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COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANALYSIS OF MALAYSIA PROPERTY LISTED COMPANIES
Leong Siaw Hua
HF SS49S P3S
Corporate Master in Business Administration 2010
LS83 2010
fusat Kbidmat Makiumat Akademik ~lJyenE~m MAlAYSIA SARAWAK
PKHIOMAT MAKLUMAT AKAOEMIK
1IIIIIIIIIIi~illllllllll 1000246477
COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANALYSIS OF MALAYSIA
PROPERTY LISTED COMPANIES
LEONG SlAW HUA
A dissertation submitted in partial fulfillment of the requirements for the degree of Corporate Master in Business Administration
Faculty of Economics and Business UNIVERSITI MALAYSIA SARAWAK
2010
DECLARATION AND COPYRIGHT
Name Leong Siaw Hua
Matric Number 08031525
I hereby declare that this research is the result of my own investigation except where otherwise stated Other sources are acknowledged by footnotes giving explicit references and bibliography is appended
Signature
Date
copy Copyright by Leong Siaw Hua and Universiti Malaysia Sarawak
ii
-V~~~-----------Y---------------------------------------------------------~
ACKNOWLEDGEMENTS
- r J
My pnmary acknowledgement and appreciations to those who aided me in
accomplishing my final year project First of all I would like to express my special thanks to
my supervisor for his guidance and valuable advises in completing my project
I am pleased to acknowledge to the lecturers in Faculty Economic and Business upon
their willingness and patient in guiding me and helping me in finishing this project
Apart from that I would Like to take this opportunity to thank both my parents for their
concern understanding and encouragement along the way Not to forget to thank my friends
for their guidance suggestion opinion and sharing of information in accomplishing this
project
III
-
ABSTRACT
COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANAYSIS OF
MALA YSIA PROPERTY LISTED COMPANIES
By
Leong Siaw Hua
( The purpose of this study is to identify the key success factors that affect Malaysia property
companies performance The hypothesis of property company performance and its
determinants are tested using annual time series data from 1999-2008 The analysis reveals
that the coefficient for shareholder fund capital expenditure and plants and equipments are
negative where an increase in shareholder fund capital expenditure and plants and
equipments will cause return on assets to decreas~ This happened when firms internal
characteristics (cash flows insider ownership and firm size) are include in the regression
analysis indicating that the efficiency of investment in plant and property and equipment and
capital expenditure are very much depended on firms internal characteristics There is the
rejection of null hypothesis at 1 per cent significant level for all the variables except for
capital expenditure and cash flow However positive relationship is found between capital
expenditure plants and equipments and return on assets when they are tested in a separate
regression The results further showed that the return on assets shows negative in figure and is
fluctuated throughout the years where the percentage of profit became smaller in year 2008 as
compared to year 2007
iv
ABSTRAK
PRESTASI SYARIKA T DAN PENENTU FAKTORNY A ANALISIS TERHADAP SYARIKAT BARTA BENDA MALAYSIA TERSENARAI
Oleh
Leong Siaw Bua
Tujuan kajian ini adalah untuk mengenal pasti faktor pengunci kejayaan yang mempengaruhi
kerjayaan syarikat harta benda Malaysia tersenarai Hipotesis kajian diuji dengan
menggunakan data siri masa dari tahun 1999 sehingga tahun 2000 Hipotesis mendedahkan
bahawa angkari bagi pemegang dana modal perbelanjaan dan loji dan peralatan adalah
negatif di mana peningkatan dalam pemegang dana modal perbelanjaan dal loji dan
peralatan akan menyebabkan pemulangan asset berkurangan Ini berlaku apabila cirri-ciri
syarikat dalaman (aliran tunai pemilikan dalaman and saiz syarikat) dimasukan dalam
kemunduran anal isis menunjukkan kecekapan pelaburan dalam kilang and harta benda dan
peralatan dan modal perbelanjaan adalah bergantung pada cirri-ciri syarikat dalaman Dengan
ini penolakan daripada null hipotesis pada satu peratus kemantapan paras bagi semua
pemboleh ubahnya kecuali modal perbelanjaan dan aliran tunai Walau bagaimanapun
hubungan positif didapati di antara modal perbelanjaan dan loji dan peralatan dengan
pemulangan dalam asset ketika diuji dalam regression yang berasingan Pemulangan dalam
asset menunjukkan angka negatif dan tidak tetap melintasi tahun di mana peratus dari
keuntungan menjadi semakin kurang pada tahun 2008 dibandingkan dengan tahun 2007
v
-- VOLi
Pusat Khidmat Maklumat Akademik ~IVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
DECLARATION AND COPyRIGHT II
ACKNOWLEDGEMENT III
LIST OF TABLES viii
LIST OF FIGURES IX
ABSTRACT IV
ABSTRAK V
CHAPTER ONE INTRODUCTION
10 Introduction
11 An Overview of Malaysia Property Market 8
12 Problem Statements 13
13 Objective 14
14 Significant and scope ofthe Study 14
15 Summary 15
CHAPTER TWO LITERATURE REVIEW
20 Introduction 16
21 Relationship between Return on Assets Plant and Equipment and Company 16
Performance
22 Relationship between Capital Expenditure Debts and Cash Flows toward 18
Company Performance
23 Relationship between Size and Company Performance 21
24 Relationship between Shareholder Funds and Company Performance 22
25 Relationship between Insider Ownership and Company Performance 23
VI
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
fusat Kbidmat Makiumat Akademik ~lJyenE~m MAlAYSIA SARAWAK
PKHIOMAT MAKLUMAT AKAOEMIK
1IIIIIIIIIIi~illllllllll 1000246477
COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANALYSIS OF MALAYSIA
PROPERTY LISTED COMPANIES
LEONG SlAW HUA
A dissertation submitted in partial fulfillment of the requirements for the degree of Corporate Master in Business Administration
Faculty of Economics and Business UNIVERSITI MALAYSIA SARAWAK
2010
DECLARATION AND COPYRIGHT
Name Leong Siaw Hua
Matric Number 08031525
I hereby declare that this research is the result of my own investigation except where otherwise stated Other sources are acknowledged by footnotes giving explicit references and bibliography is appended
