How to Have the Millionaire Mindset in Real Estate and Be the Millionaire

By Kim Hin David HO

How To Have The Millionaire Mindset In Real Estate And Be The Millionaire


Chapter 1 takes a close look at the intuitive build-up approach in the formation of the direct real estate (DRE) investment hurdle rates for new DRE investing.

Chapter 2 first examines the existence of appraisal smoothing for international DRE, via adopting the first and fourth order autoregressive model, to de-smooth the DRE total returns (TRs). Secondly, the 3-factor AHP (analytic hierarchy process) SAA (strategic asset allocation) model is studied by city and country.

Chapter 3 is concerned with the need to know the DRE sector, in which the DRE asset(s) are located and of interest to local and international investors Chapter 3 focuses on superior, comprehensive DRE market (sector) structural behaviour market (sector) analysis,

Chapter 4 looks in-depth at the risk adjusted return on capital (RAROC) on an ex-ante basis. RAROC is found, by dividing the expected TR in US$ terms by the RAROC capital, for individual pan Asia office sectors “i”.

Chapter 5 acknowledges the in-depth contribution via value investing principles and the approaches, to evaluate the SG real estate investment trust (SREIT) common stocks. The “margin of safety” is also examined and pivotal on analytical reasoning and empirical data.

Chapter 6 looks at the zone of expectation, which may well be generated from relatively wide H (high) and L (low) bands. Such wide bands accord with the SG private residential sector conditions. Chapter 7 offers this book’s conclusion

• Language: English
• Publisher: Partridge Publishing Singapore
• Release date: Jun 1, 2022
• ISBN: 9781543770117

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.

Book preview

HOW TO HAVE

THE MILLIONAIRE MINDSET

IN REAL ESTATE

AND BE THE MILLIONAIRE

HO, KIM HIN / DAVID (DR) (PROFESSOR)

137324.png

Copyright © 2022 by HO, Kim Hin / David (Dr) (Professor).

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the author except in the case of brief quotations embodied in critical articles and reviews.

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

www.partridgepublishing.com/singapore

Contents

Foreword

Acknowledgements

About The Author

The Introduction

Chapter 1 The Real Estate Hurdle Rate

Chapter 2 RE (Real Estate) Asset Allocation And Investment Strategy

Chapter 3 Maturing Real Estate Sectors – A Superior Sector Analysis Of The South Korean Seoul Real Estate Sectors In Asia

Chapter 4 Managing Direct Real Estate Market Uncertainty - Direct Real Estate Asset Allocation

Chapter 5 The Value Investing Framework For Singapore (SG) REIT, SREIT Common Stocks

Chapter 6 Managing Real Estate Market Uncertainty Via Real Options

Chapter 7 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)

This book highlights the findings, contributions and recommendations made on several crucial issues, concerning the powerful tool of real estate, direct or indirect, to grow an individual or the corporate wealth. Such a book offers an accessible guide to investing and portfolio building with clear takeaways on the mindset. The millionaire mindset makes the connection between aspiring to be wealthy and becoming wealthy. On the one hand, there is the focus on identifying and resetting one’s money blueprint while on the other hand, there is the need to peek into the insight on the prudent, disciplined thoughts and behaviour of the millionaire. Common success factors among millionaires include taking investing risks, apart from living prudently. Millionaires tend to find success in work and family life, and therefore applying their mindset to one’s life, may help one to succeed to be the millionaire. Learn the discipline of value investing. As a common stock market staple, value investing considers long-term strategies to enable favourable results from investing, and to reach success in life and in business.

Chapter 1 takes a close look at the intuitive build-up approach in the formation of the direct real estate (DRE) investment hurdle rates for new DRE investing. The DRE market premium of about 400 bps (basis points) is meant to reflect the systematic risk premium, as estimated by Henderson Global Investors in their ‘Global Property Market Risk Premium’. The estimate is acceptable. The building-up approach of DRE risk premiums serves as a rough guide to ensure that ultimately the DRE hurdle rate is adequately stringent and high enough, to achieve the risk-adjusted and Sharpe-optimal portfolio total return (TR). The DRE hurdle rate is the required rate of return within the model framework of a discounted cash flow analysis, above which an investment makes sense and below which it does not.

