Direct Real Estate Duration Risk, Total Risk and the Residential Mortgage Life Insurance (Rmli)

By Kim Hin David HO

Chapter 1 compares the direct real estate (DRE) duration Beta estimates with the time-varying Beta regression estimates, for each of the three prime DRE sectors. Except for the prime office sector, both the duration Beta and the time-varying Beta profiles follow the same general trend. The luxury residential sector and the prime office sector are inclined to move in opposite direction. However, the prime office sector shows greater volatility in the duration Beta compared with the time-varying Beta.

Chapter 2 demonstrates overall that in the presence of a set of limited available information comprising a direct real estate (DRE) asset’s passing (annual) rent, the current rental value, the expected yields and the yield-growth movements from a DRE sector analysis, conducted by a DRE consultancy or service provider, the risk-free rate and the lease maturity period; it is readily feasible to model and rigorously estimate several key risk measures and the expected total returns (TRs). Such a model and its estimations can be achieved through an ex-ante integrated DRE risk-measure model, which innovatively combines the bond duration-convexity risk conception, the Beta distribution function, and the DRE equivalent (rental) yield valuation conception.

Finally, Chapter 3 looks at the structural and behavioural experience of the prepayment risk for the underlying mortgages of China’s rapidly developing residential mortgage life insurance (RMLI) market. A reliable private prepayment dataset for China’s commercial center - the city of Shanghai - is deployed. Chapter 3 estimates the relationship between RMLI’s underlying mortgage prepayment risk and the observable macroeconomic factors, loan specific factors and borrower specific characteristics. A Cox proportional hazard model is adopted for this purpose.

Chapter 4 summarises the book’s findings and highlights the contributions and recommendations made

• Language: English
• Publisher: Partridge Publishing Singapore
• Release date: Aug 31, 2021
• ISBN: 9781543767001

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 Duration Risk, Time-Varying Risk and the GARCH Risk of the DRE Ex-Ante Systematic Risk and the Total Risk

Chapter 2 DRE risk and TR and Their Structural Ex-Ante, Non-Normal Model

Chapter 3 Structural Prepayment Risk Behavior of Underlying Mortgages for Residential Mortgage Life Insurance in A Developing Market

Chapter 4 The Conclusion

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)

Chapter 1 reiterates that unlike common stocks or bonds, which are frequently transacted, direct real estate (DRE) is sparsely transacted. DRE is heterogeneous, making it difficult to value a DRE asset accurately. DRE prices are not reported at a centralized market. There is a lack of information on DRE capital value improvements, and there is the appraisal smoothing problem if the DRE appraisal data is utilized. All these make it very difficult to precisely measure DRE total return (TR), and that an appropriate risk measure for the DRE investment portfolio is not readily available for DRE investors. Very often, DRE investors resort to the DRE TR rather than the DRE risk-adjusted TR. Chapter 1 introduces an ex-ante risk measurement and return estimation that involves no historical time series data, and of which newly built or sparsely transacted DRE assets are lacking. It is therefore possible to make use of the information available in the DRE sector and/market to look at the DRE risk pattern or to even generate an accurate estimation of the DRE investment TR.

In lack of past time series of newly built or rarely transacted DRE asset, it is possible to make use of the information available in the market to look at the DRE asset risk pattern or even to generate an accurate estimation of the DRE asset TR. The risk and return estimation model demonstrates that in the presence of a set of limited available information, comprising a DRE asset’s passing (annual) rent, current rental value, expected yield, yield-growth movements, the risk-free interest rate, and the lease maturity period from a real estate market analysis (REMA), conducted by a consultancy or service provider; it is then readily feasible to model and to rigorously estimate several key risk measures and the expected TR. Such a REMA is achievable via an ex-ante integrated direct DRE risk-measure model, which innovatively combines:

• the bond duration-convexity risk conception,

• the Beta distribution function and

• the direct DRE equivalent (rental) yield valuation conception.

The integrated risk-measure model findings are estimated under the structured Monte Carlo simulations but without the Beta distribution sub-model, and to be known as the Harry Potter computable program. The model findings suggest that higher DRE risks do not necessarily result in higher DRE total returns (TRs). Although the TRs among the four prime office sectors of Raffles Place (Singapore), Shenton Way (Singapore), Central (HK) and Wan Chai (HK), do differ slightly; the associated level of risk appears to differ to a greater extent. It is found that the relationship between the Betas and durations can explain the return differences among the DRE investment strategies. Such a finding brings new insight into areas like the DRE expected return estimation, DRE asset allocation, DRE portfolio management, risk monitoring and performance measurements, all of which help to fill the knowledge gap concerning DRE asset pricing. Chapter 2 introduces the duration of a conventional valuation model to estimate the ex-ante volatility and total risk of the DRE asset. The Chapter has the potential of estimating the risk of a new DRE asset, where its historic time series information is either limited or not available.

In Chapter 3 and since 1998, all residential mortgages in China have been adjustable-rate mortgages. The borrower’s motivation for prepayment is different from that in the US or other developed mortgage markets. In the US, mortgage insurance plays an imperative role in covering some of the risk typically faced by housing finance institutions. However, China’s residential mortgage life insurance (RMLI) market is in its infancy. It offers the insured mortgagor a life-insurance death benefit, arising from only illness or accident, settling the insured’s outstanding residential mortgage balance. Prepayments of some RMLIs’ underlying mortgages are observed, leading to a premature termination of both the residential mortgage and the insurance commitment to settle the outstanding mortgage balance even though the insured has not yet passed away. It is imperative to know more about the prepayment rate of occurrence and the prepayment characteristics of the underlying residential mortgages in terms of observable macro-economic factors, loan specific factors and borrower specific characteristics.

Therefore Chapter 3 looks at the prepayment risk behavior of the underlying mortgages for RMLIs, utilizing a pilot study of 1,000 Shanghai residential mortgagors, who have taken up RMLIs between January 1999 and December 2003. Chapter 3 adopts the Cox proportional hazard model to look at the RMLI-mortgage prepayment risk behavior. The resultant hazard rate is dependent on four primary factors, namely, the combined monthly income of the co-borrowers, growth in the gross domestic product, the number of co-borrowers and the initial loan-to-value ratio.

Chapter 4 offers this book’s conclusion.

Happy reading.

Yours sincerely,

Professor (Dr) Kim Hin/David HO

Singapore

August 2021

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 direct and indirect real estate investments.

About the Author

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Professor (Dr) Kim Hin David HO

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 thirty one years across several sectors, including the military, oil refining, aerospace engineering, public housing, resettlement, land acquisition, reclamation, and international real estate investing. Six 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 Honours with the Star for 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 fourteen 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

Direct DRE Duration Risk, Total Risk and The Residential Mortgage Life Insurance (RMLI)

Chapter 1 reiterates that unlike common stocks or bonds, which are frequently transacted, direct real estate (DRE)