ner - DBS Bank China surpassed Singapore as the top source of Asian outbound investment in that period, accounting for 60% of total outbound investment from the region. Current State

DBS Group Research • November 2016DBS Asian Insights32n

um

ber

SECTOR BRIEFING

China PropertyWatch Out for

Overseas Investments

DBS Asian Insights SECTOR BRIEFING 3202

China Property Watch Out for Overseas Investments

Produced by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Chien Yen Goh Editor-in-ChiefJean Chua Managing EditorGeraldine Tan EditorMartin Tacchi Art Director

Danielle WANG, CFAResearch DirectorDBS Vickers (Hong Kong)danielle_wang @dbs.com

Carol WU Head of Research for Greater China DBS Vickers (Hong Kong)[email protected]

Ken HE, CFA Associate Research Director DBS Vickers (Hong Kong)[email protected]

Andy YEE Senior Research AnalystDBS Vickers (Hong Kong)[email protected]

Jeff YAU CFA Research Director DBS Vickers (Hong Kong)[email protected]

Regional Research [email protected]


03

0406

19

49

Investment SummaryCurrent State of Chinese Outbound Investment

Developers’ Overseas Strategies

Developers’ Comparison Case Studies

Residential Market ComparisonAre Developers in the Right Markets?

The United States

The United Kingdom

Australia

Hong Kong

Singapore

Malaysia

Indonesia

Thailand

Comparison of Market SegmentsOfficeHospitalityRetail

hina topped the league of Asian outbound real estate investors, with its spending growing 85% annually to US$35.3 billion over the past three years. Chinese developers accounted for 10% of all outbound investments, behind insurance firms (50%) and conglomerates (23%). The trend will continue to accelerate, with the

depreciation of the Chinese yuan and slower economic growth in China. Many developers plan to grow their overseas investments to generate more than 10% of their sales in five years, faster than the market expects.

Overseas investments enjoy higher returns but this may not be sustainable due to slower capital appreciation. In addition, policy risks are emerging with mounting asset price appreciation. Slower cash collection, difficult talent acquisition, and partner risk control are also key operational challenges.

Our research shows that most overseas projects are highly leveraged and many are not consolidated into developers’ balance sheets (because the investments are done either via joint ventures or through a fund). Vanke, Beijing Capital Land, Country Garden, Fosun, and Sino Ocean’s off-balance sheet debt may need to be closely monitored. While Wanda and Greenland will consolidate their overseas debt, their swelling overseas leverage will likely erode their balance-sheet strength.

Our proprietary research on Chinese developers’ overseas expansion is based on interviews with the overseas investment offices of 13 Chinese developers, eight well-known property consultants and bankers that have helped developers with overseas expansion, as well as private equity funds and Hong Kong developers that have actively invested overseas.

Chinese outbound investments are growing at high pace, following policy relaxation and yuan depreciation. Based on Knight Frank’s research, Chinese outbound investments in the real estate sector have accelerated over the past six years. Between 2009 and 2012, outbound investments increased from US$600 million to US$5.6 billion. This further rose to US$35.3 billion by 2015, following (1) the easing of overseas investment policies, such as the raising of the threshold for approval of outward investments and the lifting of a cap on Chinese insurers’ overseas property investments, and (2) the depreciation of the yuan in 2015. In the first half of 2016, based on CBRE’s data, China surpassed Singapore as the top source of Asian outbound investment, accounting for 60% of the region’s total outbound investments.

Chinese developers will likely speed up their overseas investments more quickly than the market expects. The yuan’s depreciation, slower growth in China, and falling profitability

Investment Summary

C Topping the league

Watch out for hidden debt

Lower profitability in China


in the country’s property market will continue to spur developers to expand overseas. In addition to the 13 developers we analysed, CR Land set up its overseas investment division in 2016. Among the Chinese developers, Beijing Capital Land’s overseas projects contributed the most significant portion of presales in 2015 (16%), followed by Greenland’s 5%. Others’ contributions are lower than 3%. While their contribution to sales is largely insignificant now, overseas investments are targeted to account for more than 10% of total sales or total assets over the next five years for many developers.

Unlike Hong Kong’s and Singapore’s developers and insurance firms, Chinese developers favour development projects over commercial assets. Due to their greater transparency, mature markets have been attracting more developers at this stage. There are some developers looking to replicate their success in emerging markets such as those in Southeast Asia and India, due to favourable demographics and potentially higher returns. Country Garden, Agile, and R&F belong to this group. Fosun, Greenland, and Wanda have exposure to both mature and emerging markets.

Investment in development projects will continue to dominate their portfolios, while more focus will go to ASEAN markets. Due to their lack of expertise in managing commercial and office assets, most developers will likely continue their focus on green-field residential developments, we believe. As China’s One Belt, One Road policy has created more acquisition opportunities in the Association of Southeast Asian Nations (ASEAN) markets through infrastructure and construction investments – and the government will support such investments by providing long-term loans at low interest rates – we expect more developers to expand into this region. Country Garden is one of the most well-known examples.

Overseas investments enjoy higher internal rate of return (IRR) and profitability due to lower taxes and higher leverage. Due to the potential risks involved, Chinese developers have capped their overseas investments at below 20% of their total investments and have set higher returns for these projects (more than 15% IRR for development projects and more than 5% unlevered yield-on-cost for investment properties). In most foreign countries, land cost can be financed and in some markets, developers can borrow up to 95% of their expenditure.