Chapter 2 examines the existence of appraisal smoothing for international DRE, via adopting the first and fourth order autoregressive model, to de-smooth the DRE TR. The good fit of this autoregressive model with high adjusted R² values is noted. The set of total-weighted evaluation percentages by city and country, under the 3-factor AHP (analytic hierarchy process) SAA (strategic asset allocation) model, offers a consistently derived strategic asset allocation, which represents what an investor desires to achieve over a longer-term investment horizon.

Chapter 3 is concerned with the need to know the DRE sector, in which the DRE asset(s) are located and are of interest to the local or international investor. Chapter 3 focuses on the need for the superior, comprehensive and in-depth structural behaviour market (sector) analysis of a DRE market (sector), Such a DRE market analysis (REMA) can be outsourced to private DRE consultants or can be insourced. The insourced direct REMA is conducted oneself or by Chapter 3’s author for clarity and demonstration purposes.

Chapter 4 is concerned with the risk adjusted return on capital (RAROC) on an expected (i.e. ex-ante) basis. RAROC is obtained by dividing the expected TR in US$ terms by the RAROC capital, corresponding to the individual office sectors i. The overall RAROC on an ex-ante basis for the pan Asia office portfolio is found to be 56.9%. When adjusted for capital resources in the context of a reward-to-risk ratio, the implication for the pan Asia prime office portfolio investment strategy is to continue to focus or perhaps to expand investing activity in the three office sectors of Shanghai, Beijing and Kuala Lumpur, in order of priority. To guide the investment strategy again, the RAROC for the Asia prime office portfolio may be re-visited once more in the following year.

Chapter 5 acknowledges the in-depth contribution via exploring the possibility of adopting the value investing principles, and to improvise approaches and recommendations to evaluate the Singapore (SG) real estate investment trust (SREIT) common stock share. The investing conception of the margin of safety of Chapter 5 is pivotal on rigorous and analytical reasoning utilizing empirical data, and is drawn from the value investing theoretical framework of analysis (TFA)). The margin of safety is well supported by practical investing guidelines and recommendations. While there is no guarantee that such an investing conception and the corresponding TFA would always show favourable results, under the unknown conditions of the future, there is no valid reason to doubt the margin of safety.

Chapter 6 looks at the zone of expectation that in practice may well be generated from relatively wide H (high) and L (low) bands. Such wide bands accord with the SG private residential sector conditions. The zone of expectation is obtained from the geometrical midpoint, wherein the diagonal lines of a proposed identified rectangular zone intersect. However, from the business angle, the comfort level may well turn out to be a more realistic base case (P = Pb). The respective H and L bands must be reset differently to establish the ‘Business Expectation Zone".

Chapter 7 offers the book’s conclusion.

Happy reading.

Yours sincerely,

HO, Kim Hin / David (Dr) (Professor)

Singapore

May 2022.

Acknowledgements

The Author wishes to extend his most sincere appreciation first to my old friend Mr John NG Kok Liong, MBA (Imperial College) (University of London) and BEng (Chemical Engineering) (University of Loughborough), for suggesting this book’s topic and title. Secondly, 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.

About The Author

AU%20photo.jpg

HO, Kim Hin / David 

PhD (Development Economics) (University of Cambridge), MPhil (1st Cl Hons and a Star for Distinction) (Development Studies & Land Economy) (University of Cambridge); Honorary Professor (Development Economics & Land Economy) (University 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). 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, reclamation 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 Honours 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 15 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.

