Saturday, September 4, 2010

Commentary on OSK Research Property Super Cycle

When I was in the school, one of my professors has a very weird way of evaluating our course work. Whoever submitted the thickest bind will get an A. If I use his criteria, OSK will get an A. A for effort. 40 pages certainly a good effort to expound a sophisticated theory.

Then I have another professor who has the other extreme way of evaluating us. He will want us to be able to reduce it to one page A4 regardless of how complex the issue is. Any one can do that will be able get an A. A for understanding.

OSK writes a good thesis and I can give him double As but I have one question for him at the end of my posting. He reduced his whole thesis into the following points:

## A major mass housing boom will likely occur in the first half of this decade;

## We are in the early stage of a property ‘super cycle’ led mainly by mid-to-high end landed properties which may peak sometime in 2012/13 and followed by a potential slump;

## The current 20-year secular boom in mid-to-high end residential properties since the early 1990s may peak in 2012/13, after which mass affordable housing could dominate the real estate theme until circa 2015/16;

## Stocks with focus in the mid-to-high end segment (e.g. Sunrise, YNH Prop, IGB Corp and BRDB) are your best bets for the next 12 months prior to the 2012/13potential peak. Mass housing developers, especially the ‘fallen angles’ such as LBS Bina and MK Land may come to the fore as another major investment theme after that. For “best-of-all-worlds’’ exposure during this period, BUY SP Setia.

The central of the thesis is that the 1950s baby boomers has been moving into different stages of life cycle. They have been influencing different product segment of housing demand(from mass housing and now moving into final stage of high end landed properties). They are now in their early 50s and have plenty of money. Most of their money are sitting pretty much in cash and looking ways to get higher return with minimum risk. The bankers who are ever ready to fuel the speculation are supplying them a plenty of cheap liquidity to leverage up.

This chart illustrates how growth rate of boomers affecting the property cycle.

The property price is breaking out from the previous high -- prior to 1997/98 financial crisis. So the crazy fun party should continue.

He warns that the cycle will peak by 2012 because the boomers demographic will head to a downtrend. That will slow the demand -- pricking the bubble.

The other reason given is deferred down payment and adjustable mortgage rate is due in late 2011 or early 2012.

OSK went on to provide good historical valuation reference point.

I must say this is one of the better research paper that I came across for a while.

Let me introduce you to my last favorite Professor. When ever he listened to a very well presented paper, he will say: well researched, well thought out but is it VALID? We can get a D for it if it is INVALID.

Look at the chart below, blue is KLCI index and red is Property stock index

The property index has been moving very closely with KLCI index. Look at critical year like 97 before things fell apart, both were peaking together. The property index however is under-performed the KLCI index for the last 10 years, though we get ocassional spikes during the stock market run ups. If OSK research is right with their theory that we have been experiencing a housing bull market for the last 20 years, I am sure the earnings from home builder would have grown by leaps and bounds. The property index should have at least should not underperformed the KLCI so badly.

It's a known fact that US has a property bubble from 2003 - 2006. I'm giving you two US home builders (KB Home and Toll Brothers) to see how housing bubble lifted the home builder shares. Can see how these stocks outperformed S & P 500 by a wide margin?

I am not saying the property counters will not go up but the reason of its going up due to super cycle is questionable. The bull run duration is typically between 24-36 months. If we start counting from March 2009, it will probably peak around late 2011 to 2012. When KLCI rolls over, property counters will follow suit too. Well researched, well argued but is it VALID?


Building my nest said...

Turtle, how did you got this report??
Can you share it on your page?

Turtleinvestor said...

It is available free of charge to OSK's clients. Would NOT be able to copy and paste of the whole 40 pages as I think I ought to respect IP protection to some extend.