phenomenon, Singapore has managed to establish itself as an Asian hub, next to Japan. Mortgage market depth is lowest in Indonesia, followed by Thailand, due to their government’s dominance in providing housing finance. Indonesia’s urban poor also lack mortgage creditworthiness. Singapore has the deepest housing finance penetration. The government regulators deploy a range of sectoral tools to regulate the real estate market, most notably the loan-to-value (LTV) ratios.

Judging from national housing price indices, excluding the GFC, all four countries experienced asynchronous upswings and downswings. Singapore was experiencing a property boom before the GFC resulted in a dramatic drop in the Private Residential Price Index. Post-GFC, Singapore’s housing price index was boosted by excess liquidity coming in from China and Hong Kong. As the study period drew to an end, the Index slid downwards following sustained measures to cool down the property market. Post-GFC, Malaysia’s House Price Index kept rising due to pent-up demand and speculation which the government’s cooling measures failed to arrest. The growth of Indonesia’s Residential Property Index slowed down the mini-crisis of 2004, GFC and momentarily in 2012. Thailand’s house price index peaked in early 2006 before bottoming out in 2009 and 2010 and picking up thereafter. The Index value at the end of the study period was the same as at the beginning.

Analysis of the sampled property companies revealed that despite the market turbulence during the 2004-2012 study period, all four country groups experienced aggregated rising total revenue and net assets. Net profits and net profit margins remained after the GFC recovered to pre-GFC levels with a decline for a period of only one year. The Panel Data Regression Analysis revealed that the operating performance of only Singaporean companies (measured by ROAA and ROAE) were affected by the GFC of 2008. The timing of the GFC at the end of a property growth cycle in Singapore exacerbated the fall in revenues, profits, and market capitalisation in 2008. The V-shaped GFC crisis did not impact the real estate corporate performance of the other countries. Furthermore, Thai companies (measured by ROAE) were affected by the post-GFC recovery of 2009. And Indonesian companies (measured by ROAA) were affected by sharp inflation of 2012. The correlation test produced an interesting observation in that for all four countries, there was inverse correlation between debt ratio and certain performance measures (profit, ROAA and ROAE for Singapore, size and profit for Malaysia, ROAE for Indonesia, and profit, ROAA and ROAE for Thailand), which actually cohere with certain past studies. The sampled companies maintained high borrowings when profit levels were low since they could not tap from internal sources. The Random Effects Model isolated companies that performed extra-ordinarily badly and well during the study period that were in equal numbers. Performance were heavily influenced by market segment choice and timing of project launching. There were companies still reeling from the AFC as they entered the study period that became high performers, if not at least recovered, as they exited it.

Analysis of the property trusts revealed M-REITs were the least affected by the GFC as opposed to S-REITs. Indeed the Panel Data Regression Analysis reveals that S-REITs were the only nationality group that suffered from the GFC (measured by net profit margin, ROAA and ROAE). Thailand’s PFPO were affected by post-GFC recovery in 2009 (measured by profit margin). Correlation tests revealed that for M-REITs, there was negative correlations between leverage and profit, leverage and ROAA, and size and profit whereas for Thai PFPOs there was positive correlation be leverage and growth. No negative correlation was detected from S-REITs.

What are the lessons that can be drawn from the study? It is axiomatic to state that the next mega-shock would not be predicted. For future mega-shocks, property developers cannot expect policy responses to provide them respite if the private sector plays a minor role in the domestic real estate sector. It is conceivable that some of the public listed companies would be hit by the next mega-shock while still trying to recover from the GFC. Turning their fortune to become high performers, or at least recovered entites, within a few years after that though is not an impossibility. Diversification into related and non-related activities – the most obvious being property investment – provides one pathway to compensate for small or dwindling property development market. Finally, the Securities Commission of Malaysia should consider emulating Singapore in getting REITS to undertake fair value adjustments annually. This would better reflect the property values held by the REITS. Also REITs in Malaysia should be made to report earnings per unit to provide more information for investors.