The Introduction

How To Have The Millionaire Mindset In

Real Estate And Be The Millionaire

Chapter 1 is concerned with an attainment of the millionaire’s mindset, which requires an individual to be disciplined and committed to conduct such a mindset systematically for direct real estate (DRE) investing. Once such a systematic DRE investing mindset is conducted frequently, the individual may well become the desired millionaire. At the DRE asset (property) level, it is necessary to secure a DRE asset with a high enough performance in terms of the DRE asset’s total return (TR). This TR must be at least the same as investment hurdle rate for new and DRE investing, locally and internationally. It is meaningful to note that several forms exist to properly define the DRE asset TR. The TR measures DRE investment return via combining the rental income and capital value (CV) appreciation for say the case of Jones Lang Lasalle RE intelligence Asia Ltd (JLL REIS Asia), but with an additional depreciation factor incorporated for the case of JLL Europe.

Chapter 2 accordingly looks at how to systematically and persistently build up a desirable portfolio of high-enough, risk-adjusted direct and indirect real estate TRs. Chapter 2 examines the dynamic and integrated DRE investment strategy for say a thirteen city Pan Asia DRE portfolio, comprising office, industrial real estate (RE) and public listed RE companies inclusive of real estate investment trusts (REITs). Such a portfolio must be geographically diversified, time diversified and be optimally risk-adjusted for portfolio TRs. Because the proportional weight of a securitized Asia index like the Morgan Stanley Composite Index (MSCI) Asian return index, representing the securitized RE is minimal, the latter is allocated to Singapore (SG)’s direct real estate (DRE) sector. Such a SG DRE sector allocation confers more flexibility for potential investing in Southeast (SE) Asia’s highly developed and stable DRE sectors. Essentially, the analytic hierarchy process (AHP) model and the Markowitz quadratic programming (QP) model are integrated to enable the dynamic strategic asset allocation (SAA) and tactical asset allocation (TAA). The AHP SAA model reflects investor-expert assessment and is rigorous for geographical diversification. Via pair-wise comparisons and subject to consistency ratio checks, such investor assessment of macroeconomic and DRE specific factors, affecting the Asian office sectors, become non-conflicting.

Chapter 3 correspondingly focusses on the micro-structure aspect of the need to know very well the DRE sector, in which the DRE assets are located and of interest to the local or international investor. Chapter 3 emphasises the need for superior, comprehensive and in-depth structural behaviour market (sector) analysis of a DRE sector. Such a direct REMA (real estate market analysis) can be outsourced to private DRE consultants or can be insourced. The insourced direct REMA is conducted oneself or by Chapter 3’s author for clarity and demonstration purposes. Accordingly, the author conducts the direct REMA for e.g. the unique, comprehensive and prominent South Korean Seoul DRE market comprising the:

• Seoul office sector,

• Seoul housing sector,

• South Korea retail sector

• Seoul hotel sector and

• Yoido Business District (YBD).

Seoul, as South Korea’s capitol city has three central business districts, which include Chung-Gu (usually known as the ‘CBD’, the traditional central business district), then Yoido (YBD) and the TBD (Teheran-road business district, Kangnam). The prime office sectors’ uncertainty stems from the demand side and supply side considerations, although there is less downside demand in the mid to longer term, allied to the gradual deepening of South Korea’s economic restructuring.

Chapter 4 brings together the above Chapters 1 and 2 into a cohesive approach.

It is noteworthy Chapter 4’s theme is about direct real estate (DRE) market (sector) analysis. The DRE REMA is optimally managed under the theoretical conceptions of DRE finance, provided that the uncertainty is quantifiable. Chapter 4 examines what DRE REMA is broadly about, mainly from the economic framework of market disequilibria, and deploys case studies involving major Asia cities. Such a market disequilibria framework enables a superior DRE REMA. The DRE REMA is different for the various Asian cities, owing to the Asian cities’ different stages of maturity. Chapter 4 so divides the examination of Asian cities into three main groups, to highlight the differentiation and the extent of DRE market uncertainty:

