will the contagion spread to asian real estate ? peter churchouse july 2008 some random thoughts...
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Will the Contagion Spread to Asian Real Estate?
Peter ChurchouseJuly 2008
Some Random Thoughts from the Trenches
2
A fashionable notion a year ago
- Domestic consumption vs exports Absolute or relative terms Wishful thinking - Naive!
“ You can’t have it both ways”
De-Coupling - what do we mean?
3
Easy Credit The Greenspan
Put
The Global Credit Merry Go Round
Anatomy of a Modern Credit Cycle
Housing bubble Consumer spending
Corporate leverage
Sub prime Near Prime Prime
Commercial
Consumer
Credit card
Auto
Corporate Bonds
Credit Defaultswaps
4
Risk Aversion on the Rise
10 Year BBB US Industrials – spread over US Treasuries
5
ITRAXX Asia High Yield Index
6
The hole gets very much deeper
$400bn becomes more like $1.5 trillion
Huge credit contraction will crimp global growth
Inflationary pressures gathering steam
Central banks - rocks and hard places!
Stagflation - not a good environment for financial assets
A Credit Problem Becomes a Global Economic Problem
7
- The positive spin - Little supply driven concerns
- dearth of cranes on horizons Vacancy rates low Unemployment low Affordability good Consumer debt low Low real / nominal rates Corporate balance sheets O.K.
Asian Real Estate
8
Credit availability is tightening Stock markets dull sentiment Inflation rising, rates rising Rising costs of essentials Cap rates rising Construction costs escalating sharply
- The bear case -
Asian Real Estate
9
• Modest supply increase = slightly higher vacancies• Services job growth slows • Tenant resistance • Rentals flatten or roll over in 2009 • Cap rates rise / price fall 10% - 20%
Hong Kong – What Next?
A (hopefully) Educated Guess
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( July 1997 = 100 )
Hong Kong – What Next? A (hopefully) Educated Guess
Hitting the wall
Credit availability ok Prices flat / down approx 10% to mid 2009 Recovery H2 2009
Supply least ever Middle high end demand
will soften Rates rise, not hugely
Some Distress but Hardly an Some Distress but Hardly an ImplosionImplosion
Nicholas BrookeNicholas BrookeChairman, Professional Chairman, Professional
Property ServicesProperty Services
PPPPSS
1212
BackgroundBackground
Not de-coupled but regional economies more Not de-coupled but regional economies more robust than in 1997robust than in 1997
Greater dependence on institutional Greater dependence on institutional investment and longer term debtinvestment and longer term debt
Less dependence on exports given stronger Less dependence on exports given stronger domestic consumptiondomestic consumption
Impact of any downturn likely to be on market Impact of any downturn likely to be on market specific basisspecific basis
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Hong Kong OfficesHong Kong Offices
Increased office supply in decentralised Increased office supply in decentralised locations will lead to softening in prices and locations will lead to softening in prices and rentsrents– But strong loyalty to Central remainsBut strong loyalty to Central remains
Reliance on redevelopment options and, in Reliance on redevelopment options and, in due course, sites on Central Reclamationdue course, sites on Central Reclamation
Possible creation of Government enclave on Possible creation of Government enclave on Kai TakKai Tak
1414
1515
Site 1
Site 2
Site 3
Site 5
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Hong Kong ResidentialHong Kong Residential
Two markets within a marketTwo markets within a market– Traders versus upgradersTraders versus upgraders
Average sales price in 2007 less than HK$3 Average sales price in 2007 less than HK$3 million and average unit area was 53smmillion and average unit area was 53sm
Despite dip, volumes relatively healthy at Despite dip, volumes relatively healthy at 64,450 units in first 6 months of 2008 i.e. an 64,450 units in first 6 months of 2008 i.e. an average of 10,740 per monthaverage of 10,740 per month
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33%
49%
11%5% 2%
Total Stock of Private Residential Units by Class in Hong Kong (2007)
Total Stock of Private Residential Units by Class in Hong Kong (2007)
Classification of Residential Units by Class :
Class A - saleable area less than 40m²
Class B - saleable area of 40m² to 69.9m²
Class C - saleable area of 70m² to 99.9m²
Class D - saleable area of 100m² to 159.9m²
Class E - saleable area of 160m² and above
Class B (519,498 units)
Class A (350,455 units)
Class D (54,778 units)
Class C (121,404 units)
Class E (22,763 units)
Sources: Rating and Valuation Department
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Hong Kong ResidentialHong Kong Residential
Investment demand centred on MTR Investment demand centred on MTR proposalsproposals
Government seriously considering more Government seriously considering more flexibility in industrial conversions – starter flexibility in industrial conversions – starter homes, elderly housinghomes, elderly housing
Impact of new Town Planning Board imposed Impact of new Town Planning Board imposed height limitsheight limits
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Investors’ View on AsiaInvestors’ View on Asia
Japan – standing investmentsJapan – standing investmentsMacau – luxury residentialMacau – luxury residentialMalaysia – villas and high end apartments Malaysia – villas and high end apartments China – second tier citiesChina – second tier citiesSingapore – wait, as prices will fallSingapore – wait, as prices will fallVietnam – prices fallen, some good buysVietnam – prices fallen, some good buysIndia – opportunities in the hotel sectorIndia – opportunities in the hotel sectorMiddle East – Abu Dhabi, QatarMiddle East – Abu Dhabi, Qatar
UBS Investment Research
British Chamber of Commerce:China Pty – bull market correction
Jul 2008
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 96
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
This material has been prepared by UBS Securities Asia Ltd, an affiliate of UBS AG (UBS).