Signature
Date
copy Copyright by Leong Siaw Hua and Universiti Malaysia Sarawak
ii
-V~~~-----------Y---------------------------------------------------------~
ACKNOWLEDGEMENTS
- r J
My pnmary acknowledgement and appreciations to those who aided me in
accomplishing my final year project First of all I would like to express my special thanks to
my supervisor for his guidance and valuable advises in completing my project
I am pleased to acknowledge to the lecturers in Faculty Economic and Business upon
their willingness and patient in guiding me and helping me in finishing this project
Apart from that I would Like to take this opportunity to thank both my parents for their
concern understanding and encouragement along the way Not to forget to thank my friends
for their guidance suggestion opinion and sharing of information in accomplishing this
project
III
-
ABSTRACT
COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANAYSIS OF
MALA YSIA PROPERTY LISTED COMPANIES
By
Leong Siaw Hua
( The purpose of this study is to identify the key success factors that affect Malaysia property
companies performance The hypothesis of property company performance and its
determinants are tested using annual time series data from 1999-2008 The analysis reveals
that the coefficient for shareholder fund capital expenditure and plants and equipments are
negative where an increase in shareholder fund capital expenditure and plants and
equipments will cause return on assets to decreas~ This happened when firms internal
characteristics (cash flows insider ownership and firm size) are include in the regression
analysis indicating that the efficiency of investment in plant and property and equipment and
capital expenditure are very much depended on firms internal characteristics There is the
rejection of null hypothesis at 1 per cent significant level for all the variables except for
capital expenditure and cash flow However positive relationship is found between capital
expenditure plants and equipments and return on assets when they are tested in a separate
regression The results further showed that the return on assets shows negative in figure and is
fluctuated throughout the years where the percentage of profit became smaller in year 2008 as
compared to year 2007
iv
ABSTRAK
PRESTASI SYARIKA T DAN PENENTU FAKTORNY A ANALISIS TERHADAP SYARIKAT BARTA BENDA MALAYSIA TERSENARAI
Oleh
Leong Siaw Bua
Tujuan kajian ini adalah untuk mengenal pasti faktor pengunci kejayaan yang mempengaruhi
kerjayaan syarikat harta benda Malaysia tersenarai Hipotesis kajian diuji dengan
menggunakan data siri masa dari tahun 1999 sehingga tahun 2000 Hipotesis mendedahkan
bahawa angkari bagi pemegang dana modal perbelanjaan dan loji dan peralatan adalah
negatif di mana peningkatan dalam pemegang dana modal perbelanjaan dal loji dan
peralatan akan menyebabkan pemulangan asset berkurangan Ini berlaku apabila cirri-ciri
syarikat dalaman (aliran tunai pemilikan dalaman and saiz syarikat) dimasukan dalam
kemunduran anal isis menunjukkan kecekapan pelaburan dalam kilang and harta benda dan
peralatan dan modal perbelanjaan adalah bergantung pada cirri-ciri syarikat dalaman Dengan
ini penolakan daripada null hipotesis pada satu peratus kemantapan paras bagi semua
pemboleh ubahnya kecuali modal perbelanjaan dan aliran tunai Walau bagaimanapun
hubungan positif didapati di antara modal perbelanjaan dan loji dan peralatan dengan
pemulangan dalam asset ketika diuji dalam regression yang berasingan Pemulangan dalam
asset menunjukkan angka negatif dan tidak tetap melintasi tahun di mana peratus dari
keuntungan menjadi semakin kurang pada tahun 2008 dibandingkan dengan tahun 2007
v
-- VOLi
Pusat Khidmat Maklumat Akademik ~IVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
DECLARATION AND COPyRIGHT II
ACKNOWLEDGEMENT III
LIST OF TABLES viii
LIST OF FIGURES IX
ABSTRACT IV
ABSTRAK V
CHAPTER ONE INTRODUCTION
10 Introduction
11 An Overview of Malaysia Property Market 8
12 Problem Statements 13
13 Objective 14
14 Significant and scope ofthe Study 14
15 Summary 15
CHAPTER TWO LITERATURE REVIEW
20 Introduction 16
21 Relationship between Return on Assets Plant and Equipment and Company 16
Performance
22 Relationship between Capital Expenditure Debts and Cash Flows toward 18
Company Performance
23 Relationship between Size and Company Performance 21
24 Relationship between Shareholder Funds and Company Performance 22
25 Relationship between Insider Ownership and Company Performance 23
VI
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
DECLARATION AND COPYRIGHT
Name Leong Siaw Hua
Matric Number 08031525
I hereby declare that this research is the result of my own investigation except where otherwise stated Other sources are acknowledged by footnotes giving explicit references and bibliography is appended
Signature
Date
copy Copyright by Leong Siaw Hua and Universiti Malaysia Sarawak
ii
-V~~~-----------Y---------------------------------------------------------~
ACKNOWLEDGEMENTS
- r J
My pnmary acknowledgement and appreciations to those who aided me in
accomplishing my final year project First of all I would like to express my special thanks to
my supervisor for his guidance and valuable advises in completing my project
I am pleased to acknowledge to the lecturers in Faculty Economic and Business upon
their willingness and patient in guiding me and helping me in finishing this project
Apart from that I would Like to take this opportunity to thank both my parents for their
concern understanding and encouragement along the way Not to forget to thank my friends
for their guidance suggestion opinion and sharing of information in accomplishing this
project
III
-
ABSTRACT
COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANAYSIS OF
MALA YSIA PROPERTY LISTED COMPANIES
By
Leong Siaw Hua
( The purpose of this study is to identify the key success factors that affect Malaysia property
companies performance The hypothesis of property company performance and its
determinants are tested using annual time series data from 1999-2008 The analysis reveals
that the coefficient for shareholder fund capital expenditure and plants and equipments are
