One of the best performing and steadiest markets in Asia is Kuala Lumpur and the reason they haven’t gone through rampant growth is because if you want to buy in KL, you have to be able to purchase the whole thing and complete on it before you can sell.
05 Apr 2009
Tim Murphy, Managing Director, IP Global discusses the impact of the global financial crisis on Asian markets, the lessons to be learnt from the downturn and the opportunities to invest in distressed assets.
Which countries do you think are best placed to withstand the global downturn?
No country is totally immune to the financial crisis but the extent they can withstand it very much varies from market to market. We have invested in 14 countries in the last three years and everywhere we have invested has been impacted somehow, although some a lot less than others. We do favour some markets a lot more than others and the key characteristic of those markets is that they are not overly leveraged by the consumer.Places like Hong Kong where the market is not heavily geared, interest rates are extremely low and the impact of the recession is far less than it would be in England, the US or Spain. Asia as a whole is a bit more resilient than the rest of the world because Asians are generally savers, not spenders and the banks are much more cautious with mortgage finance. Banks will not provide 90 percent loans of value for buy to let, the loan will be 70 of value. Places such as Hong Kong, Kuala Lumpur and Malaysia are markets that we have found have picked up quicker than many others around the world. I think the reason they do not lend as much money is partly cultural but also Asia just has not developed in the same way as the UK for instance. The UK is a credit mad society and the fact is Asians tend to be a lot more cautious with regards to financing. In my opinion Asia will never gear up in the way markets have in the West.
Are you surprised at how the Middle East has been affected?
Yes , particularly the extent to which Dubai has been affected. These countries are very rich and powerful because of the oil but Dubai has had a massive issue with global events. What has surprised everyone was that the banks were doing very well but investores were ploughing money into dirhams because they believed the dirham would depeg from the US dollar. The US dollar was getting weaker and weaker and when this crisis hit investors wanted to repatriate to US dollars. As a result, the dollar got stronger and it became apparent they didn’t need to depeg the dirham, so money was pulled out of the Middle East.Suddenly banks did not have any money to lend to investors to borrow to buy property, so Dubai has been absolutely demolished. I think everyone is shocked at how bad it is. We still believe Abu Dhabi is the safer bet, the underlying fundamentals are there and it is the biggest sovereign fund in the world. But even Abu Dhabi has been affected because of a lack of lending from the mortgage providers.
Do the US and Europe offer good investment opportunities or is there simply not the finance to take advantage of them?
We are about to launch new UK deals and we can get better finance abroad than we can in the UK. Finance is there, it just depends where you live and what kind of job you have. Certainly lending in the UK and the US will really hamper the market until there is proper lending available and those markets are going to be pretty stagnant. But if you look at what is already going on in London, there is a lot of activity from foreign investors who have got access to funding and who only need to borrow 50 or 60 percent.You will see activity at that level. Of course, if you really want the market to rebound, you need normal people to buy and normal people need to borrow 80-85 percent and without this, market activity will be hampered. It is going to be a while before that returns, and that is why the recovery in the UK and the US will be a lot slower than it will be in Asia where people have still got money.
Do you think government stimulus packages will help to restore confidence and activity?
The latest one that has just been announced in the US of $500 billion seems to have lifted the market; the US and Asia have rallied recently. They are short term measures and they are necessary. People generally don’t like protectionism but if you haven’t got faith in the banking system then the whole world is in trouble. Stimuls packages will start to work but initially it was widely thought one single measure would be enough but clearly we need five, six or seven measures to actually restore confidence.
Confidence has been knocked so badly because everything that has been tried so far has not worked and some of the measures were quite sensible. When people are lacking confidence and sentiment is low, it is almost impossible to drag sentiment back to where it was before and that is what has happened this time. Everybody has just decided that the world is coming to an end so any measures taken don’t really matter.I noticed it was a lot more prevalent in the UK when I visited rather than somewhere like Malaysia where people seem to have a bit more of a ‘can do’ attitude and are a bit more optimistic. It is interesting that places like Abu Dhabi, Singapore, China have still got enormous sovereign funds and could make a real impact with them but those governments are also making sure they protect their own at the moment. There is no knight in shining armour unfortunately, the only way to get out of this recession is to work hard and dig deep.
Do you think pushing through infrastructure projects and government development projects will help stimulate those economies and construction sectors?
Definitely. Dubai needs to invest in this anyway because they have built so much property but the transport links are awful. You have only got to go there and you know traffic is absolutely horrendous. Abu Dhabi is going to grow extremely quickly over the next five years and so they have got to get the infrastructure right. Abu Dhabi is not very big at the moment but with the amount of development that is going to go on around Reem Island, they are going to need significant infrastructure.This is a very good time for these economies to be focusing on infrastructure, keeping people in employment and getting ahead of the next growth curve. The same is happening in China and Vietnam and these countries are urbanising at an incredible rate. China, for instance, is urbanising quicker than any nation in the world but it is still pre-industrial revolution in terms of the scale of urbanisation - it is where the UK was before it industrialised in terms of the percentage of people living in rural areas. That will completely change in the next ten or twenty years so the best thing they can do is get ready for that because it is inevitable.
Do you agree that it is a good opportunity for these markets to reflect and catch up with themselves?
