Taipei Times: Does recent heated buying signify that the sluggish property market is about to recover?
Chao Teng-hsiung (
But property prices couldn't be any lower. We have begun to see a recovery in confidence now that the government has kick-started several stimulus measures including preferential loans, the real estate-backed securitization law and the halving of the incremental land-value tax. Therefore, housing sales are expected to rise by up to 50 percent, which will gradually bring up prices. As a matter of fact, prices of land, raw materials and steel are soaring to slightly boost property prices by, say, some NT$3,000 to NT$10,000 [per ping] in some areas.
PHOTO: GEORGE TSORNG, TAIPEI TIMES
TT: While you are very optimistic about the property market, some economists said the actual recovery will arrive in the second quarter of 2004. Do you agree?
Chao: Properties in central and southern Taiwan are cheaper than those in China, which means investors will see a lot of room to increase profit margins if prices go up. Locally or globally, the economy will do better next year than this year, which is sure to revitalize the property market especially when the prices are low and the government is launching measures to boost the market and the economy. I am sure the property market will gradually recover early next year. After the government implements the three direct cross-strait (transportation, postal and trade) links, hopefully next year, the property market will boom in two years's time.
TT: How will the three links contribute to a property-market boom?
Chao: Many businesses have been looking forward to the opening-up of three links so that they can benefit from China's emerging markets. If the three links are in place, some 300,000 Taiwanese families, which have bought houses there, may consider moving back given the fact that Taiwan's qualify of life and security is much better than in China. Many mainland Chinese, if allowed, may also be interested in buying houses here since prices are low. China-based Taiwanese businessmen no longer need to settle down in China since they can make China-bound round trips in one day.
TT: The sector is tying its hopes to the recent passage of the Real Estate Securitization Statute (不動產證券化條例), which is designed to revive the property market. But what is real estate-backed securitization? How much do you think investors will be interested in buying these assets?
Chao: The statute is one of the many stimulus measures the government is offering, but it is the most helpful tool in my view. Securitization of real estate refers to the process of converting properties into marketable equities for sale to investors. From the point of view of investors, they can now become shareholders of multi-million-dollar skyscrapers with a small amount of money and benefit from the profit-making building's annual revenues and dividends. They can now invest in something they couldn't afford in the past in the form of shares. Under the statute, individual real-estate owners and developers can entrust authorized investment trust companies to issue the beneficiary certificates and professional appraisers to come up with an [objective] valuation before selling the real estate-back securities to investors.
The stock issuance, moreover, is subject to government approval with qualified ratings, which I am sure both local and foreign investors will have confidence in buying. If the to-be-securitized properties generate fixed income and are located in prime areas, their shares will be viewed as blue-chip shares by investors. Most likely, securities sales of office buildings with a high occupancy rate and commercial buildings such as shopping malls will first be issued to lead the market, followed by those of apartment buildings or business/residential buildings.
TT: What about property developers' financing needs? Will their liquidity problems still be addressed now that undeveloped land is excluded from the securitization plan?
Chao: We hope the Real Estate Securitization Statute can eventually be revised. The exclusion will first disadvantage Taiwan's future infrastructure construction projects, which each require a minimum working capital of NT$5 billion. If private developers are excluded from the securitization plan to raise capital, they may not be capable of participating in the government's build-operate-transfer (BOT) schemes to renovate urban areas. The goal of getting Taiwan internationalized and improving our living standards will remain just talk.
TT: It is estimated that the first real-estate-backed securities will be put on sale in the local stock market by the year's end. How large is the potential market?
Chao: If the statute can be further relaxed, the size of market will be bigger than expected since capital inflows will come from foreigner investors, the government's funds and the private sector. Regarding the market size, the nation's total wealth amounts to NT$109 trillion, approximately NT$77 trillion of which will go to the property market. Let's assume that 15 percent of the NT$77 trillion stays in the commercial property market, the value of the nation's commercial properties is about NT$11 trillion. If 10 percent of the NT$11 trillion-valued commercial properties are securitized, the initial real estate-backed shares may reach NT$1.1 trillion. If the statute is less strict than it is now, these real estate securities can be liquidated within five years, which will generate NT$220 billion of new capital per year in the sector. Since only the issuance of beneficiary certificates will be approved [by the government], the return on investment is guaranteed to level out at between 4 percent and 5 percent, which is way higher than savings interest rates.
TT: The newly passed law requires properties to be sold to a third party -- such as a special purpose company or a special purpose trust -- which issues the real estate-backed securities. But it also stipulates that special purpose companies need to have a minimum working capital of NT$300 million before they can manage the deal. Don't you think the requirement is too low?
Chao: If special purpose companies are entrusted to manage the deal, their marketing and managerial professionalism matter rather than their size of capital. All they need is NT$50 million to sell the real estate securities. Be it NT$1 billion or NT$300 million in capital, it's just a threshold that the government sets to prevent the market from being overcrowded with too many participating trust companies. The investors, market forces, governmental regulators and private rating agencies will decide whether they are qualified to stay in the marketplace.
TT: In conclusion, what do you think should be done next to further facilitate the securitization plan and its market?
Chao: We hope the government can further loosen some restrictions in the statute. For example, restrictions on investors, whose wealth is required to exceed NT$5 million, should be relaxed. If the wealth limit can be lowered by half, potential investors will grow by some 60 percent to 70 percent. Also, we expect to soon see the launch of high-quality property-backed securities by responsible trust companies and developers. Hopefully, we expect the value of real estate securities will reach NT$110 billion in the first year. If it succeeds, the securitization plan will not only revive the property market, but also attract foreign investors to boost the local economy while bringing down the unemployment rate and enhancing the public's confidence in our economy. Moreover, if undeveloped land with economic value can be included, the securitization scheme will become more effective in bolstering the property sector.
TT: Does your group have any plans to issue such shares?
Chao: Our association is mulling plans to found a trust company to take part in the securitization scheme, hoping that I can chair the company to set up a good market example. But we're still working on it. And my company [Far East Construction Co (遠東建設)] is also planning to issue securities backed by three types of real estate in Taipei valued at NT$500 million, NT$1 billion and NT$2 billion. Both plans still depend on the legislation and its supporting measures being completed soon.
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