negative where an increase in shareholder fund capital expenditure and plants and
equipments will cause return on assets to decreas~ This happened when firms internal
characteristics (cash flows insider ownership and firm size) are include in the regression
analysis indicating that the efficiency of investment in plant and property and equipment and
capital expenditure are very much depended on firms internal characteristics There is the
rejection of null hypothesis at 1 per cent significant level for all the variables except for
capital expenditure and cash flow However positive relationship is found between capital
expenditure plants and equipments and return on assets when they are tested in a separate
regression The results further showed that the return on assets shows negative in figure and is
fluctuated throughout the years where the percentage of profit became smaller in year 2008 as
compared to year 2007
iv
ABSTRAK
PRESTASI SYARIKA T DAN PENENTU FAKTORNY A ANALISIS TERHADAP SYARIKAT BARTA BENDA MALAYSIA TERSENARAI
Oleh
Leong Siaw Bua
Tujuan kajian ini adalah untuk mengenal pasti faktor pengunci kejayaan yang mempengaruhi
kerjayaan syarikat harta benda Malaysia tersenarai Hipotesis kajian diuji dengan
menggunakan data siri masa dari tahun 1999 sehingga tahun 2000 Hipotesis mendedahkan
bahawa angkari bagi pemegang dana modal perbelanjaan dan loji dan peralatan adalah
negatif di mana peningkatan dalam pemegang dana modal perbelanjaan dal loji dan
peralatan akan menyebabkan pemulangan asset berkurangan Ini berlaku apabila cirri-ciri
syarikat dalaman (aliran tunai pemilikan dalaman and saiz syarikat) dimasukan dalam
kemunduran anal isis menunjukkan kecekapan pelaburan dalam kilang and harta benda dan
peralatan dan modal perbelanjaan adalah bergantung pada cirri-ciri syarikat dalaman Dengan
ini penolakan daripada null hipotesis pada satu peratus kemantapan paras bagi semua
pemboleh ubahnya kecuali modal perbelanjaan dan aliran tunai Walau bagaimanapun
hubungan positif didapati di antara modal perbelanjaan dan loji dan peralatan dengan
pemulangan dalam asset ketika diuji dalam regression yang berasingan Pemulangan dalam
asset menunjukkan angka negatif dan tidak tetap melintasi tahun di mana peratus dari
keuntungan menjadi semakin kurang pada tahun 2008 dibandingkan dengan tahun 2007
v
-- VOLi
Pusat Khidmat Maklumat Akademik ~IVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
DECLARATION AND COPyRIGHT II
ACKNOWLEDGEMENT III
LIST OF TABLES viii
LIST OF FIGURES IX
ABSTRACT IV
ABSTRAK V
CHAPTER ONE INTRODUCTION
10 Introduction
11 An Overview of Malaysia Property Market 8
12 Problem Statements 13
13 Objective 14
14 Significant and scope ofthe Study 14
15 Summary 15
CHAPTER TWO LITERATURE REVIEW
20 Introduction 16
21 Relationship between Return on Assets Plant and Equipment and Company 16
Performance
22 Relationship between Capital Expenditure Debts and Cash Flows toward 18
Company Performance
23 Relationship between Size and Company Performance 21
24 Relationship between Shareholder Funds and Company Performance 22
25 Relationship between Insider Ownership and Company Performance 23
VI
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
ACKNOWLEDGEMENTS
- r J
My pnmary acknowledgement and appreciations to those who aided me in
accomplishing my final year project First of all I would like to express my special thanks to
my supervisor for his guidance and valuable advises in completing my project
I am pleased to acknowledge to the lecturers in Faculty Economic and Business upon
their willingness and patient in guiding me and helping me in finishing this project
Apart from that I would Like to take this opportunity to thank both my parents for their
concern understanding and encouragement along the way Not to forget to thank my friends
for their guidance suggestion opinion and sharing of information in accomplishing this
project
III
-
ABSTRACT
COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANAYSIS OF
MALA YSIA PROPERTY LISTED COMPANIES
By
Leong Siaw Hua
( The purpose of this study is to identify the key success factors that affect Malaysia property
companies performance The hypothesis of property company performance and its
determinants are tested using annual time series data from 1999-2008 The analysis reveals
that the coefficient for shareholder fund capital expenditure and plants and equipments are
negative where an increase in shareholder fund capital expenditure and plants and
equipments will cause return on assets to decreas~ This happened when firms internal
characteristics (cash flows insider ownership and firm size) are include in the regression
analysis indicating that the efficiency of investment in plant and property and equipment and
capital expenditure are very much depended on firms internal characteristics There is the
rejection of null hypothesis at 1 per cent significant level for all the variables except for
capital expenditure and cash flow However positive relationship is found between capital
expenditure plants and equipments and return on assets when they are tested in a separate
regression The results further showed that the return on assets shows negative in figure and is
fluctuated throughout the years where the percentage of profit became smaller in year 2008 as
compared to year 2007
iv
ABSTRAK
PRESTASI SYARIKA T DAN PENENTU FAKTORNY A ANALISIS TERHADAP SYARIKAT BARTA BENDA MALAYSIA TERSENARAI
Oleh
Leong Siaw Bua
Tujuan kajian ini adalah untuk mengenal pasti faktor pengunci kejayaan yang mempengaruhi
kerjayaan syarikat harta benda Malaysia tersenarai Hipotesis kajian diuji dengan
menggunakan data siri masa dari tahun 1999 sehingga tahun 2000 Hipotesis mendedahkan
bahawa angkari bagi pemegang dana modal perbelanjaan dan loji dan peralatan adalah
negatif di mana peningkatan dalam pemegang dana modal perbelanjaan dal loji dan
peralatan akan menyebabkan pemulangan asset berkurangan Ini berlaku apabila cirri-ciri
syarikat dalaman (aliran tunai pemilikan dalaman and saiz syarikat) dimasukan dalam
kemunduran anal isis menunjukkan kecekapan pelaburan dalam kilang and harta benda dan
