Some China developers likely to default

Source: http://www.businesstimes.com.sg/specials/property/some-china-developers-likely-default-20140812

Some China developers likely to default

Declining credit and cooling property market may lead to an industry shakeout

[SHANGHAI] China's slumping property market is fuelling speculation the industry is set for a shakeout as small developers face difficulty raising funds to pay off debt.

Yield premiums on Chinese real estate bonds denominated in US dollars have jumped 27 basis points this month to 574 basis points over Treasuries, the sharpest increase among emerging Asian countries, according to Bank of America Merrill Lynch indexes.

That compares with a 24 basis-point advance for Indonesian builders. Moody's Investors Service and Standard & Poor's said some smaller Chinese developers may default in the second half amid falling sales and shrinking access to credit.

China's real estate industry poses the biggest near-term risk to growth in the world's second-largest economy after new home prices dropped in the most number of cities in two years in June, according to JPMorgan Chase & Co. While government steps to ease property curbs helped builder bonds rally in July, they're giving up those gains ahead of housing price data due next week.

IREIT GLOBAL TO ADD DIVERSITY, SAY ANALYST

Source: http://business.asiaone.com/news/ireit-global-ipo-add-diversity-say-analysts

Analysts say an upcoming new listing of a trust that holds German office assets will add diversity and depth to the real estate investment trust (Reit) sector here.

Property and market consultants told The Straits Times that IReit Global Group offers an attractive proposition for investors, with a projected distribution per unit yield of 8 per cent next year.

But the debut could be hit by poor market conditions due to geopolitical concerns over, for example, impending United States air strikes against militants in Iraq.

OCBC Investment Research analyst Eli Lee said the 8 per cent forward yield offers a 130-200 basis point spread above average forward yields for Singapore Reits (S-Reits).

For instance, the office S-Reit subsector's average forward yield is 6 per cent, while the overall sector has an average of 6.7 per cent.

"That said, unlike IReit, which holds properties in Germany, the typical office S-Reit has the bulk of its portfolio exposure here," said Mr Lee.

"The differences in key geographical drivers could lead to meaningful divergences ahead, in terms of rental outlook, occupancy trends and reversion profiles."

Voyage Research deputy research head Ng Kian Teck noted that S-Reits have performed well, with most reporting second-quarter earnings that are either in line with or better than expectations.

IReit will have to dangle higher yields if it wants local investors to put their money into assets they are not very familiar with in a place that is half a world away.

Mr Ng added that market conditions have not been favourable for initial public offerings (IPO).

The two most recent entrants, Accordia Golf Trust and Terratech, have both sunk into the red since making their debuts in the past two weeks, and have yet to hit their IPO prices.

Mr Ng said: "The poor performances are fresh in the minds of investors, and with IReit coming behind them, the timing is not good.

"There's a lot of uncertainty now, with global markets not doing well, but a good asset is a good asset, and investors will come in, especially since Reits are usually held for the longer term."

Overseas trusts such as IReit also face inherent challenges, including currency exchange losses from a strengthening Singapore dollar, and subject potential investors to higher risks, noted Mr Ng.

Mr Donald Han, managing director of property consultancy Chestertons, pointed out that some Singapore-listed overseas Reits have done well, particularly those from growing economies.

They include Ascendas India Trust, Global Logistics Properties and Mapletree Greater China Commercial Trust, whose owners have been around for a long while.

Mr Han said Germany is considered a safe haven among European countries and is one of the key drivers of growth for the region.

"IReit's 8 per cent yield is fairly attractive compared with yields for Singapore's prime office sector, which are less than 4 per cent," he added.

"Yields for business parks and office space are also well below 6 per cent, even in major German cities such as Munich and Frankfurt." Analysts warned that IReit's assets are mostly in second-tier German cities and highly reliant on a single tenant.

Three of its properties are leased to GMG, a unit of Deutsche Telekom, and the four office properties that make up the initial portfolio are in the cities of Bonn, Darmstadt, Munster and Munich.

The company has priced the IPO at 88 cents a unit, and 167.7 million units will be available.

The public offer closes next Monday. Trading is expected to start next Wednesday.