DRE market (sector) uncertainty derives from internal and external demand and supply sources. Such sources conform to the structural macroeconomic and microeconomic factors, which uniquely affect an Asian DRE market (sector). Therefore, managing DRE market (sector) uncertainty optimally is achieved at the portfolio level via DRE asset allocation. It is important because the DRE portfolio virtually eliminates the unique (i.e. specific) uncertainties among the various Asian DRE sectors, retaining within the DRE portfolio only the systemic (i.e. market- or sector- wide) uncertainty. Apart from DRE asset allocation, the alternative and modern approach to portfolio risk management is the value-at-risk (VaR) approach. Chapter 4 first discusses the more familiar portfolio risk management approach that deploys asset allocation. Secondly, to discuss modern portfolio risk management approach that deploys the portfolio VaR. Both approaches are examined in theoretical depth, while the empirical validation is undertaken for a pan Asia direct real estate (DRE) portfolio comprising the office sectors across eight major cities in East Asia.

Chapter 5 is correspondingly concerned with the DRE investment portfolio, the portfolio that should include DRE and indirect real estate (IDRE) assets (sectors). The IDRE sectors comprise private and public listed real estate investment trusts (REITs), the private and public listed direct real estate (DRE) companies. It is because the proportional weight of a securitized Asia index like the Morgan Stanley Composite Index (MSCI) Asian total return index, which represents the securitized RE is minimal, the latter is allocated to the Singapore (SG) DRE sector. Chapter 5 accordingly looks closely at the value investing framework, an investment operation, in which a thorough analysis, promises safety of principal and an adequate return. The value investing framework is developed to examine the intrinsic value of the SREIT (SG Real Estate Investment Trust) companies, and to infer that the SREITs offer investors an adequate margin of safety.

The Margin of safety investing concept recommends that the price an investor pays for an investment asset (sector) must always lie significantly below its fundamental or intrinsic value. A true margin of safety is based upon a thorough analysis, which is substantiated with facts, persuasive reasoning and with reference to a body of actual experience. The SREITs, backed by strong parentage, enjoy several competitive advantages over their competitors and such SREITs adopt sustainable growth strategies. SREITs’ outlook is favourable as the structural demand for SREITs remains robust.

Chapter 6 reiterates that apart from the direct real estate (DRE) asset allocation and the value-at-risk (VaR) approaches to risk management at the DRE portfolio level, it is essential to highlight another modern and important alternative to coping with uncertainty i.e. real option analysis and pricing, which help to better define DRE market (sector) uncertainty in extent and time. Real option analysis and pricing can represent uncertainty via a decision tree and the risk-neutral probability conception, to examine how uncertainty impacts on the value of DRE development decisions. The pricing of uncertainty is based on the risk-free hedge security conception. Pricing uncertainty is examined at the micro level of a DRE development opportunity on vacant land. Such a micro level tells us more about the value of waiting to invest, whereas the net present value (NPV) approach would suggest refraining from development. In general, an option is a contract giving the buyer the right but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. There are two basic types of options, namely the call option gives the holder the right to buy an underlying asset by a certain date for a certain price. The other put option gives the holder the right to sell the underlying asset by a certain date for a certain price.

Chapter 7 offers the book’s ‘Conclusion’.

137394.png

Chapter 1

The Real Estate Hurdle Rate

To attain the millionaire mindset, it is essential for an individual to be disciplined and to be committed to conduct such a mindset systematically in direct real estate (DRE) investing. Once such a mindset is conducted frequently, the individual may well become the desired millionaire. At the DRE (property) level, it is necessary to secure a property with a high enough performance in terms of the property’s total return (TR). This TR must be at least the same as investment hurdle rate for new and direct real estate (DRE) investing, locally and internationally. It is quite meaningful to note that eqs (A1) to (A6) so define the TR.

TR Definitions – The JLL REIS Asia

JLL Europe

TR = Market Occupancy x initial Yield + Capital growth – Depreciation of the building.(A2)

The reason for including a depreciation factor is to indicate the overstatement of CVs that occurs when a best building basis is used to compute CVs. It does not have much impact.