peralatan dan modal perbelanjaan adalah bergantung pada cirri-ciri syarikat dalaman Dengan
ini penolakan daripada null hipotesis pada satu peratus kemantapan paras bagi semua
pemboleh ubahnya kecuali modal perbelanjaan dan aliran tunai Walau bagaimanapun
hubungan positif didapati di antara modal perbelanjaan dan loji dan peralatan dengan
pemulangan dalam asset ketika diuji dalam regression yang berasingan Pemulangan dalam
asset menunjukkan angka negatif dan tidak tetap melintasi tahun di mana peratus dari
keuntungan menjadi semakin kurang pada tahun 2008 dibandingkan dengan tahun 2007
v
-- VOLi
Pusat Khidmat Maklumat Akademik ~IVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
DECLARATION AND COPyRIGHT II
ACKNOWLEDGEMENT III
LIST OF TABLES viii
LIST OF FIGURES IX
ABSTRACT IV
ABSTRAK V
CHAPTER ONE INTRODUCTION
10 Introduction
11 An Overview of Malaysia Property Market 8
12 Problem Statements 13
13 Objective 14
14 Significant and scope ofthe Study 14
15 Summary 15
CHAPTER TWO LITERATURE REVIEW
20 Introduction 16
21 Relationship between Return on Assets Plant and Equipment and Company 16
Performance
22 Relationship between Capital Expenditure Debts and Cash Flows toward 18
Company Performance
23 Relationship between Size and Company Performance 21
24 Relationship between Shareholder Funds and Company Performance 22
25 Relationship between Insider Ownership and Company Performance 23
VI
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
ABSTRACT
COMPANY PERFORMANCE AND ITS DETERMINANTS AN ANAYSIS OF
MALA YSIA PROPERTY LISTED COMPANIES
By
Leong Siaw Hua
( The purpose of this study is to identify the key success factors that affect Malaysia property
companies performance The hypothesis of property company performance and its
determinants are tested using annual time series data from 1999-2008 The analysis reveals
that the coefficient for shareholder fund capital expenditure and plants and equipments are
negative where an increase in shareholder fund capital expenditure and plants and
equipments will cause return on assets to decreas~ This happened when firms internal
characteristics (cash flows insider ownership and firm size) are include in the regression
analysis indicating that the efficiency of investment in plant and property and equipment and
capital expenditure are very much depended on firms internal characteristics There is the
rejection of null hypothesis at 1 per cent significant level for all the variables except for
capital expenditure and cash flow However positive relationship is found between capital
expenditure plants and equipments and return on assets when they are tested in a separate
regression The results further showed that the return on assets shows negative in figure and is
fluctuated throughout the years where the percentage of profit became smaller in year 2008 as
compared to year 2007
iv
ABSTRAK
PRESTASI SYARIKA T DAN PENENTU FAKTORNY A ANALISIS TERHADAP SYARIKAT BARTA BENDA MALAYSIA TERSENARAI
Oleh
Leong Siaw Bua
Tujuan kajian ini adalah untuk mengenal pasti faktor pengunci kejayaan yang mempengaruhi
kerjayaan syarikat harta benda Malaysia tersenarai Hipotesis kajian diuji dengan
menggunakan data siri masa dari tahun 1999 sehingga tahun 2000 Hipotesis mendedahkan
bahawa angkari bagi pemegang dana modal perbelanjaan dan loji dan peralatan adalah
negatif di mana peningkatan dalam pemegang dana modal perbelanjaan dal loji dan
peralatan akan menyebabkan pemulangan asset berkurangan Ini berlaku apabila cirri-ciri
syarikat dalaman (aliran tunai pemilikan dalaman and saiz syarikat) dimasukan dalam
kemunduran anal isis menunjukkan kecekapan pelaburan dalam kilang and harta benda dan
peralatan dan modal perbelanjaan adalah bergantung pada cirri-ciri syarikat dalaman Dengan
ini penolakan daripada null hipotesis pada satu peratus kemantapan paras bagi semua
pemboleh ubahnya kecuali modal perbelanjaan dan aliran tunai Walau bagaimanapun
hubungan positif didapati di antara modal perbelanjaan dan loji dan peralatan dengan
pemulangan dalam asset ketika diuji dalam regression yang berasingan Pemulangan dalam
asset menunjukkan angka negatif dan tidak tetap melintasi tahun di mana peratus dari
keuntungan menjadi semakin kurang pada tahun 2008 dibandingkan dengan tahun 2007
v
-- VOLi
Pusat Khidmat Maklumat Akademik ~IVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
DECLARATION AND COPyRIGHT II
ACKNOWLEDGEMENT III
LIST OF TABLES viii
LIST OF FIGURES IX
ABSTRACT IV
ABSTRAK V
CHAPTER ONE INTRODUCTION
10 Introduction
11 An Overview of Malaysia Property Market 8
12 Problem Statements 13
13 Objective 14
14 Significant and scope ofthe Study 14
15 Summary 15
CHAPTER TWO LITERATURE REVIEW
20 Introduction 16
21 Relationship between Return on Assets Plant and Equipment and Company 16
Performance
22 Relationship between Capital Expenditure Debts and Cash Flows toward 18
Company Performance
23 Relationship between Size and Company Performance 21
24 Relationship between Shareholder Funds and Company Performance 22
25 Relationship between Insider Ownership and Company Performance 23
VI
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
ABSTRAK
PRESTASI SYARIKA T DAN PENENTU FAKTORNY A ANALISIS TERHADAP SYARIKAT BARTA BENDA MALAYSIA TERSENARAI
Oleh
Leong Siaw Bua
Tujuan kajian ini adalah untuk mengenal pasti faktor pengunci kejayaan yang mempengaruhi
kerjayaan syarikat harta benda Malaysia tersenarai Hipotesis kajian diuji dengan
menggunakan data siri masa dari tahun 1999 sehingga tahun 2000 Hipotesis mendedahkan
bahawa angkari bagi pemegang dana modal perbelanjaan dan loji dan peralatan adalah
negatif di mana peningkatan dalam pemegang dana modal perbelanjaan dal loji dan
peralatan akan menyebabkan pemulangan asset berkurangan Ini berlaku apabila cirri-ciri
syarikat dalaman (aliran tunai pemilikan dalaman and saiz syarikat) dimasukan dalam
kemunduran anal isis menunjukkan kecekapan pelaburan dalam kilang and harta benda dan
peralatan dan modal perbelanjaan adalah bergantung pada cirri-ciri syarikat dalaman Dengan
ini penolakan daripada null hipotesis pada satu peratus kemantapan paras bagi semua
pemboleh ubahnya kecuali modal perbelanjaan dan aliran tunai Walau bagaimanapun
