Property/REITs - Singapore - Limited Domestic Impact From Liquidity Curbs In China
- We see limited impact on Singapore’s property sector from the liquidity curbs in China due to the rarity of deals over US$1b.
- Within our coverage, GLP is the most sensitive to a depreciating renminbi as China accounts over 56% of its NAV. We downgrade GLP to HOLD but maintain our target price of S$2.40 post the 11% runup in share price.
- We remain OVERWEIGHT on the sector with CapitaLand, City Developments, AREIT, CCT and FLT as our top picks.
- Capital curbs in China will see Chinese overseas investments face increased scrutiny from state regulators. These include:
- capital outflows from China into overseas real estate deals worth more than US$1b by Chinese state-owned enterprises (SOE), and
- investments of US$1b or more by any Chinese companies in an overseas entity unrelated to the investor’s core business.
- The renminbi has depreciated 4.9% ytd against the US$ (12.6% from Jan 14’s peak).
Limited domestic impact from the liquidity curbs.
- While the curb will ostensibly dampen Chinese investors’ appetite for domestic real estate, ARA’s privatisation bid and GLP’s appeal to Chinese investors, we reckon the overall impact could be muted due to the rarity of deals valued above US$1b, the prospects of an investor pool for ARA and GLP’s strategic appeal.
Takeover prospects not extinguished.
- While GLP’s reported investor consortium includes Chinese fims like Hopu investment and China Investment Corp (an SOE), we note the Chinese authorities could be less inclined to view a potential takeover as a "foreign investment". China accounts for 56% of GLP's NAV, and a bid from CIC and Hopu could be viewed as an extension of strategic control over domestic assets.
- For ARA, while AVIC Trust is an SOE in the aviation industry, we reckon it is likely that either investment partner Warburg Pincus assumes sole investor mantle or other suitors (not discounting consortium members like John Lim or Straits Trading) might also participate.
- In any case, firm trading activities in both GLP and ARA suggest the market may think likewise.
Sensitivity to depreciating renminbi.
- Among developers within our coverage, GLP (56%) and Capitaland (45%) have the highest exposure to China by asset value.
- Within our REIT coverage, ART (15%) has the highest Chinese exposure by asset value followed by MLT (6%).
- A 10% renminbi depreciation against the S$ will translate to a 3.5% earnings impact for Capitaland, while REITs within coverage could see earnings impact of 0.1-0.9%. GLP could see 4.5% earnings impact from a 10% renminbi depreciation against the US$.
- We note that UOB Global Economics & Markets Research expects the S$ to depreciate against the US$ by 3.4% from current levels, while our UOBKH Greater China team expects the renminbi to depreciate against the US$ by about 4% from current levels. The CNY/SGD cross rate from both these estimates would thus imply a 0.6% depreciation of the renminbi against the S$ in 2017.
Downgrade Global Logistic Properties to HOLD but maintain our target price of S$2.40.
- GLP’s share price has nearly reached our target price, after rallying about 11% since our initiation on 23 Nov 16. We now prefer to buy on dips, with an entry price of S$2.08.