Property Defaults Seen as Financing Stresses Mount: China Credit

Source:  http://www.bloomberg.com/news/2014-08-11/property-defaults-seen-as-financing-stresses-mount-china-credit.html
Property Defaults Seen as Financing Stresses Mount: China Credit

China’s stocks rose, sending the benchmark index to its biggest gain in a week, amid speculation subdued inflation will give policy makers more scope to loosen monetary policies to support growth.

Industrial Bank Co. advanced 1.5 percent and Haitong Securities Co. jumped 1.7 percent to lead gains for financial companies. China Vanke Co. and Poly Real Estate Group Co., the nation’s biggest developers, climbed at least 1.2 percent after a Beijing-based newspaper reported Shenzhen is the latest city to loosen its property curbs.

The Shanghai Composite Index (SHCOMP) rose 0.8 percent to 2,211,29 as of 10:19 a.m., while the Hang Seng China Enterprises Index (HSCEI) jumped 1.6 percent. Chinese stocks have rallied from this year’s low, with the Shanghai index rebounding 11 percent, amid signs stimulus measures such as monetary easing and accelerated infrastructure spending are helping the government to achieve its economic goals for this year. Consumer prices rose 2.3 percent in July, below China’s target of 3.5 percent for 2014.

“Inflation is low and that should leave the government with more ammunition to support the economy,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “The policy front for property stocks is undoubtedly improving and there are some opportunities for the sector. Upcoming economic data will be good and at least they won’t miss market expectations.”

The CSI 300 Index added 1 percent. The Bloomberg China-US Equity Index, the measure of the most-traded U.S.-listed Chinese companies, surged 1.5 percent on Aug. 8.

Consumer prices rose at the same pace as in June and also the median estimate in a Bloomberg News survey of economists, according to the National Bureau of Statistics. Factory-gate prices fell 0.9 percent, matching projections and extending the longest stretch of declines since 1999.

Monetary Conditions

China loosened monetary conditions last quarter at the fastest pace in almost two years, a Bloomberg LP gauge showed, testing the waning effectiveness of credit in supporting economic growth.

Bloomberg’s new China Monetary Conditions Index -- a weighted average of loan growth, realinterest rates and China’s real effective exchange rate -- rose 6.71 points to 82.81 in the second quarter from the previous three months. That’s the biggest jump since the July-September period of 2012, with May and June’s numbers the first back-to-back readings above 80 since January 2012.

The bureau will release data on industrial production, investment and retail sales on Aug. 13. Factory output probably rose 9.2 percent in July from a year earlier, while retail sales growth accelerated to 12.5 percent from 12.4 percent a month earlier, according to median estimates in a Bloomberg survey.

Property Easing

The Shanghai Composite is valued at 8.1 times 12-month projected earnings, compared with the five-year average multiple of 11.2, according to data compiled by Bloomberg. Trading volumes in the index were 5.5 percent lower than the 30-day average for this time of day.

Shenzhen, a first-tier city, plans to make small adjustments to property policies and scrap limits onhome prices, the China Times reported, citing an unidentified person familiar with the matter.

Shenzhen has prepared policies to ease controls on the property market, including reducing the deed tax and lowering mortgage down payments for second home buyers, the newspaper reported. The city government held a closed-door meeting last week on the real-estate market, it said.

Jinan canceled home purchase limits last month after implementing them for more than 3 years. Hohhot in Inner Mongolia eased home-purchase limits in June, while the China Times reported in July that Wuhan city will relax rules on local residents third-home purchases.

Bourses Link

The southeastern province of Fujian asked banks to speed up approvals for mortgage lending and increase loans to developers, according to a statement on the city’s housing administration.

Pressure is increasing on Hong Kong’s exchange to provide clarity on trading rules before a link starts with Shanghai that will give foreigners unprecedented access to China’s $3.6 trillion stock market.

Investors won’t be able to sell Shanghai shares through an exchange link with Hong Kong unless they transfer the stock to a broker before trading starts that day, according to Hong Kong Exchanges & Clearing Ltd. Shares must be transferred prior to 7:30 a.m. if investors want to execute the trades, Hong Kong bourse Chairman Charles Li wrote in a blog posting published yesterday. This will allow the two exchanges to settle the trades in compliance with mainland Chinese rules, he wrote.