hubungan positif didapati di antara modal perbelanjaan dan loji dan peralatan dengan
pemulangan dalam asset ketika diuji dalam regression yang berasingan Pemulangan dalam
asset menunjukkan angka negatif dan tidak tetap melintasi tahun di mana peratus dari
keuntungan menjadi semakin kurang pada tahun 2008 dibandingkan dengan tahun 2007
v
-- VOLi
Pusat Khidmat Maklumat Akademik ~IVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
DECLARATION AND COPyRIGHT II
ACKNOWLEDGEMENT III
LIST OF TABLES viii
LIST OF FIGURES IX
ABSTRACT IV
ABSTRAK V
CHAPTER ONE INTRODUCTION
10 Introduction
11 An Overview of Malaysia Property Market 8
12 Problem Statements 13
13 Objective 14
14 Significant and scope ofthe Study 14
15 Summary 15
CHAPTER TWO LITERATURE REVIEW
20 Introduction 16
21 Relationship between Return on Assets Plant and Equipment and Company 16
Performance
22 Relationship between Capital Expenditure Debts and Cash Flows toward 18
Company Performance
23 Relationship between Size and Company Performance 21
24 Relationship between Shareholder Funds and Company Performance 22
25 Relationship between Insider Ownership and Company Performance 23
VI
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
Pusat Khidmat Maklumat Akademik ~IVERSm MALAYSIA SARAWAK
T ABLE OF CONTENTS
DECLARATION AND COPyRIGHT II
ACKNOWLEDGEMENT III
LIST OF TABLES viii
LIST OF FIGURES IX
ABSTRACT IV
ABSTRAK V
CHAPTER ONE INTRODUCTION
10 Introduction
11 An Overview of Malaysia Property Market 8
12 Problem Statements 13
13 Objective 14
14 Significant and scope ofthe Study 14
15 Summary 15
CHAPTER TWO LITERATURE REVIEW
20 Introduction 16
21 Relationship between Return on Assets Plant and Equipment and Company 16
Performance
22 Relationship between Capital Expenditure Debts and Cash Flows toward 18
Company Performance
23 Relationship between Size and Company Performance 21
24 Relationship between Shareholder Funds and Company Performance 22
25 Relationship between Insider Ownership and Company Performance 23
VI
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
~107i7 1
26 Summary 25
CHAPTERTHREEMETHOLOGY
30 Introduction 26
31 Hypotheses 26
32 Research Design 29
321 Data Sample and Data Collection 29
322 Empirical Model 30
33 Summary 31
CHAPTER FOUR EMPIRICAL RESULTS
40 Introduction 32
41 Descriptive Statistics 33
42 Regression Analysis 34
43 Summary 39
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
50 Introduction 41
51 Summary and Findings of the Study 41
52 Limitation of Study 44
53 The Underlying Factors of the Market and Implications 45
54 Conclusion 47
REFERENCES 48
VII
-~-------------- - ---shy
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
LIST OF TABLES
Title Page
Table 1 Supply of Residential Units in Malaysia 10
Table 2 Total Transaction Values (RMm) 12
Table 3 Total Number of Transaction 12
Table 4 Summary Statistics of the Variables 33
Table 5 Result of Insider Ownership Cash Flow and Size 34
Table 6 Result of Plants and Equipments Capital Expenditures and Shareholder 35 Fund
Table 7 Result of Panel Least Square Regression 36
VIII
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
LIST OF FIGURES
Title Page
Figure 1 Key Success Factor for Property Sector 5
Figure 2 Factors affect Company Performance in Property Sector 26
Figure 3 Return on Assets 38
IX
IOZ17J I
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
CHAPTER ONE
INTRODUCTION
10 Introduction
Malaysia experienced a strong beating from global financial crisis in the first half of 2009
as the Gross Domestic Product (GDP) contracted significantly Since then there were some
positive movements in some economic indicators in 3rd quarter due to the government national
recovery packages that restore market confidence and maintain the stability of financial market
and expectation of positive growth in the 4th quarter and these growth show evidence that
Malaysia is out of recession and there is still an upside potential in the investment of property in
Malaysia There are signs of improvement on the worldwide economy where stocks that
decreased in value previously are strong enough to get back to the market For example Dow
Jones gained 40 after their March low
The slowdown in Malaysias economy has caused Malaysians become more cautious with
their investment in properties However property prices in Malaysia remain one of the most
competitive in the region They offer stronger investment returns as compared to its neighboring
countries
In encouraging foreign investments economy liberalization measure introduced by the
government has made 2009 a significant new era in Malaysias development history The
comprehensive package with new policies are said to have a significant impact towards real
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
--- --------- - -------- - -
estate sector as the restrictions for foreign investors to purchase the properties in Malaysia had
been removed These measures aimed to increase the number of transactions and attract overseas
investment
Plants and equipments one of the firms strategic action is the main factor to determine the
success of property sector Bhat (2000) noted that the age of property company size plant and
equipment building and return on assets can help to increase profits and improve the
competitive edge of a company Porter (1989) states that the key success factor for property
sector depend on internal factors and external factors Internal factors especially plants and
equipments is the key success factor of property sector because they are valuable and imitability
as a strategic location determined the success of a property company The author stated that
looking for locations that are economically attractive is one of the critical dimensions of success
Kamarulzaman Hassan the analyst of T A Securities Holdings Berhad support this point by stated
that location of property is an issue besides demand and supply Bhat (2000) support that plants
and equipments determined the cost and revenue as they have direct impact on maintenance
expenditures However Porter (1989) stated that imitating is profitable if the industry is great but
it will become a way of insuring disaster if the industry is less attractive
