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Asmah Mohd Nasir asmah@inspen.my National Institute of Valuation (INSPEN),

European Real Estate Society (ERES) Conference 2009, Stockholm. 24 – 27 June 09 http://www.eres.org. Diversification Effects of Indirect Real Estate in a Mixed Asset Portfolio: The Malaysian Experience. Asmah Mohd Nasir asmah@inspen.gov.my

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Asmah Mohd Nasir asmah@inspen.my National Institute of Valuation (INSPEN),

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  1. European Real Estate Society (ERES) Conference 2009, Stockholm. 24 – 27 June 09 http://www.eres.org Diversification Effects of Indirect Real Estate in a Mixed Asset Portfolio:The Malaysian Experience Asmah Mohd Nasir asmah@inspen.gov.my National Institute of Valuation (INSPEN), Valuation and Property Services Department (JPPH), MINISTRY OF FINANCE, MALAYSIA.

  2. REITS IN MALAYSIA www.inspen.gov.my Source: Ernst & Young, 2008

  3. PORTFOLIO www.inspen.gov.my • INVESTING IN A PORTFOLIO OF BONDS, CASH, STOCKS AND REITS/PROPERTY SHARE • MEANS VARIANCE CRITERION • OPTIMAL PORTFOLIO – EQUAL INVESTMENTS AND HIGHEST SHARPE RATIO • PORTFOLIO SELECTION BASED ON: - RETURNS – higher returns - RISK - lower risk - CORRELATIONS - low or negative

  4. ASSETS IN THE MIXED ASSET PORTFOLIO www.inspen.gov.my • CASH – Fixed Deposit Rate (6 months) • BONDS – RAM Quantamshop MGS All Index • SHARES – KLCI index • REITS – simple price index of 13 REITs • PROPERTY SHARES – Property sector index

  5. RETURN AND RISK OF SECURITISED REAL ESTATES www.inspen.gov.my

  6. US Data Australian Data RETURNS AND STD DEVIATIONS OF OTHER ASSETS CLASS www.inspen.gov.my Source: Newell and Wen (2007) Source: Idzorek, Barad & Meier (2007)

  7. Malaysia’s LPTs Performance • LPT – Listed Property Trust • FD – Fixed Deposit • TB – Treasury Bill • KLCI – Kuala Lumpur Composite Index • MGS – Malaysian Government Securities

  8. Correlations between Asset Classes

  9. INDIRECT REAL ESTATE IN A MIXED ASSET PORTFOLIO www.inspen.gov.my • Increase the risk-adjusted returns – Mueller, 1994 • Weights – 15-20% - Liang et al , 1996 • Warrants inclusion in a mixed asset portfolio – Seiler, Webb and Myers, 1999 • Provides higher returns – Hishamuddin et al, 2003 • Do offer some diversifications benefits – Lee & Ting, 2008

  10. Returns at Different Intervals and Period of Study Annual Returns for Various Asset Classes Based on Different Return Intervals for Period 12/1995-12/2007 Annual Returns for Various Asset Classes Based on Different Return Intervals for Period 12/1998-12/2007

  11. Std. Devs.at Different Intervals and Period of Study Standard Deviations of Various Asset Classes Based on Different Return Intervals for Period 12/1995-12/2007 Standard Deviations of Various Asset Classes Based on Different Return Intervals for Period 12/1998 - 12/2007

  12. Correlations with other Asset Class

  13. Returns S. Deviation Sharpe Ratio Difference Before After Before After Before After Returns Std Dev Sharpe Ratio 1. Equal Investment Annual 7.11% 7.50% 0.0585 0.08 0.7136 0.575 0.39% 0.0215 -0.1386 Semiannual 8.58% 9.30% 0.0753 0.109 0.7485 0.584 0.72% 0.0337 -0.1645 Quarterly 10.30% 11.00% 0.1132 0.149 0.6499 0.538 0.70% 0.0358 -0.1119 Monthly 8.29% 8.40% 0.075 0.096 0.7125 0.571 0.11% 0.021 -0.1415 2. Highest Sharpe Ratio Annual 4.40% 4.80% 0.012 0.015 1.2119 1.24 0.40% 0.003 0.0281 Semiannual 4.07% 4.10% 0.0113 0.011 1.0013 1.001 0.03% -0.0003 -0.0003 Quarterly 3.95% 3.90% 0.0086 0.009 1.1681 1.168 -0.05% 0.0004 -1E-04 Monthly 4.09% 4.10% 0.0077 0.008 1.4881 1.491 0.01% 0.0003 0.0029 Benefits of REITs in a Mixed-Asset Portfolio

  14. CONCLUSIONS www.inspen.gov.my • Different interval period results in varying returns, standard deviations & correlations coefficient of assets . For REITs, current period is best to describe its returns and risk characteristics. • Generally, REITs and Property share are risky asset class, with larger variances compared to stocks, however its volatility is lower during post crisis period – better economic condition. • As opposed to previous studies, including indirect real estates in a mixed-asset portfolio does not gain much diversification benefits: Returns – lower than stocks, but higher than bonds & cash negative during poor economic conditions Std Deviations – variance is largest Corr.Coeff. – with stocks – moderately strong positive - with bonds & cash – low positive and negatively correlated • Outcome: Generally does not provide diversification benefits – low increase in portfolio returns, higher increase in portfolio risk.

  15. LIMITATIONS www.inspen.gov.my • LACK OF DATA - REIT INDEX – The current index based on simple price index is not normal distributed. Data is only available from 1990 onwards. • OTHER REAL ESTATE INDEX - Data on direct real estate is limited to residential data only (only quarterly index is available). There is no commercial property index.

  16. Asmah Mohd Nasir asmah@inspen.gov.my THANK YOU

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