The Versatility of the Real Estate Asset Class - the Singapore Experience

By Kim Hin David HO

Chapter 1 takes a close look at two types of heterogeneous investors (momentum and disposition) to form a unique difference model, to interpret housing price dynamics. Three parameters are crucial, namely, auto-correlation, the rate of mean reversion and the contemporaneous adjustment towards long-term equilibrium price. The key implication is that the 2006 boom of the Singapore private housing market does not offer as large a magnitude as that from the price gain in the 1990’s boom-and-recovery over the long-term. Singapore’s private housing market is low risk, offering stable returns owing to virtually no divergence even in the speculative 1990s. The best way to invest is to consider the momentum strategy and avoid the herd behaviour for profit sustainability. For policy makers, the Singapore private housing market is over-damped in the long run.

Chapter 2 adopts game theory to look at the private residential development oligopolistic market; the determination of residential development sale prices in an uncertain market and under incomplete information of competing developers; the dynamic interaction among developers; the time lags of the development project completion from project start; and the launching of the residential development for sale before completion and the residential development’s own capacity constraints. Developers tend to cooperate for long-term benefit, leading to a sales slowdown. Relatively high profits, earnable in the first few periods, provide an allowance to price undercut others, to sell much faster. First-mover advantage in a new market is evident. As uncertainty rises, prices decrease while price variability increases.

Chapter 3 looks at the institutional nature of legal origin and the total returns (TRs), derived from investing in a country’s direct real estate, and via the adoption of a multi-factor arbitrage pricing theory (APT) model. The 1st and 4th order autoregressive model is adopted to de-smooth the TRs. De-smoothed data is used in conjunction with 2 macroeconomic variables (real GDP growth rate and interest rate) and 1 real estate risk factor (vacancy rate) to form the multi-factor structural model. A pooled panel analysis is conducted with the law-system dummies, denoting British legal origin and French legal origin, and the factor loadings (i.e. the sensitivity of the risk factor to the TRs). Macroeconomic and real estate risk factors in equilibrium affect the TRs. Vacancy rate commands high and significant risk premium owing to its direct impact on the TRs, relative to GDP growth rate and interest rate.

Chapter 4 is concerned with the real estate mezzanine investment (REMI), a new financial instrument for Asia’s real estate market, and examines the REMI structure, the measurement and characteristics of its risks and returns via a forward-looking binomial asset tree (BAT) model. Risk neutral pricing probability is adopted. REMI bears more risk than typical commercial bank loans, resulting in higher interest rates than pure equity. Different risk issues focus on two major sources - the financial loan to value (LTV) ratio risk and the real estate and capital markets risk. Chapter 4 fulfils the need to close the gap concerning the REMI structure and performance in the steady state, utilizing reliable, authoritative information and data sources. Lastly, Chapter 5 offers this book’s conclusion.

• Language: English
• Publisher: Partridge Publishing Singapore
• Release date: Feb 22, 2021
• ISBN: 9781543763614

