Risk-Adjusted Performance of Real Estate Stocks: Evidence from Developing Markets

Journal of Real Estate Research, The, Oct-Dec 2004 by Ooi, Joseph T L, Liow, Kim-Hiang

With the exception of Hong Kong (17.4%) and Singapore (8.7%), the publicly-traded real estate sector only constitutes a small percentage of the overall market capitalization of the stock markets in East Asia. While the markets covered in the sample are located in the same region, the data shows that they are clearly in different stages of development. Based on the gross national income (GNI) per capita as of yearend-2000, Singapore and Hong Kong can be classified as more developed economies. As a percentage of GNI, foreign direct investment (FDI) constituted a high 10.35% in Hong Kong and 7.94% in Singapore. This reflects the openness of these two economies in welcoming global investors. In addition, the size of the slock market relative to the economy (3.78 in Hong Kong and 1.60 in Singapore) indicate that these two economies are closely integrated with the world capital markets. The long-term sovereign risk ratings also vary from AAA for Singapore to B for Indonesia.

The average size of the firms listed on the East Asian stock markets was $US 297.2 million, which is comparable to the average Arm in Australia. However, they are still relatively small when compared to U.S. or U.K. companies. In terms of market liquidity, the statistics suggest there the stock value turnovers for Hong Kong, Malaysia, Singapore and Thailand were comparable to the markets in Australia and U.K. Indeed, the stock value turnover of South Korea (3.76 times) and Taiwan (3.15 times) were ranked second and third most highest in the global ranking by Standard & Poor's.

Sample Description

The financial characteristics of the sampled firms over the whole sample period as well as the two sub-periods are tabulated in Exhibit 3. Results of the analysis of variance tests indicate significant differences across markets as well as over the two sub-periods.

The market capitalization for the average real estate firm in East Asia was $US 154.28 million. It ranges from $US 17.42 million in Indonesia to $US 480.29 million in Singapore. The debt-equity ratio of the sampled firms averaged 1.439. Real estate firms in Malaysia, Singapore, Hong Kong and Taiwan employed noticeably less debt in their capital structure. In contrast, real estate firms in Thailand, Indonesia and South Korea, which incidentally were also most severely affected by the Financial Crisis, employed high debt ratios. The property asset intensity ratio, which indicates the proportion of asset held by the individual firms in real estate assets, averaged 54.9% over the study period. Comparisons across the markets indicate that the sampled firms in Hong Kong, Indonesia, Malaysia and Singapore held more real estate assets. This also implies a higher proportion of developers, builders and contractors amongst the sampled firms in South Korea, Thailand and Taiwan. Although these firms carry less real estate assets in their balance sheet, they still derived a significant proportion of their income from real estate activities. Hence, their inclusion in the real estate-related sector indices. The dividend yield averaged 2.95% over the sample period, with the highest recorded by Hong Kong and Taiwan real estate stocks. Dividend yields of real estate securities in the other rive economies were in the 2%-3% range. The low dividend yields are not surprising because real estate firms in East Asia do not enjoy any tax advantages from income disbursement.5