The IPD TR Index - London CBD office

Direction wise, the TRs from the IPD Office TR index for the London CBD largely track the TRs imputed from the JLL Europe’s rent index and the CV index for the Central London Offices, even though the JLL TR series is observed to be overstating the IPD TR series. While the IPD series may well reflect more smoothing because of regular and frequent valuations and transactions update, the IPD series is a long-standing one that is well administered and backed by a database of extensive commercial property coverage as well as strong local expertise. Therefore, the IPD series should be authoritative, reliable and in accord with market conditions.

The National Council of RE Investment Fiduciaries (NCREIF US)

Quarterly calculated TR = Income Return (IR) + Capital Appreciation Return (CAR), where

(A5)

Annualized TR, TRY, is calculated by chain linking quarterly returns in eq (A6).

TRY = (1 + TRQ1) x (1 + TRQ2) x (1 + TRQ3) x (1 + TRQ4) – 1(A6)

, where TRQ1, TRQ2, TRQ3 and TRQ4 are the TRs for quarters 1, 2, 3 and 4 respectively.

Chapter 1 adopts ‘property’ and ‘direct real estate’ interchangeably. Both labels describe the one and the same thing. Chapter 1 therefore appropriately examines a model of the intuitive build-up approach in the formation of the direct real estate (DRE) investment hurdle rates for new and DRE investing. These DRE hurdle rates serve as a rough guide to ensure that ultimately each DRE hurdle rate is adequately stringent to achieve the risk-adjusted (Sharpe-optimal) portfolio TR. The DRE market premium of about 400 bps (basis points) is meant to reflect the systematic risk premium, as estimated by Henderson Global Investors on the ‘Global DRE Asset Market Risk premium’. For liquidity premium, there is some non-liquidity issue when there are no specifically stated lease terms, which are comparable to internationally adopted lease terms. A resettlement problem highlights the peril of the direct real estate (DRE) investment and should be viewed as riskier. With such a problem, it can be construed to be less liquid to own DRE assets. Transparency premiums are discussed.

Essential to the transparency premiums, the definition risk and tenure risk premiums are set to very low bps levels or 0%, owing to a clear definition of the business district of interest (i.e. the demarcation of the central business district (CBD) areas inclusive), and in conjunction with a master plan for the CBD and freehold land ownership. The DRE hurdle rate is therefore the required rate of return within the model framework of a discounted cash flow analysis, above which an investment makes sense and below which it does not.

Often, this DRE hurdle rate is also based on the firm’s cost of capital or weighted average cost of capital, plus or minus a risk premium to reflect the project’s specific risk characteristics. It is also known as the DRE required rate of return or the minimum amount of return that investors require before they make an investment in a DRE asset (a single property). The DRE hurdle rate is that minimum return to investors to be achieved before a ‘carry’ is permitted. In such a carry arrangement for the business transaction, a DRE hurdle rate for e.g. of 10% means that a private equity fund for e.g., needs to achieve a total return (TR) of at least 10% per annum before the profits, namely the excess TR, are shared, in accordance with the carried-interest arrangement.

The DRE Hurdle rate and The DRE Risk Premium

One method of analyzing a country’s risk is to look at its international credit rating, ranging from 0 to 100 bps (basis points), with 100 bps, reflecting the highest country risk. Utilizing such country credit ratings, we can estimate the direct real estate (DRE) hurdle rates of return and DRE risk premiums, so that investors may be compensated accordingly for those country risks. A market-based approach, which utilizes the common stock market returns and the country’s credit rating to determine an overall risk premium, is adopted to analyze risk and return. This method relies on the market perception of the risk and reward relationship, based on historic common stock market experiences.

The DRE risk premium or the discount is the difference in the DRE hurdle rate of return between a base country and a particular country under study. As observed in Table 1, the US is usually taken to be the base country to benchmark the risk-free rate in terms of the 10-year US$ bond issue yield, because the USA is the largest stimulator of economic growth worldwide, and the USA has the largest economy in the world. The base lending rate or the risk-free rate is kept low because it is controlled by the Central Bank of the respective countries under study.