Population in an area is the important factor which determined the demand and supply of
property Supply and demand is the backbone of a market economy The demand is high when
there is a larger population The standard of living and the development land affect the choice of
consumers in their decision making on the types of property and the location to invest This is
supported by Porter (1989) where tremendous demand for new building and demographic shift in
2
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
rates
the populatjon is the important factor for property sector In the concept of economics price is a
reflection of supply and demand Property contained large per cent of buyers cost Oversupply
will force the price to go down as the demand is less than the supply in the market However this
is no longer happened as developers know how to control the situation after experienced the crisis
hits on 1987 and 1997
In Porter 5 forces suppliers are the determinant factors that affect the profits gained and the
costs to customers The materials used in the construction of property tend affect the price and
this will be the burden of customers Barney (1991) noted that resources owned must enabled a
finn outperfonn its competitors The resources are carefully managed in order to achieve the
objective of sustainable development Malaysia has no problem on materials such as sand and
cement as Malaysia is the sole proprietor However material such as steel is said to affect the
costs of construction as the price of steel is depend on world market which subject to exchange
The threat of new entrants into the market is said to affect the profit gained as the entry
barriers are low Porter (1989) noted that the situation of rivalry in property sector has always
been active where a lot of new competitors have come in The competitors have enough capital to
finance a lot of new projects The increasing number of competitors combined with slowing
demand has led to overcapacity which caused the profit to drop
3
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
Poter (1989) stated that there are two ways property firms can gain competitive advantage I
One is lowest cost and another one is differentiation Property firms managed to gain higher
margin at prevailing price levels if they are able to develop and finance their projects and deliver
at a lower cost The author further stated that property firms can better utilizE the land or gain
higher profits per square foot if they are skilled in employing new concepts into projects or
skilled in property design
Other financial factors are debt equity cash flows capital expenditure plants and
equipments SIze insider ownership and return on assets (Bhat 2000 Vol garis Asteriou and
Agiomirgianakis 2002) From the above variables cash flows insider ownership and firm size
could be categorized as internal firms characteristics and capital expenditure plants and
equipments and shareholder fund as firm strategic action Those variables are important as they
significantly affect firm performance Presented below is a comprehensive framework of key
success factor for property sector
I Competitive advantage is the taking of offensive or defensive actions in order to create a defendable position in an
industry
4
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
q Figure 1 Key Success Factor for Property Sector
~CI
Firm Performance
ROA
Drivers
~i ~~ 3a ~i ~~ 11)=gt3111 rIJshyn ~~
Internal Firms Characteristics Firms Strategic Action
Plant amp Equipment
Cash Flow
Insider Ownership
Size Capital Expenditure
Shareholder Fund
5
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
------------------~-------------~-
The performance of a firm is always measured by return on asset or return on equity and
one of the ways to achieve high perfonnance is improving the return on assets of company
Return on assets has significant impact towards company performance as it enabled a firm to
have an effective maintenance system which tends to increase profits and improve competitive
edge Return on assets represents the efficiency of assets utilization in a company ~Iigh return on
assets tends to affect the efficient management of a company (Bhat 2000)
A greater cash flow is said to increase the risk of being take over by other finns (Davis and
Stout 1992) This is because firm holding free cash flow may find it hard to perform due to the
increase government pressures This happened in the long run when the financial markets and
legal systems become more strengthened (Brush Bromiley and Hendrickx 2000) Firms with
large cash flow tend to have higher rates of return up to one year start from the day they are
identified by value line However they only out perform firms that are of similar size (Stephen
and Joseph 2000) The author noted that free cash flow hypothesis predicts that firms that are
overinvesting will face pressure form investors Thus the cash flow will distribute to
shareholders instead of reinvest in the finn The study further found that by using Tobins Q in
the analysis finns with low Q and high free cash flow should have a superior performance postshy
listing as they are forced to use their cash flow in a more efficient way
Other than this size of a firm has the ability to affect firm performance Firm with larger
size is considered to be more efficient compared to firm with smaller size Small firms are less
competitive as they have less power However firms might suffer from inefficiency when they
become larger Thus cause inferior financial performance (Majumdar 1997) Other than this
6
--- - -- ===============~==~======~~====~~~ -
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
firms with larger size tend to have an easy access to loans especially longer-term loans and this is
considered to affect sales and profit of a firm (Topalova 2004)
Other than that a higher equity ownership will enhance the interest of the controlling
shareholders in non-stationary distribution of dividends (Filatotchev et aI 2001 La Porta et aI
2000a) Merton (1974) noted that there is a positive relationship between equity volatility and
