PRICING AND RISK ANALYSIS OF SES LISTED PROPERTY COMPANIES

Abstract

Investment in property is always perceived as a game for the very big players who have the vast resources that cannot be matched by the smaller investors. Coupled with the huge capital outlay, other disadvantages such as iliquidity, indivisibility, imperfect market and long searching process are additional factors that inhibit the smaller players from participating in property investments. This however does not mean that the smaller investor is excluded from property investment completely. They (smaller investors) can participate indirectly by investing in the various property counters listed on the Stock Exchange of Singapore (SES). The decision to invest lies on the answers to these questions : which company to invest in?, what is the risk to be borne?, and what is the return to be expected?. Capital Asset Pricing Model (CAPM), an equilibrium pricing model, provides answers to these questions. Within the CAPM framework, relationships between risk and return can be derived. In addition, the beta coefficient and its corresponding expected return based on the level of systematic risk can be determined. This can help to determine the extent of over or undervaluation of the companies in questions. It is hypothesised that there is no relationship between the market return and the individual stock return (ß=0)and there is no consistent underpricing of SES listed property companies. However, such hypothesises are nullified with empirical findings and the converse is true. This shows the general applicability of the CAPM for the property sector listed on the SES. It also shows in particular the usefulness of this model in providing quick analysis in the field of investment analysis without the lengthy analyses needed if Stock Valuation models are used. With the aid of the CAPM model, this study examines the relative riskiness of the listed property companies by means of the beta coefficients. The beta coefficients are then used to examine the relative investment potential of the companies. In term of investment potential with risk level equalised, the following companies are recommended for potential long term investments: 1. Bukit Sembawang Estates Limited, 2. City Developments Limited, 3. Singapore Land Limited and 4. Straits Steamship Land Limited.