Will Malaysia succumb to the 'curse' of Battersea power station?
Matthew Partridge Jul 09, 2012
We’re starting to think that Battersea power station is cursed: every attempt to develop it has failed.
In the 1980s, businessman John Broome tried to turn it into a theme park. However, the project fell through and he went bust. The most recent sale - to Malaysian developers - was prompted by the bankruptcy of the previous owners, Irish property firm Real Estate Opportunities (REO).
It goes deeper than just individual corporate disasters - the two big foreign owners of the site also saw their home economies collapse. In 1996, Hong Kong-based Parkview International finally acquired the site; a year later, the Asian crisis hammered the Hong Kong stock market.
Meanwhile, the Irish housing bubble began to burst soon after REO bought the power station in late 2006.
We realise that the notion of 'the curse of Battersea power station' might sound a little crazy. But there are good reasons why the sale of this sort of ‘white elephant’ site might act as an important economic warning light.
So what are they? And will Malaysia be the next victim of the Battersea curse?
How big buildings can become monuments to ‘irrational exuberance’
Most of the time, businesses behave more or less rationally. The 'creative destruction' of the free market system forces firms to either shape up or be replaced by other, leaner competitors.
However, a period of prolonged growth - often due to central banks and governments trying to artificially extend the boom times - can make firms lazy and overconfident.
They start to think that the good times will continue to roll, and that their success can be replicated in other areas. And banks and investors throw money at them at a time when there may be few decent-looking productive opportunities left.
These two factors often tempt them into projects that are either hubristic or foolish. It’s not difficult to find examples from recent history: Icelandic fishermen becoming corporate raiders during their boom, for example, or bankers with over-inflated egos taking over rivals for little more than bragging rights (RBS’s fight with Barclays over ABN Amro).
But few grand schemes seem to attract empire-building executives like trophy real estate projects. This is because they soak up large amounts of money (so they can put to work all that investment cash), are glamorous - and so attract media attention - yet are often still seen as low risk. After all, in boom times, everyone thinks you can’t go wrong with bricks and mortar.
This phenomenon is so well known that some investors use the 'skyscraper index' to find markets that are overvalued. This measure, created by banker Andrew Lawrence in 1999, looks at the number of tall buildings being built in a country.
The idea is that countries that have a rapid spike in construction may be at the top of the economic cycle. Fans of the index claim that it would have predicted the panic of 1907, the Great Depression in the 1930s and the low growth of the 1970s.
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So is it time to sell Malaysia?
Battersea power station won’t be turned into a skyscraper, of course. However, the winning consortium - the Employees’ Pension Fund of Malaysia - has ambitious plans for the property, for which it paid £400m. These plans, which largely follow those of REO, include 1.7 million square feet of office space, 3,500 homes and a tube station.
Given the fate of previous owners, the big question now is - is this a bad sign for the Malaysian economy?
On the surface, the answer would seem to be no. Indeed, Malaysia looks like it’s in a strong position, with its GDP growing by 5.2% last year. Credit ratings agencies have also praised the country’s finances, with both Standard & Poor’s and Moody’s giving its debt relatively high ratings.
However, these good reviews hide some serious vulnerabilities. Malaysia is closely linked to the Chinese economy, which is now its largest trading partner. It is also vulnerable to a downturn in the European economy.
Indeed, a recent report by the analysis firm RHB Research Institute is extremely bearish. It claims that a combination of a Chinese hard landing and an extended eurozone downturn could even push the Malaysian economy into recession.
And even if the eurozone does manage to boost its growth, the only way it will be able to do so is by printing more money – and therefore making its exports more competitive against those of countries like Malaysia.
At the same time Malaysia still has many structural problems. Corruption and weak property rights act as a major drag on growth. And while the government has talked about further privatisation, it continues to attempt to direct the economy through 'five year plans'.
The stock market is expensive, too, with the FTSE Bursa Malaysia KLCI Index trading at 15.7 times current earnings – and at 2.3 times book value. It’s also trading near an all-time high.
So how could you play this? The most risky option is to short the iShares Malaysian ETF (NYSE: EWM). However, shorting is very risky. It’s never easy to time the turn in a market precisely, and you could lose more than your initial investment. Instead, you may be better off simply avoiding Malaysia. If you wish to invest in an emerging market, then perhaps look at a less China-dependent one such as India, which my colleague John Stepek has tipped recently.
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