shareholder wealth Equity holders have the incentive to increase cash flow volatility of a firm
(Jensen and Meckling 1976) However there are literatures showing that equity volatility caused
both positive and negative impact towards shareholder wealth Shareholder wealth is proved to
decrease more when there is an increase in equity volatility for firms with low interest coverage
low investment low cash flow and high leverage (Shin and Stulz 2000)
Plants and equipments is the physical assets owns by a company that cannot quickly
convert to cash It is one of the investments of a company The return on investment generates
from plants and equipments able to help a company in sustaining growth The decrease in plants
and equipments investment tends to affect performance of a firm Revaluation of plants and
equipments is proved to improve forecasts of future earnings in the case that dividends may be
paid
One of the important factors that have to be concerned is the capital expenditure of a firm
The capital expenditure of a company is significantly related to profitability Generally
profitability is related inversely to the liability Thus the more debt a company incurs the worse
its earnings An appropriate capital expenditure allows firms to minimize capital structure Thus
7
- - oVloj ~l
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
reduce the total costs of firms Capital expenditures have a negative relationship with future
returns of firms (Baker Stein and Wurgler 2003)
The value of a company is made up of debt and equity Debt can boost as weH as hurts
company performance A moderate debt allowed company to gain market shares while an
excessive debt will bring about market share losses Debt is considered to create a better
monitoring opportunities The presence of debt enabled cash flow claims contractually set at the
time of borrowing However the failure to meet the claims will lead to bankruptcy or loss of
control over an asset even the entire firm (Damodaran 2009) Firms that are more likely to issue
debt are those with financial needs Thus financial deficits have become the determinant of the
decision to issue debt (Diamond 1991)
Debt has been analyzed as disciplinary in the shareholders-manager conflict Debt tends to
help in managing the conflict as it is easier to control the shareholders in modifying the leverage
ratio than to adjust the share of capital (Bruslerie and Latrous 2007) Debt improves company
performance in which it allows shareholders to select the first-best investment policy It reduces
the distortion in shareholders investment incentives (Lyandres and Zhdanov 2007)
11 An Overview of Malaysia Property Market
Malaysia real estate is expected to warm up in the second half of 20 1 0 before ushering
in the Spring in 2011 (Borneo Post Business 30122009) Malaysia property market is on an
upward trend as the prices of middle class suburban property is rising due to the steady stock
8
---~7T7r---------~~-------------------------- --------------r~------------------ J
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
market movement Generally high rise residential units in Kuala Lumpur increase about 12 to 18
per cent per annum for the last 15 to 20 years The demand is expected to continue as a result of
the limited land space stated by the Director of Ho Chin Soon Research
Sarawak one of the states of Malaysia recorded the highest increased in 2008 which was
about 47 The performance of the Sarawak property market moderated in HI 2009 There were
11867 transactions recorded in HI 2009 with a total value of RMl 66 billion Compared to the
HI and H2 2008 the volume of transactions increased by 1l1 but decreased by l2
respectively Value of transactions showed the same movement that is increased by 48 against
HI 2008 but decreased by 78 against H2 2008
Residential property sub-sector continued to lead in market share accounting for 468
followed by agricultural (360) commercial (101) development land (44) and industrial
(28) sub-sectors Volume of transactions in residential commercial and industrial sub sectors
was higher against HI 2008 but lower compared to H2 2008 Conversely agricultural sub-sector
noted the opposite movement whereas development land sub-sector rose against both halves of
2008 In terms of value residential and development land sub-sectors increased against HI 2008
but decreased against H2 2008 Conversely commercial and agricultural sub-sectors declined
against both halves of 2008 whilst industrial sub-sector noted higher value Sarawak lead to the
highest increased in year 2008 followed by Labuan (253) and Kuala Lumpur (25)
The yield on property investments is considered much higher than the yield on a similar
sum generates in other types of investments In order to strengthen Malaysia property market
9
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
Malaysia government had come out with various programs to encourage foreign investor to
purchase residential properties in order to increase the inflow of foreign currency as well as to
encourage property development and other sector such as construction
In Malaysia large greenfield developments are considered costly to build when housing
market for residential properties has reached the equilibrium Malaysian developers who involved
in Greenfield projects will have to spend large amount of time and money as they have to provide
infrastructure such as roads communication cables substations electricity waste water treatment
plant and street lighting where all these cost are always borne by the local councilor the state
government in other countries
Table I Supply of Residential Units in Malaysia
State Existin o Stock Completion Transactions
2007 2008 2007 2008 2007 2008 WP Kuala Lumpur 377761 389122 12395 11361 14399 18203
WP Putra Jaya 3865 3871 I 8 6 141 117
WP Labuan 10498 10568 11 70 221 316
Selangor 1153469 1204525 80009 51056 57251 59435
Johor 630484 646869 21 618 16385 22286 21253
Pulau Pinang 312598 32~330 11884 13058 13902 15341
Perak 360330 366742 11363 6412 16505 16988
Negeri Sembilan 224699 227319 3863 2620 I 9113 8310
Melaka 142397 148028 3891 5631 7988 6239