Kim Hin David HO

Dr HO Kim Hin / David is Honorary Professor in Development Economics & Land Economy, awarded by the UK public university, the University of Hertfordshire. He retired end-May 2019 as Professor (Associate) (Tenured) from the National University of Singapore. Professor HO spent the last thirty-one years across several sectors, which include the military, oil refining, aerospace engineering, public housing, resettlement, land acquisition, land reclamation, real estate investment , development and international real estate investing. He spent six years in the real estate career as part of the executive management group of Singapore Technologies at Pidemco Land Limited, and as part of the senior management team of the Government of Singapore Investment Corporation’s GIC Real Estate Private Limited. Seventeen years are spent in the National University of Singapore at the then School of Building and Estate Management, the Department of Real Estate, School of Design and Environment, where his research expertise is in two areas. First is international real estate in the area of risk-return behavior behind international real estate investing in direct and indirect real estate. Secondly, is urban and public policy analysis involving real estate, sea transport, public housing, land and land use. Schooled in development economics and in land economy at the University of Cambridge, England, he has effectively extended these disciplines to examine his two expertise areas. Apart from being well versed in econometrics, his quantitative interests include real estate demand and supply, investment and finance, artificial intelligent modeling in real estate and system dynamics modeling for real estate market analysis and public policy analysis. He is the Member of the Royal Economics Society (U.K.), Academic Member of the National Council of Real Estate Investment Fiduciaries (U.S.), Fellow of the American Real Estate Society (U.S.), member of the American Economic Association (U.S.) and member of the Economic Society of Singapore and the Singapore Institute of Management. He holds the degrees of Master of Philosophy (1st Class Honors with Distinction), Honorary Doctor of Letters and the Doctor of Philosophy from the University of Cambridge, U.K. He has published widely in top international journals and conferences, in chapters of international academic book publishers. Dr Ho has written 11 major books (including this book), undertaken many consultancies and funded research projects. He has written a total of about 275 published works (with 91 in peer reviewed, reputable international journals). He is an editorial board member of the Journal of Economics & Public Finance, Real Estate Economics journal, Journal of Property Research, Journal of Property Investment & Finance, Journal of Real Estate Finance & Economics, the Property Management journal and the International Journal of Strategic Property Management. He has published widely in conferences, Finance, chapters of international academic book publishers, undertaken many consultancies and funded research projects. He is an immediate past Governor of the St Gabriel's Foundation that oversees nine schools in Singapore; and a District Judge equivalent member of the Valuation Review Board, Ministry of Finance, Singapore, and the Singapore Courts.

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CONTENTS

Foreword

Acknowledgements

About the Author

Introduction

Chapter 1   Housing Price Dynamics in a Behavioral Context

Chapter 2   Strategic Behavioral Pricing of the Private Residential Development Market - A Simplified Experimental Approach

Chapter 3   Country Legal Origin of Direct Real Estate Risk Premiums

Chapter 4   The Risk-Return Behavior of Real Estate Mezzanine Investment (REMI) – The Singapore Experience

Chapter 5   The Conclusion

References

Endnotes

FOREWORD

"Over 100 years ago, this (Singapore) was a mud-

flat, swamp. Today, this is a modern city. Ten years

from now, this will be a metropolis. Never fear."

(The first Prime Minister of Singapore Lee Kuan Yew, 1965)

This book highlights and discusses the flexibility of the real estate asset class in terms of its direct real estate and indirect real estate sectors with respect to the Singapore experience. Chapter 1 looks at the heterogeneous momentum and disposition investors. Such investors form a unique difference model to interpret housing price dynamics. Three parameters are crucial, namely, auto-correlation, the rate of mean reversion and the contemporaneous adjustment towards long-term equilibrium price. Chapter 1 examines the dynamic structures that oscillate and/or diverge from equilibrium. Disposition investors predominate although the interaction between momentum and disposition investors acts as a key determinant of private housing price dynamics for a given time in a specific market. Key implication is that the 2006 boom of the Singapore private housing market does not offer as large a magnitude as that from the price gain in the 1990’s boom-and-recovery over the long-term. Singapore’s private housing market is low risk, offering stable returns owing to virtually no divergence even in the speculative 1990s. The best way to invest is to consider the momentum strategy and avoid the herd behaviour for profit sustainability. For policy makers, the Singapore private housing market is over-damped in the long run. Disposition investors predominate this market, and their behaviour contributes to the market mechanism, which automatically adjusts private housing market prices. It is imperative to relax government intervention in Singapore’s private housing market to enhance its efficiency.

\\

Chapter 2 then looks at game theory to examine the behaviour of rational residential developers for their pricing strategy under a competitive environment. A uniquely simplified experimental research design is framed within the Singapore context. The Chapter considers the private residential development oligopolistic market; the determination of residential development sale prices in an uncertain market and under incomplete information of competing developers; dynamic interaction among developers; time lags of the development project completion from project start; launching of the residential development for sale before completion and the residential development’s own capacity constraints. Thus, residential developers tend to cooperate for long-term benefit, leading to a sales slowdown. Developers are motivated to deviate from cooperating at the beginning and at the end of successive periods in a sub-market. Relatively high profits, earnable in the first few periods, provide an allowance to price undercut others to sell much faster. For the last few periods, the punishment for any deviation from cooperating is insignificant or zero. First-mover advantage in a new market is evident. As uncertainty on the developer’s residential prices rises, then prices decrease while price variability increases. The merits of a uniquely simplified experimental research design are discussed for the strategic behavioural pricing of the private residential development market under a game theoretic approach. Chapter 2 enhances the residential development strategy of investing-developers in the residential development market. There is limited research on pricing strategy for the private residential development market in Asia.