Yes, not just economies but also individuals. This situation has given everybody food for thought. Certainly with IP Global, although we have done well over the last three or four years, suddenly life has got a bit more difficult. We are still doing good business but nothing like the levels we were doing before and it helps us to reflect on how to better advise our investors and how to better look for opportunities. We genuinely believe that IP Global and our clients can make more money in the next five years than we have ever made because there are such good opportunities but we are all reflecting a bit.
As a business what would say are the main lessons that you have learnt?
Don’t ever take anything for granted. We have had offers of mortgage finance that have subsequently been removed. We are probably taking a slightly more cautious view of mortgage finance in markets where it is available but those circumstances may change. Things have got a bit tougher in Abu Dhabi, we are still confident of getting there but certainly we underestimated this recession with regard to lending but I think most people did.It is not so much what we have done wrong, it is more a case that we are much more focused on the customer, to make sure we look after them during these difficult times. We set their minds at rest, we communicate with them about their assets, their property investment and just make sure we keep tabs on what is happening with their money – people have been very upset and worried about their financial state of affairs.
Do you think there will be a much more stringent approach to valuations, with people more concerned with what they are physically buying rather than repackaged financial instruments?
Yes I do. Not just individuals but it is for governments to regulate and to be a lot more careful. Everyone talks about financial instruments but property as well has been bundled and sold as a commodity with little focus on the fundamentals of the property market. One of the best performing and steadiest markets in Asia is Kuala Lumpur and the reason they haven’t gone through rampant growth is because if you want to buy in KL, you have to be able to purchase the whole thing and complete on it before you can sell.That takes out a whole swathe of investors who aren’t really investors and who are basically punters who put down 5 – 10 percent and try and flip because they have not got any money. Where that happens is where markets get very dangerous. In London, all over the US, Dubai, Singapore, properties may have changed hands seven or eight times before completion which is just a nonsense. You can get to Malaysia in an hour from Singapore and they do the exact opposite. You can’t sell your property in Malaysia until the developer signs it off and says you can sell it once it is completed. And that stops problems; people need mortgages and they need to be real buyers. It might not be as exciting but it is far less scary during a situation like now.
Do you think there needs to be greater collaboration between government and private enterprises?
Certainly. Our investment property isn’t regulated, at IP we have our own independent owners’ committee which is a self-regulating body. We do this because there isn’t anything out there regulating our industry and there needs to be. There are pseudo ‘self regulatory’ bodies out there but I don’t think they properly do this. We need regulating and I think corporations need to be regulated much more carefully with the kind of financial product they are selling. It is quite obvious that some of them don’t even understand what they are selling themselves, let alone the clients.
To what extent do you think Islamic Finance is going to be an area of increasing interest?
I think it is going to be huge – Sharia law now is a massive issue with our investors and they are becoming more and more informed with regard to property investment around the world. We do a lot of work in KL and that is really the centre of Muslim finance and Sharia law. Now all the banks want to get a piece of the action. There are a lot of deep pockets in the Middle East and if you want to attract these investors, there is no doubt it will affect more and more property markets around the world. If you want these investors to buy in London and New York, you have to have Islamic finance available.
To what extent do you think REITs are going to be affected by the financial downturn?
REITs will be affected in the same way the hedge funds and mutual funds have been in as much the weak ones, small ones, the badly managed and regulated ones will go away and the good ones will stay. It is very much survival of the fittest. REITs were the flavour of the month but people weren’t certain about what REIT they were buying and although there was a lot of rubbish out there, there are also some very good ones. REITs here in this market yield 10 or 11 percent in a property market that is only yielding five or six so there is definitely a place for them. In the short term it will be a smaller REIT market but in the long term, a much bigger, more powerful REIT market will emerge with big, successful REITs replacing a lot of the small ones which will wither and die. The market will be all the better and stronger for it.
Real estate markets will always bounce back eventually; inflation has come in as quickly as deflation came and that will help the property markets around the world albeit with higher interest rates. Clients are far happier with their property portfolios than investments they have elsewhere. The bottom line is that when these economies recover, people have got to live somewhere. Most markets are aspirational and people want to buy their own homes so it is a matter of when rather than if. The worst property market in the world has not gone down nearly as much as equity markets.
What is your outlook for the next 12 months?
In my opinion it is not going to get worse, it is going to get better. We had our best month in six months in February and we have sold quite a lot of real estate in March. We are focusing very much on distressed assets, looking at places like London for our investors in Hong Kong, for US investors it is very cheap to buy sterling so you can buy properties at a 30 - 40+ percent discount. These are proper, complete properties that are ready to go and not off plan. We will be looking at places like Australia where we are keeping an eye on the currency at the moment.We are caretaking our clients but we are still doing business; it’s just that we will not be aggressive until we think it is the right time. We are just going to pick off ten or 20 units at a time and speculate on some really nice projects but we are not going to overly exert ourselves in any one area. We are going to balance our portfolio and are focusing much more on yield at the moment, low interest rates, steady rentals. We are being very sensible and want to get back to basics. When I first started buying property, it was all about rental yield, it wasn’t about trying to double my money in six months. People’s expectations in the last five or ten years have become ridiculous - not just in property but what people expect companies to deliver on their balance sheet. This is what has driven a lot of this because people are trying to create profits from nothing. But if you buy a property and you rent it for £2000 a month and your mortgage is £1200 a month, you can forget about it for the next 20 years and then have a nice surprise when you sell it. That is the way to make money in property and that is what we are going to be doing, focusing on the fundamentals of strong rental yields, minimal legal risk, good leverage but not over leveraging. Then we can just sit on a nice yield and wait for the markets to rebound.