Tax changes in the US will likely dampen New Year celebrations of listed Asian real estate firms, but earnings will still get a lift from government spending and investments in higher-performing European markets in 2018.
Reforms of the US tax code, which will create a single 21% corporate rate from 2018, will almost certainly push up American interest rates and strengthen the dollar, forcing a monetary tightening in Asian countries that could weaken consumer demand and squeeze profit margins.
An unwinding of assets accumulated by the US Federal Reserve as a buffer against the 2008 global financial crisis also risks renewed market volatility. The first cache of the US$4.5 trillion stimulus fund was offloaded in October, but the effects will only start to become apparent during 2018.
Big Asian real estate firms have taken advantage of low funding costs to hedge dollar debt, but smaller players will have a higher exposure as repayment costs creep up. Some market consolidation appears inevitable.
Most Asian developers will struggle to match their 2017 earnings growth, but the past year has been freakish to say the least: the MSCI Asia Ex Japan Index is expected to finish the year up more than 30% year on year. By comparison, the United States’ MSCI index had risen about 19% by mid-December, Latin America by 16%, Eastern Europe 11% and Western Europe 8%.
Real estate firms have a modest weighting of 5.9% in Asia’s Ex Japan MSCI index, and it is dominated by China (34.5% of the country weighting), South Korea (17.9%), Taiwan (13.1%), Hong Kong (11.3%) and India (9.9%), all of which have out-performed most smaller markets in the past year.
Singapore, Indonesia, Thailand, Malaysia, Pakistan and the Philippines, which collectively account for the remaining 13.3% of the weighting, are likely to gain only about 7-8% this year, about one-third of the growth recorded by the broader MSCI Index. Pakistani equities will end the year in the red.
Real estate investment trusts (REITS) will suffer the most from higher interest rates, as they tend to trade in line with fixed-income assets and many are over-leveraged. One-year returns on the MSCI AC Asia Ex Japan IMI REITS Index should exceed 30% in 2017, but such growth cannot likely be sustained.
REIT mergers are likely in Singapore, which has nine of the 10 biggest trusts in the index – the largest is Hong Kong’s Link REIT, with a 30.4% share. Singapore has a weighting of 59.1%, Hong Kong 35.2% and Malaysia 3.5%. Total float-adjusted capitalization exceeds US$44 billion.
Property firms that rely mostly on domestic earnings could feel the pinch in some over-supplied markets as conditions tighten, but developers will get a lifeline from higher government spending on low-cost housing and infrastructure, especially in India and major Southeast Asian countries.
India wants to add 50 million affordable units in urban and rural areas by 2022, with US$1.3 trillion of investment tipped for the period spanning 2017-2024. Delhi Land & Finance, Brick Eagle Group and Tata’s housing arm will be key players in the building drive. Indonesia, meanwhile, will need to add one million low-cost units in 2018 to match demand. Malaysia’s Sime Darby and SP Setia are active in the sector, as well as local firms like Bumi Serpong Damai and Ciputra Development.
In Malaysia, US$541 million will be spent on low-cost housing in 2018: revenues of I&P Group, SP Setia and Mah Sing Group will get a big boost in the process. Tighter funding rules, on the other hand, will likely dampen China’s property market. Companies with listings or partnerships in Hong Kong like China Evergrande Group and Sun Hung Kai Properties will be able to source project financing, but may need to shift their focus from the saturated luxury market segments.
Chinese firms will also chase Southeast Asia’s US$300 billion infrastructure bonanza, feathered by its ‘One Belt One Road’ initiative, though funding could again be an issue.
The Philippines will spend only US$20 billion in 2018 on its announced US$180 billion package and Vietnam has found less than US$7 billion of the US$500 billion it wants to invest by 2020. Indonesia may also struggle to get its planned investment of US$86 billion each year from 2015 through 2019.
However, Malaysia has locked in US$52 billion for infrastructure in fiscal 2018 and Thailand will spend US$58 billion from 2015-2025, partly on upgrades in the Eastern Economic Corridor (EEC) and on rail transit lines in Bangkok. Thai property companies Amata Corp and WHA Corp will be likely winners in the EEC, which could boost development in nearby beach town Pattaya.
The Philippine’s EEI Corp is building a US$1.6 billion mass transit railway that will also improve connectivity for estates being built by firms like Ayala Land and SM Prime Holdings. Pembangunan Perumahan (Indonesia), Gamuda Berhad (Malaysia) and Vietnam Infrastructure will be other key players. Offshore investments, mostly in European cities like London, Frankfurt and Amsterdam, will also provide a buffer against falling Asian returns.
Published in Daily Times, January 1st 2018.