Chapter 3 scrutinises the institutional nature of legal origin and the total returns (TRs), derived from investing in a country’s direct real estate, and via the adoption of a multi-factor arbitrage pricing theory (APT) model. Quarterly direct real estate data from the Jones Lang LaSalle Real Estate Intelligence-Asia index is used for 13 cities in Asia and across 3 sectors (office, residential and retail) are obtained. Findings confirm the existence of smoothing effects that cause a temporal bias and a seasonal lag. The 1st and 4th order autoregressive model is adopted to de-smooth the total returns (TRs). De-smoothed data is used in conjunction with 2 macroeconomic variables (real GDP growth rate and interest rate) and 1 real estate risk factor (vacancy rate) to form the multi-factor structural model. A pooled panel analysis is conducted with the law-system dummies, denoting British legal origin and French legal origin, and the factor loadings (i.e. the sensitivity of the risk factor to the TRs). Macroeconomic and real estate risk factors in equilibrium affect the TRs. Vacancy rate commands high and significant premium owing to its direct impact on the TRs, relative to GDP growth rate and interest rate. Both the British and French legal origins have a significant relationship each on the TRs.

Chapter 4 is concerned with the real estate mezzanine investment (REMI), which is a new financial instrument for Asia’s real estate market, offering superior returns than those for the typical commercial bank loans. The resultant risk exposure is relatively high. With recent and robust growth of the Singapore real estate market, there is the fast-growing real estate investment trust market. Chapter 4 examines the REMI structure, the measurement and characteristics of its risks and returns via a forward-looking binomial asset tree (BAT) model. Risk neutral pricing probability is adopted to construct the BAT tree. TRs are measured by the probability weighted average returns and discussed under different scenarios. REMI bears more risk than typical commercial bank loans, resulting in higher interest rates than pure equity. Different risk issues focus on two major sources - the financial loan to value (LTV) ratio risk and the real estate and capital markets risk. Empirical analysis involves a rigorous discrete-time forecasting of the market rent and capital value expectations of Singapore’s prime office sector, given the conditions and assumptions unique to this market. Chapter 4 fulfils the need to close the gap concerning the REMI structure and performance in the steady state, utilizing reliable, authoritative information and data sources.

Chapter 5 concludes this book.

Happy reading.

Yours sincerely,

Professor (Dr) HO, Kim Hin / David

Singapore

December 2020.

ACKNOWLEDGEMENTS

The Author wishes to extend his most sincere appreciation to the School of Design & Environment, under the highly able Deanship of the Provost & Chair Professor (Dr) LAM Khee Poh, of the National University of Singapore. The same wish is extended to the University of Cambridge and the University of Hertfordshire in Hatfield, UK. These three tertiary institutions of higher learning and research are globally leading Universities, inspiring and encouraging both modern and contemporary studies of large and complex physical infrastructural provision, in particularly public housing.

ABOUT THE AUTHOR

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Professor (Dr) HO, Kim Hin / David

PhD (Development Economics) (Cambridge), MPhil (1st Cl Hons with Distinction) (Development Studies & Land Economy) (Cambridge); Honorary Professor (Development Economics & Land Economy) (Uni of Hertfordshire); Honorary Doctorate of Letters (International Biographical Centre) (Cambridge); Systems Engineering (US Naval Postgraduate School), MRES (UK), AM NCREIF (US), FARES (US), MAEA (US), MESS, MSIM. Retired Professor (Associate) (Tenured) (International Real Estate) (Department of Real Estate) (School of Design and Environment) (National University of Singapore, NUS). Home Address: Block 220 Ang Mo Kio Avenue 1 #02-807, Singapore 560220; email address: [e-mail].

