Singapore Property - Capital Controls ~ What If?
What if cross-border capital flows are restricted?
- Recent Chinese, Malaysian and Indonesian measures to stem capital flights from their respective countries suggest that the free flow of capital across borders should not be taken for granted.
- While no regional countries have resorted to draconian capital controls to date, we think the impact on demand for Singapore property will be muted even if the screws are tightened further.
- We remain NEUTRAL on the sector with CCT, KREIT and UOL as our preferred stocks.
Small impact on residential demand
- As 25% of current demand for new private homes springs from foreigners, restrictions on cross-border capital flows may affect this market.
- Nonetheless, we believe the influence of foreign capital has receded quite a fair bit in recent years. The 75% of demand that is supported by locals today is higher than pre-GFC levels of 66% in 2007 and 71% in 2011, before the introduction of Additional Buyers’ Stamp Duties for foreign home buyers. Hence, we do not expect major price falls if capital controls are implemented.
- The three largest groups of foreign buyers in Singapore are the Chinese, Malaysians and Indonesians, with respective market shares of 7.5%, 6.2% and 2.4%. Actual flows from these markets may be larger as companies and foreign buyers with undisclosed nationalities account for another 5.6% of demand.
Less foreign competition for development land
- We estimate that over 40% of development land has been sold to foreign developers since 2013. Chinese developers were the most avid buyers with an estimated share of 15%. We believe that foreign participation at land tenders has ratcheted up competition and that a reversal of this trend could help local developers replenish land at more reasonable prices.
Potential impediment to commercial real-estate investments
- On the other hand, depending on the origin of investment capital, restrictions on capital flows may rein in investment demand for commercial properties. Major office deals this year involved capital from Indonesia and Qatar.
Incremental impact on our stock views
- While we see a minimal impact on Singapore’s property market if capital controls increase, we could turn more negative on developers with large high-end residential exposure. This is because the high end of the market has bigger exposure to foreign capital.
- Ho Bee and Wing Tai have pure high-end exposure while CDL has a large amount of saleable resources at the high end. Cutting our home-sales assumptions by 10% for 2017-18E would result in 3% lower EPS for CDL and 14% lower for Wing Tai. The impact on CAPL, UOL and Ho Bee would be smaller, at 1% or less.
- We will also be more positive on developers with small land banks and good balance-sheet capacity. Less foreign competition for development land may result in less aggressive bids. Wing Tai, CDL and UOL have the lowest leverage in our coverage with net gearing of 20%, 27% and 27% respectively.