China CPI low, PPI negative; China confidence rising; Hong Kong housing at new record; South African bank bust

Source: http://www.interest.co.nz/news/71385/china-cpi-low-ppi-negative-china-confidence-rising-hong-kong-housing-new-record-south-afr

China CPI low, PPI negative; China confidence rising; Hong Kong housing at new record; South African bank bust; UST 10yrs 2.42%; NZ$1 = US$0.846, TWI = 79.3

Here's my summary of the key news the weekend in 90 seconds at 9 am, including news of a bank failure in South Africa.

But first, on Saturday, China’s July consumer price inflation came in at +2.3% and well remained below their government’s +3% goal, and factory-gate deflation extended its declining run to 29 consecutive months, coming in at -0.9%, suggesting policy makers still have room for monetary easing amid a lack of pressure on prices. Chinese consumers are not yet driving their economy.

Having said that, the latest consumer confidence survey in China does indicate a growing positive moodin the country.

And in neighbouring Hong Kong, home prices hit a new all-time record as volumes in their housing markets returned.

In banking news, a specialist South African bank is in strife and is now under the protection of the South African central bank. It needs to raise significant capital and other local banks have agreed to underwrite the capital raising. The bank’s troubles stem from its SAR 9 billion (NZ$1 bln) acquisition of a furniture retailer in 2008, which has prompted losses and write downs after sales dropped. The bank doesn’t take deposits and makes small loans not backed by assets to low-income earners. Many of its customers are struggling to keep up with repayments amid rising unemployment and inflation.

Equity markets rose in final trading in New York on Saturday; but UST 10yr yields fell back again and ended the week at 2.42%. The US oil price is under US$98/barrel, Brent is under US$105/barrel. Gold is down slightly also and is now at US$1,311/oz.

We start the week with the NZ dollar basically unchanged. We are now at just over 84.6 USc, just under 91.3 AUc. The TWI is at 79.3. 

Rosesyrup Research

A comprehensive assessment of IREIT Global

Call: Buy / subscribe

Target Price  = $1.093

Upside: 24.2%

Major Selling points

Most points listed here are already highlighted in the prospectus, I only try to summaries it for the benefit of those who don't read the prospectus.

1. The one and only REIT in Singapore that provide investors with exposure in Germany office rental market.
2. Germany office market and economy show strong recovery in the previous quarter and is likely to continue, though at a more modest rate.
3. Contract tenure with lessee guaranteed for next 7 years.
4. Huge subscribe (60%) by China Tycoon who would greatly reduce the free float. Low supply = high price.
5. Inflation adjusted yield=> A protection which wasn't provided by most REITs listed on SGX.

Foreseeable Key disadvantages and risks

1.    No growth story: With debt standing at 33% there is little opportunity for expansion without liquidation of existing shareholders' stake. Leasing contract also sealed for the next 7years making it  hard, if not impossible, to increase rent to market rate.

2.    Very undiversified: All properties located in Germany and revenue source come mainly from Deutsche Telekom only.

3.    EURO Zone Debt crisis: The 2010 crisis was subdued not solved, which requires extensive restructuring of the economies and is not likely to happen. Thus it is a matter of time the crisis resurface again. And if that happens, developed nations in Euro zone stand to lose most.

I did a quick scan over other blogs and read their opinions on IREIT. Some of their valid concern includes:

1. Forex risk: Revenue of IREIT is in EUR while it's distribution is in SGD, thus risk of EUR depreciating and lowering the promised yield of IREIT. 
• My Opinion: SGD, which has risen significantly in the past few, is more likely to depreciate than EUR in the near future. (MAS will choose to let SGD depreciate rather than hiking interest rate for the fear of bursting the housing bubble)
2. Issuance price is 1.13X of NAV: In short, these bloggers think that investors would not want to pay a 13% premium over the asset value as they could avoid the premium by directly buying an office in Germany! (A very problematic assumption)
• My Opinion: Out of the 13% premium, 9% already goes to pay for the underwriting fee which is a must for all publicly listed asset. Thus investors in fact only pay 4% premium which I think is worth it because:
• Affordability: Surely Investors with 10k cannot afford to buy an office space in Germany but now they can buy 11 lots in IRET.
• Liquidity: If a direct owner of office building wants to dispose of his asset, he needs to pay an agent fee and waits for some period of time before finding an interested buyer. With IREIT, Reit holders simply buy and sell on SGX with minimum brokerage fee.
• Goodwill: The properties come with a 7 years (average tenure, not overall) commitment from lessee, thus REIT holders need not worry about finding lessee for the next 7 years.
• No choice: This is the only REIT in Singapore which provide investors with exposure to Germany's office market. Unless investors willing to trade on other stock exchanges around the world, they got little option on SGX.
3. Interest rate hike: It is fear that EU's current near zero interest rate policy won't hold forever and the resulting hike would decrease the yield from IREIT, which is 33% funded with debt.
• My opinion: The loan has a fixed interest rate for the next 5 years
• Average tenure of contract is 7years, after which IREIT can mark its rental to market rate.
• Hence only 2 years worth of yield is likely to be affected.