Professor HO Kim Hin / David spent 31 years across several sectors, including the military, oil refining, aerospace engineering, public housing, resettlement, land acquisition, reclaimation and international real estate investing. 6 years were in Pidemco Land Ltd (now CapitaLand Ltd) and GIC Real Estate Pte Ltd. 17 years were in the NUS School of Design and Environment at the Department of Real Estate. He holds the Master of Philosophy (First Class Honors with Distinction), Doctor of Philosophy from the University of Cambridge; and the Honorary Professor from the University of Hertfordshire. He has published widely in 275 articles (inclusive of 91 articles in top peer reviewed, international journals; pertaining to real estate investment, real estate development, urban policy, consultancies, public cum private funded research projects and so also published 14 major books. He was governor of the St Gabriel’s Foundation and member (District Judge equivalent) of the Valuation Review Board under the Singapore Ministry of Finance and the Singapore Courts.

INTRODUCTION

The Versatility of The Real Estate Asset

Class - The Singapore Experience

Chapter 1 is concerned with two types of heterogeneous investors (momentum and disposition) form a unique difference model to interpret housing price dynamics. Three parameters are crucial, namely, auto-correlation, the rate of mean reversion and the contemporaneous adjustment towards long-term equilibrium price. For Singapore, the Chapter examines the dynamic structures that oscillate and/or diverge from equilibrium. Disposition investors predominate although the interaction between momentum and disposition investors acts as a key determinant of private housing price dynamics for a given time in a specific market. Key implication is that the 2006 boom of the Singapore private housing market does not offer as large a magnitude as that from the price gain in the 1990’s boom-and-recovery over the long-term. Singapore’s private housing market is low risk, offering stable returns owing to virtually no divergence even in the speculative 1990s. The best way to invest is to consider the momentum strategy and avoid the herd behaviour for profit sustainability. For policy makers, the Singapore private housing market is over-damped in the long run. Disposition investors predominate this market, and their behaviour contributes to the market mechanism, which automatically adjusts private housing market prices. It is imperative to relax government intervention in Singapore’s private housing market to enhance its efficiency.

Chapter 2 adopts game theory to examine the behaviour of rational residential developers for their pricing strategy under a competitive environment. A uniquely simplified experimental research design is framed within the Singapore context. The Chapter considers the private residential development oligopolistic market; the determination of residential development sale prices in an uncertain market and under incomplete information of competing developers; dynamic interaction among developers; time lags of the development project completion from project start; launching of the residential development for sale before completion and the residential development’s own capacity constraints. Results show that residential developers cooperate implicitly for long-term benefit, leading to a sales slowdown. Developers are motivated to deviate from cooperating at the beginning and at the end of successive periods in a sub-market. Relatively high profits, earnable in the first few periods, provide an allowance to price undercut others to sell much faster. For the last few periods, the punishment for any deviation from cooperating is insignificant or zero. First-mover advantage in a new market is evident. On the effect of uncertainty on the developer’s residential prices, results show that as uncertainty increases, prices decrease while price variability increases. The Chapter highlights the merits of a uniquely simplified experimental research design for the strategic behavioural pricing of the private residential development market under a game theoretic approach. Chapter 2 enhances the residential development strategy of investing-developers in the residential development market. There is limited research on pricing strategy for the private residential development market in Asia.

Chapter 3 examines the institutional nature of legal origin and the total returns (TRs), derived from investing in a country’s direct real estate, and via the adoption of a multi-factor arbitrage pricing theory (APT) model. Quarterly direct real estate data from the Jones Lang LaSalle Real Estate Intelligence-Asia index is used for 13 cities in Asia and across 3 sectors (office, residential and retail) are obtained. Findings confirm the existence of smoothing effects that cause a temporal bias and a seasonal lag. The 1st and 4th order autoregressive model is adopted to de-smooth the total returns (TRs). De-smoothed data is used in conjunction with 2 macroeconomic variables (real GDP growth rate and interest rate) and 1 real estate risk factor (vacancy rate) to form the multi-factor structural model. A pooled panel analysis is conducted with the law-system dummies, denoting British legal origin and French legal origin, and the factor loadings (i.e. the sensitivity of the risk factor to the TRs). Macroeconomic and real estate risk factors in equilibrium affect the TRs. Vacancy rate commands high and significant premium owing to its direct impact on the TRs, relative to GDP growth rate and interest rate. Both the British and French legal origins have a significant relationship each on the TRs.

Chapter 4 is concerned with the real estate mezzanine investment