Kedah 239011 245289 10138 6278 10740 10434
Pahang 196687
47561
201630 7768 4943 4910 6564
Terengganu 48999 2145 1438 2840 3223
Kelantan 51940 53310 1577I I 1370 534 641 I
Perlis 18545 20034 517 1489 485 664
Sabah 117190 120175 6603 I 2985 4667 5314
Sarawak 176132 181339 7333 5207 6225 8789
Malaysia II 4063167 4193 150 181123 130309 172207 181831 Source Stock Report-NAPIC
10
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
The numbers of housing are considered overbuilding There were 4193150 units of houses
in Malaysia in 2008 and 130309 were completed
In terms of transactions Selangor accounted for the largest number (59435) followed by
lohor (21253) and Kuala Lumpur (18203) Kuala Lumpur had 389122 homes and the largest
number of homes is in Selangor with 1204525 homes Perak comes forth with 366742
There were large numbers of unsold property Due to this developers will have to face
problem of unsold stock and on the same time they will have to bear the maintenance cost for
providing free infrastructure and the costs of obtaining approvals for development
There is a need to realign the number of units coming into the marketplace in terms of
consumers affordability as economic slowdown Other than this subsidies should also give to
fist-time home buyers so that they are afford to have their first home
Banks do provide various types of financing for property development It includes a wide
range of debt and equity instruments depend on the needs of the projects The purpose of
financing is to encourage developers and construction firms to reinvest in new projects Return
on assets allowed investors to know how well a company has been using its capital assets and
equity The higher the returns the more likely the company is going to generate profit
11
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
Table 2 Total Transaction Values (RMm)
Sector 1H08 1H09 2H08 2H09 FY08 FY09 YoY
Residential 2078265 1764710 2052132 2053509 4130397 3818219 -756
Commercial 843955 684591 817636 848961 1661591 1533552 -771 I
Industrial 407991 324113 I 381752 321443 789743 645556 -1826 I
Agricultural 439135 361146 412076 427401 851211 788547 -736
Development 876319 445376 524626 360437 1400945 I 805813 -4248
Others 046 031 251 1116 297 1147 28620
Total 4645665 3579967 4188473 4012867 8834184 7592834 -1405 Source JPPH and MIDFR
Table 3 Total Number of Transaction
Sector I 1H08 1H09 2H08 2H09 FY08 I FY09 YoY Residential II 108040 96859 I 108662 114821 216702 211680 -232
~~~
Commercial 15259 14571 16490 18782 31749 33353 505
Industrial 3972 3596 4154 4465 8126 8061 -080 Agricultural 36659 32793 32295 36433 68954 69226 039 Development 7611 7367 7091 I 8274 14702 15641 639 Others I 10 6 19 7 29 31429 Total 171542 155196 168698 182794 340240 337990 -066
Source JPPH and MIDFR
The KL Property index performed in line with FBM KLCI which gam +486ytd as
compared to the broader market of +451 The Malaysian Home Price Index (MHPI) indicated
that the performance of MHPI was stable in 4Q08 until 2Q09 during the time when the economy
was at its most vulnerable
Refer to a report prepared by MIDF AMANAH INVESTMENT BANK BERHAD on
equity beat it stated that the recovery in 2H09 was because of i) lower cost of funds ii)
innovative promotional package iii) liberalization of policies and iv) the RM670 billion
economic stimulus
12
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
swings that that
people decided
The property market surprised many as it performed stronger than the broader market in
2009 Property sector showed a marginal -066yoy declined in total number of transaction in
comparison with -1405yoy declined in the value of property Residential propel ties continued
to lead the market which accounted for 60 of total property transactions and about 50 of total
value transacted in 2009 The high demand was due to mid-end property type that is vast liquidity
Its yield and easy disposal made it popular among investor especially during a challenging
economy
12 Problem Statements
The recent uncertainty in the stock market seems to affect property market The wide
cause uncertainty in the property market tend to affect the confidence of
investors A fall in the stock market tends to increase the demand for property where many
to invest in property as a hedge against stock market fluctuations Overall
confidence of the purchasers seems to be the largest factor affects the demand of property
Ever since the strike of world financial crisis and a shrinking economy with the falling
demand of exports it is the time for us to re-evaluate the management of countrys real estate
There is still lack of the participation of foreign investors in this sector to drive its marketability
The slowdown of global economic policy flip flops as well as slow liberalization measures do
not seemed to build up confidence in property sector The slowdown in Malaysias economy has
caused the stocks and real estate turn sluggish It is therefore important for us to analyze the
13
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1
performance of Malaysias property market to build up confidence in people who adopt the wait
and see attitude in view of the uncertainty in the world economy
13 Objective
The objective of this study is to identify the key success factors that affect Malaysia
property companies performance
14 Significant and Scope of the Study
This study is important as it identify the performance of Malaysias property market It
enables investors to make the decision on whether they should invest in property as the
slowdown in Malaysia economy has caused its traditional investment instruments such as real
estate become slowly moving It is hope that this study will help to improve the international
marketing in order to overcome the sluggishness in local demand of countrys real estate
This study is based on panel data from Thompsom Financial database The sample data
will emphasized on at least 10 years on shareholder funds cash flow capital expenditure plants
and equipments size and insider ownership from year 1999-2008 The sample data included
return on assets (ROA) where most of the previous studies using it to measure company
performance
14
1