Eric WongCo-head of Asia Property Research
Eric Wong
+852 2971 6430
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Easy come, easy go… price rebound unlikely in Q3
Source: Hopefluent
Price (Rmb psm)
2008200720062005 Time
22
Policies targeted developers, buyers less affected
818 846 887 914 1,200 1,300 1,380 1,410 1,600 1,700 1,760 1,800 1,800
1,6821,754
1,7931,856
2,000 2,100 2,220 2,2702,410
2,600 2,8603,000
3,100
1,000
2,000
3,000
4,000
5,000
6,000
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08
0%
10%
20%
30%
40%
50%
60%
Developers loan balanceConsumer mortgage loan balance YoY Growth of developers' loan
YoY Growth of mortgage loan
Source: CEIC
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Metrics the regulators monitor…all exceeded
Source: CEIC
0%1%2%3%4%5%6%7%8%9%
10%
Jan
07
Mar
07
May
07
Jul 0
7
Sep
07
Nov
07
Jan
08
Mar
08
May
08
0%2%4%6%8%10%12%14%16%18% CPI (LHS) (red: exceed target)
Interest rate (RHS)
Deposit reserve rate (RHS)
0500
1,0001,5002,0002,5003,0003,5004,000
Jan
07
Mar
07
May
07
Jul 0
7
Sep
07
Nov
07
Jan
08
Mar
08
May
08
RMB bn
10%12%14%16%18%20%22%24%26%28%
New Loans (LHS) M2 supply (RHS) Urban fixed asset inv (RHS)
Gov Target
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Govt’s supply side objectives – increase supply— More funds allocated to public housing: target Rmb50bn (now: Rmb 3bn) investment a year— More price-capped supply: 7,000 units (priced at 30% below market average) in Guangzhou in 2008— More 90/70 products: 50% of supply in GZ, SH in 2008— More confiscation of and penalty on idled land— More investigation of illegal practices— Protect farm land (see 100-day campaign)— Turn land supply into housing supply — Promote first-time home ownership
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Govt’s demand side objectives – curb bubble forming— More mortgage rate hikes
— Increase upfront payment ratio— Introduction of property holding taxes— Enforcement of LAT— Foreign purchase restriction— More investment channels
Source: CEIC
1Y Lending >5Y Lending 1Y Deposit 5Y Deposit
Mar 6.39 7.11 2.79 4.41
May 6.57 7.20 3.06 4.95
Jul 7.02 7.38 3.33 5.22
Aug 7.20 7.56 3.60 5.49
Sep 7.47 7.83 3.87 5.76
Dec 7.56 4.14 5.85
7.83
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Govt favours first-time buyers— 6.7% and 20-30% upfront payment for 1st purchase— 8.6% and 40% or higher upfront for 2nd purchase— Last rate hike kept mortgage rate unchanged— Further mortgage tightening may target speculators— Proposed property holding taxes may target large and luxurious units— Transaction taxes may not be so successful as sellers transfer burden to buyers
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When will the market recover?
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-VE real rates still supports prices
Source: CEIC
InflationRequired reserve ratio Lending rate > 5 years
Deposit rate 3 months
-4-202468
10121416
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
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Indications of a market recovery — Price cuts followed by stable growth afterwards— Significant bounce in volume— Tightening focuses more on developers’ loans— No new policy implementation in next 6 months— Balanced mix of private and public units