Valuation method 1

Model: DDM

g: 1.75%

r: 8.35%

CF1: $0.0704

Target Price: $1.067           

Upside: 21.2%

Valuation method 2

Model: DDM (Phase 1) + NAV (Phase 2)

Phase 1: 7 years with the same assumption made as in method one above.

·         PV=  $0.3797

Phase 2: 7 years and thereafter

·         Property price: $478.30M

·         Appreciate: 1.33%

·         Discount: 8.35%

·         Number of shares: 419.4M

·         PV per shares = $0.7136

Target Price  = $1.093

Upside: 24.2%

Conclusion

Given that IREIT contract with its main customer only last for 7 years and IREIT is free to adjust its rental rate thereafter, I would say that method 2 is more realistic than method 1.

Property developer Ying Li to explore new frontiers

Source: http://www.stproperty.sg/articles-property/foreign-property-news/property-developer-ying-li-to-explore-new-frontiers/a/129046

CHINESE property developer Ying Li International Real Estate has kept a low profile since its listing on the mainboard in 2008 but the firm now wants investors to know that it has aggressive expansion plans.

Ying Li's transformation will involve raising capital, entering new markets, developing more ambitious real estate projects and spinning off a real estate investment trust (Reit).

The success of this wide-ranging strategy falls on the shoulders of Mr Ko Kheng Hwa, 58, who came on board as Ying Li's chief executive and executive director in March.

He was formerly the CEO of Singbridge International Singapore, a wholly owned unit of Temasek Holdings, which primarily develops and invests in large-scale integrated townships in China.

"We will expand our core business in Chongqing while entering new markets and investing in new real estate products," Mr Ko said in an interview with The Straits Times.

He has had 34 years of experience in the government service and government-linked companies, holding top positions at Keppel Corp, the Economic Development Board and JTC Corp.

Earlier this month, Ying Li also roped in Mr Tan Kiang Hwee, 50, the former chief executive of Temasek-owned urban planner Surbana, as its chief operating officer.

Since it started in 1993, Ying Li has focused on developing mixed-use commercial and office buildings in Chongqing's core central business district and selling them off, a business that has helped it to amass a market capitalisation of about $965 million.

But Ying Li has now set itself new targets. Its next phase of growth aims to go beyond developing mixed-use property and into "thematic" real estate.

Its buildings will house companies in the same industry class together for that additional competitive edge, akin to a media, health-care or education hub.

Mr Ko said Ying Li will also look at building residential townships which will offer social and commercial amenities.

Moreover, Ying Li will widen its focus beyond Chongqing's business district and suss out opportunities in the suburbs, and even possibly to other second- and third-tier cities in China.

"We want to build critical mass, presence and grow our reputation in these selected cities," said Mr Ko.

He noted that Chongqing has been selected by the Chinese government as one of the non-coastal regions to be developed under the "Go West" policy. Businesses there can therefore expect better incentives, infrastructure and policy implementation to drive economic growth, he said.

To fund these expansion plans, Ying Li will be placing out new shares to targeted investors who can contribute capital as well as add value to the business through their networks.

It will also issue bonds and consider entering joint ventures for certain developments. Finding a partner will allow Ying Li to be involved in more projects than when it was self-financing all its developments.

In the medium term, Ying Li is looking to list a real estate investment trust for its malls. Ying Li already owns and runs two retail malls and a third one, the size of VivoCity, is slated to open by the end of the year. Its malls, land banks and some office units which it retains are valued at about seven billion yuan (S$1.4 billion).

Plans are also in motion to make operations at Ying Li and its projects more eco-friendly and green by Chinese and international standards.

Consider IREIT

Hi all,

Do take a look and consider subscribing to IREIT. I am currently valuing IREIT and will release my assessment soon.]

Cheers and goodluck.