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China slumps; Singapore real estate in focus

Stanislaus Jude Chan
Stanislaus Jude Chan10/22/2018 07:30 AM GMT+08  • 4 min read
China slumps; Singapore real estate in focus
SINGAPORE (Oct 22): The renminbi this week touched its weakest level in almost two years even as the Shanghai Composite Index sank to a low of nearly four years — testing the government’s ability to maintain market calm as risks mount for Asia’s la
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SINGAPORE (Oct 22): The renminbi this week touched its weakest level in almost two years even as the Shanghai Composite Index sank to a low of nearly four years — testing the government’s ability to maintain market calm as risks mount for Asia’s largest economy.

Chinese stocks have now slumped about 30% since their January high as Beijing struggles to maintain financial stability amid slowing economic growth, a trade war with the US, and rising US interest rates.

Policymakers have so far refrained from undertaking major market rescue efforts, but concerns are mounting over some US$603 billion ($829 billion) of shares pledged as collateral for loans — or 11% of China’s market capitalisation — which could tip the market into a downward spiral.

After the selloff over the previous week, FXTM research analyst Lukman Otunuga says “a semblance of stability” seems to be returning to financial markets “as investors sweep aside trade disputes and global growth fears to focus on the US earnings season”.

The benchmark 10-year US Treasury yields on Oct 18 rose to 3.21%, however, climbing back towards seven-year highs. This came after the release of meeting minutes that showed the US Federal Reserve may favour more rate hikes next year.

In Singapore, United Overseas Bank is expected to announce its 3QFY2018 financial results before market open on Oct 26. According to Thomson Reuters estimates, UOB is expected to post 3Q earnings of $1.05 billion. Last quarter, UOB saw its earnings climb 28% y-o-y to hit a new peak of $1.08 billion. This brought earnings for the first half to a record $2.05 billion.

Last month, UOB was named Best Regional Bank of the Year for the Belt and Road Initiative in Southeast Asia at the 2018 Asiamoney New Silk Road Finance Awards.

In a Sept 26 report, Phillip Capital analyst Tin Min Ying notes that among the three local banks, UOB could be least affected by the trade war. “Between 10% and 15% of UOB’s loans book are trade-related, with the bulk anchored out of Southeast Asia. Thus, we do not expect the trade war to pose significant risks to trade loans growth unless it escalates into an overall global slowdown,” says Tin.

The bank could face some headwinds related to mortgages in Singapore. Among its local peers, UOB has the largest proportion of property-related loans — around 50% of total loans. However, Tin says weakness in the property-related loan market may only be felt next year, owing to drawdowns of previously approved loans. Phillip is maintaining its “buy” call on UOB, with a price target of $33.69. Shares in UOB closed at $25.48 on Oct 18.

Meanwhile, the property sector has been hit by new restrictions, which in turn would affect developers’ earnings and, consequently, investor interest in their stocks. Following the curbs announced a few months ago, URA announced that the average size of new private flats outside the central area would have to be at least 85 sq m, about 20% higher than the previous floor of 70 sq m. Nine districts, up from four previously, will be subject to an even more stringent minimum average requirement of 100 sq m.

The new requirements, which come into effect from Jan 17 next year, will help deter the development of projects with shoebox units from overloading existing public utilities infrastructure in certain areas. This will also limit property developers’ scope to boost margins by launching smaller units with a higher psf pricing.

Analysts say the latest restrictions are likely to lead investors to focus more on developers’ recurring revenue streams and geographic diversification. “In view of the challenging near-term outlook for Singapore residential property, investors may consider more diversified developers with strong balance sheet,” says DBS Group Research lead analyst Derek Tan. “This could include CapitaLand, with a 7.6% [revalued net asset value] from Singapore residential, and Ho Bee Land, with recurrent income of more than 90%.”

A number of real estate investment trusts are releasing their financial results in the coming week. Mapletree Logistics Trust and Mapletree Industrial Trust are releasing their 2QFY2019 earnings on Oct 22 and 23 respectively. On Oct 24, Frasers Centrepoint Trust, Suntec REIT and Ascendas India Trust will report their earnings. Parkway Life REIT reports on Oct 25, as will CapitaLand Mall Trust, and Sembcorp Marine.

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