From the overall economic environment, the direct real estate market analysis (REMA) and outlook, it is unlikely the private banks would increase the lending rate drastically and at a sharp and accelerated increase in the short to medium term.

Table 1. The Basis for Risk Free Rate

NB. Yields which the new risk-free rates are based on are the Yield to Maturity of the bonds priced by Bloomberg. (Source: Author, 2007 & 2022)

The Risks Of International Direct Real Estate (DRE) Investment

Separating such risk premiums serves as a rough guide to ensure that ultimately the DRE hurdle rate is adequately stringent to achieve the risk-adjusted and Sharpe-optimal portfolio total return (TR). Consider the instance of the aggressive overthrow of a Western government, which is deemed to be a political risk but for e.g. would clearly affect liquidity. For the sake of clarity and ease of understanding, the following definitions are used.

When purchasing or managing a DRE asset, there are several institutions involved. The government sets the political framework. There are solicitors, agents (for both transacting and managing DRE assets), tenants who pay rent, and then other investors with whom transactions occur. Such market players define the various and key risks of concern:

1. default risk – tenant(s) defaulting on rental leases;

2. legal risk - legal representation (and the legislative framework);

3. political risk – government failure (in contrast to market failure);

4. liquidity – other investors; and

5. market transparency – agents (and technology).

Therefore, Table 2 recommends a model of the intuitive build-up approach in the formation of the DRE asset investment hurdle rates, which are stringent and high enough, for new and DRE investing. The DRE market premium of about 400 bps is meant to reflect the systematic risk premium as estimated by Henderson Global Investors Ltd on their ‘Global DRE Asset Market Risk Premium’. The premium estimate is still acceptable.

Table 2. Intuitive Build-UP Investment DRE Hurdle Rate Model (in Local Currency Terms)

For liquidity premium, there is the non-liquidity issue when there are no specifically stated lease terms that are comparable to internationally adopted lease terms. A resettlement problem highlights the peril of direct real estate (DRE) investment and should be viewed as riskier. With such a problem, it can be construed to be less liquid to own DRE assets. Transparency premiums are discussed comprehensively. The definition risk and tenure risk premiums are set to very low bps levels or 0% owing to a very clear definition of the business district of interest (demarcation of the CBD areas inclusive) in conjunction with a master plan for the district, and freehold land ownership respectively.

On transparency premium, the improvement in transparency is readily observed in the following instances:

• introduction of private and public real estate performance indices,

• more financial disclosure by publicly listed vehicles, and

• improved external governance of these companies.

Despite such improvements, the JLL Real Estate Transparency Scores 1 to 5 i.e. high to opaque respectively, by category, country and year (for e.g. 2006 vs. 2004) of Table 3. Such a Table still scores poorly for many Asian countries, except for Hong Kong, Singapore, Malaysia and Japan. Most Asian countries do not have the associated private or public investment performance indices for assessing transparency scores. In the Asia Pacific region, the growth of Real Estate Investment Trusts (REITs) and the global focus on accounting standards in several Asian countries, have resulted in better transparency scores across the region.

Table 3. The JLL Real Estate Transparency Scores, 2006

The direct real estate (DRE) hurdle rates of Table 2 are estimated on the pre-tax & un-leveraged basis for private equity investment, as DRE investments, inclusive of DRE developments, are made in the private market most if not all of the time. It is imperative to reiterate that the DRE hurdle rate is in turn closely connected with the DRE cap (capitalization) rate, which is the ratio of annual net operating income (NOI) to DRE asset value, and which is also the sum of two rates, namely, the DRE asset interest rate and the DRE recapture rate.

A Capital Market Approach

If the anticipated capital value (CV) and rental sources should take a turn for the worst, then the yield should rise. From a capital market approach, the DRE asset cap rate can be viewed from the investor’s perspective to match at least the safe (i.e. risk free) interest rate. The safe rate is that expected on safe investments like the sovereign or US government bonds. More typically, the DRE cap rate is envisaged to be the annual rate at which the DRE asset earns money, represented by the ratio of