Tuesday, May 13, 2014

China property bubble


China's property boom is said to be on its last leg and possibly reaching systemic proportions.

“In 1990, Tokyo’s total land value accounted for 63.3% of US GDP (gross domestic product), while Hong Kong reached 66.3% in 1997.

“Now, the total land value in Beijing is 61.6% of US GDP, a dangerous level,” said Vanke Group vice-chairman Mao Daqing.

According to The Telegraph, a leaked recording of Mao’s dinner speech more or less confirms what the bears have been saying for months.

It is a dangerous bubble, and already deflating, says Ambrose Pritchard-Evans in his column in The Telegraph.

China’s anti-corruption campaign has resulted in a flurry of home sales as many people try to get rid of high priced units.

Transaction volume has slowed down in the 27 cities surveyed, of which 21 cities have inventory exceeding 12 months, said The Telegraph, quoting Mao.

“We believe that a sharp property market correction could lead to a systemic crisis in China, and is the biggest risk China faces in 2014,” said Nomura’s Zhiwei Zhang.

The risk is particularly high in third and fourth-tier cities, which accounted for 67% of housing under construction in 2013, said Zhang, as quoted by The Telegraph.

China can leave the situation to correct itself or prick the bubble.

“Whatever measure is taken, when China sneezes, you will catch a cold, wherever you are,” said Pritchard-Evans in his column.

Citing the decision by the US Federal Reserve to pop the bubble in 1928, he said it caused a lot of adverse effects which the world should be aware of.

The United States was then the world’s rising creditor power, with foreign reserves above 6% of global GDP, almost exactly the same as China’s holdings today.

The other major announcement last week was Barclays’ plan to trim staff.

Hot on the heels of shareholders’ rejection of its bonus plan, Barclays is cutting 19,000 jobs over the next three years.

Barclays increased its expected job cuts this year to 14,000, from 12,000 announced in February, with the extra 2,000 jobs going in the investment bank, according to Reuters.

It said it woukld cut a further 5,000 jobs in the investment bank by the end of 2016.

Under its revival plan, the 320-year-old bank will set up a bad bank which will carry £115bil of risk-weighted assets.

This includes £90bil of investment bank assets and all of its European retail banking operations, amounting to £16bi of assets.

Barclays is raising £5.8bil (US$8.9bil) from its shareholders to help plug a larger-than-expected capital shortfall.

Barclays certainly has a lot to deal with before it can comfortably start thinking of rewarding its staff with big bonuses.

New, potentially risky practices among asset managers and mortgage servicers have been identified by the US Financial Oversight Council in its latest report.

At issue were indemnifications that asset managers offer some clients involved in securities lending activities to guard against the risk of borrower defaults, said the South China Morning Post (SCMP).

Although asset managers did receive collateral in exchange for the securities they lend, the report raises concerns that indemnifications could still leave asset managers at risk because they were not required to set aside capital, SCMP said.

Mortgage servicers handle borrowers’ accounts, processing payments and handling foreclosure proceedings.

The report says non-bank servicers do not have the same capital, liquidity or risk oversight as banks. As a result, it said the failure of a non-bank servicer could hurt investors in mortgage-backed securities.

The regulators have taken the initiative to identify risks posed by the non-bank sector.

It will be interesting to see what measures they will take to contain these risks after flagging the red flags in the sector.

GST and OPR will affect house prices

The anticipated goods and services tax (GST) and the hike in the overnight policy rate (OPR) will impact housing affordability and sales, according to Maybank IB Research.

It said the benchmark OPR of 3% was expected to rise 50 bps (basis points) to 3.5% following the central bank’s monetary policy committee meeting in early July.

The report said a 50bps increase in the mortgage rate could lead to a 6.8% jump in monthly instalments based on a base lending rate (BLR) minus 2.4% for a 35-year loan.

“This would impact affordability and investment decisions for new purchases,” it said.

The report also said the housing affordability index has been trending down since 2009 due to hikes in the BLR to 6.6%. The BLR was set at 5.6% between 2009 and 2011. Other reasons for the index to trend downwards include the spike in property prices without a significant rise in income.

The report said that with most developers already doing GST-related repricing and re-costing exercises ahead of the April 2015 timeline and the anticipated higher interest rates, the housing affordability index could decline further. This would lead to a decline in property sales.

“While developers will be able to pass on the upcoming GST to buyers of non-residential properties, they may have to absorb some of the GST impact for residential properties that were sold during/before 2013 and which remain uncompleted on April 2015.

“We believe a majority of the sales secured in the last one year have not taken into account the implementation of GST,” the analyst said.
Margins are also likely to compress in the coming period due to the offering of more non-cash incentives to attract property buyers.

On top of that, the report said higher labour costs and higher transportation costs after last September’s fuel price hike were expected to eat into margins.

Malaysia’s high household debt amounted to RM854bil last year, accounting for 86.8% of nominal gross domestic product (GDP).

Maybank IB said investors felt Eco World Development might be the new leader for the property sector given the support by former S P Setia staff and its expansive land bank worth RM43bil in gross developmental value.

Meanwhile, Batu Kawan in Penang was introduced as a new property hotspot in Malaysia. It stands to benefit from the new second Penang bridge and better control on land supply from the state government.

“It is unlike Iskandar Malaysia, which relies on the bilateral relations between Malaysia and Singapore,” the research house said.

Maybank IB observed that the share price of land owners Tambun Indah, Malton and Global Oriental rose 14%, 19% and 24%, respectively, benefiting from interest in Batu Kawan.

Overall, the research house maintained a “neutral” call on the property sector, citing that foreigners were more focused on the property sector in other emerging markets.

CIMB ‘overweight’ on property mart

Research house sees sales picking up in second half of 2014 amid positive news flow.

CIMB Investment Bank remains positive on the property sector and expects property purchases to pick up pace in the second half, ahead of the implementation of the goods and services tax in April next year.

It maintains an “overweight” call on the sector and has chosen Mah Sing as top sector pick.

The research house said in its property market report yesterday that re-rating catalysts for the sector include strong sales by developers in the second half of the year, and positive news flow on infrastructure projects, such as MRT2 and high-speed rail from Kuala Lumpur to Singapore.

“We remain optimistic on the prospects for the residential property sector due to favourable demand and supply dynamics as well as the strong affordability,” it said.

“We do not subscribe to the view that residential property prices will fall as a result of the impact from the numerous measures by the government to curb speculation. This is because residential property prices are largely a function of economic prospects and job opportunities, as well as confidence and sentiment,” it added.

With real gross domestic product growth forecast to accelerate from 4.7 per cent last year to 5.0 per cent this year and the country enjoying what is effectively full employment, combined with a firm stock market, it does not see prices falling at all.

“We believe that house prices will continue to rise 5-10 per cent per annum this year on the back of supply constraints and buyers jumping back in before the implementation of GST in April 2015,” it said.

Transaction volume, however, could shrink by another 10 per cent on the back of the cooling measures.

The supply overhang remains manageable and unsold stock stayed the same at around 66,000 units. Unsold stock declined in the Klang Valley and Penang but rose in Johor.

CIMB IB is most cautious on the Johor market due to the torrent of supply coming from China developers.

However, for developers with townships in Johor that can launch landed properties as well as industrial properties, sales should continue to hold up well.

“While we continue to remain bullish on the prospects of Iskandar Malaysia as a growth corridor, the property play there will likely cool off after last year’s big price spike,” it added.