Yet, this may come down as asset prices have been pushed to historical highs in many markets. With global quantitative easing, asset prices have appreciated in many overseas markets in which Chinese developers are interested. As sellers are holding prices firm, it is difficult for developers to reap high returns. As such, good projects are very difficult to find in mature markets. Meanwhile, in emerging markets, demand could be volatile due to policy risks. Talent acquisition and financing are also more difficult than in China because their brands are not as well-known. Most developers prefer to expand overseas through joint ventures, but partnership risk is also something that needs to be taken into consideration. In addition, cash collection in most overseas markets is slower than in China.

ASEAN

High prices in many markets


05

hinese outbound investment is growing rapidly, especially after various policy easing measures following 2013. According to Knight Frank, Chinese outbound investment in the real estate sector has been growing rapidly over the past six years. Between 2009 and 2012, outbound investment increased from US$600

million to US$5.6 billion. The number nearly tripled in 2013 to US$15.8 billion, after the Chinese government eased policies on overseas investment, such as raising the ceiling of investments and lifting the cap on insurers’ investment in real estate and overseas in 2013 and 2014. In 2015, spurred by depreciation of the yuan, outbound investment doubled from 2013/2014’s figure to US$35.3 billion.

There was no sign of slowdown in outbound investment in the first half of 2016 even after China imposed capital controls to stabilise its currency. Based on CBRE’s research, China surpassed Singapore as the top source of Asian outbound investment in that period, accounting for 60% of total outbound investment from the region.

Current State of Chinese Outbound Investment

CThe leader among

Asian outbound investors


Diagram 1. Chinese outbound real estate investment (2009-2015)

Source: RCA, Knight Frank, DBS Vickers

Chinese developers accounted for 10% of China’s outbound investment. Insurance firms, conglomerates, and developers accounted for 50%, 23%, and 10% of Chinese outbound investment in the first half of 2016, respectively, based on CBRE’s data.

Commercial and residential developments are the major targets of Chinese capital overseas. In terms of subsectors, commercial and residential developments were the most popular targets in 2015. The hospitality sector has also seen increasing interest from Chinese investors.

Slowdown in growth in the domestic market, yuan depreciation, and growing Chinese migration/investments are the main reasons Chinese developers have started venturing overseas. In 2014, China saw gross floor area (GFA) sales decline after peaking in 2013; meanwhile, unsold stock was mounting. Developers’ no longer see rapid growth in the domestic market. This, along with yuan depreciation and increasing Chinese emigration, are encouraging developers to go global.

Focus on commercial, residential projects


07

Diagram 2. Investment destinations by region (2015)

Source: RCA, DTZ, DBS Vickers


Diagram 3. China’s outbound real estate investment by asset class

2014 2015

Diagram 4. Top 10 destinations (2014-2015)

Source: RCA, Knight Frank, DBS Vickers

Source: Jones Lang LaSalle

• Gateway cities in the US

and the UK are the most

favourable destinations

• Gateway cities in Asia

Pacific are also another

focus


09

Diagram 5. China’s GFA sold

Diagram 6. Top Chinese migration destinations

Source: NBS, DBS Vickers

Source: www.statista.com

Mature markets preferred

Developers’ Overseas Strategies

We interviewed 13 Chinese developers on their overseas expansion strategies and asked about their vision on “going global”, the current status of their overseas expansion plans, their regional and product focus, their execution plans, risk management, and the challenges they have faced so far. We also interviewed four property consultants and banks that help with developers’ overseas investments as well as two Hong Kong private equity funds that have been active in overseas property investment.

Regional focusThey prefer mature markets to developing ones. We generally divide developers’ overseas investment destinations into two categories: Mature markets and emerging markets. Due to their comprehensive legal systems, high transparency, as well as more stable policies and market dynamics, mature markets have been attracting more developers. Chinese Overseas Land, Vanke, Sino-Ocean, Beijing Capital Land, Landsea, etc. mainly focus on mature markets. Fosun, Greenland, and Wanda also have exposure to mature market through their various strategies. These developers look for diversification and normal returns in the mature markets.

Some look to replicate their success in China in emerging markets. Emerging markets enjoy higher population growth, more favourable demographics, and growing demand for homes – the description of China’s market 10-20 years ago. This group of developers are mainly expanding their prospective markets and trying to repeat their success in China in other countries. While market and regulatory risks might be higher, their potential returns can be higher as well. Country Garden belongs in this group; Fosun, Greenland, and Wanda have exposure to emerging markets too, given their strategy to expand in both emerging and developed markets. Vanke, Sino-Ocean, and Poly Property are also considering entering these markets.

The US, Australia, the UK, and Malaysia are likely to remain popular. Japan, Russia, and India are on developers’ watch list.

The main reasons to enter the US are: (1) The size of the market – it is the second-largest property market in terms of annual sales value each year; (2) the strengthening US dollar and its relatively sound economy make the market a good choice for market-risk diversification; and (3) well-established market and legal systems.

The main reasons to enter Australia are: (1) It is one of the most popular Chinese migration destinations due to its good education system; its high standards of living also make it an attractive retirement location; and (2) its well-established market and legal systems.

The main reasons to enter Malaysia are: (1) The country’s friendly immigration policy; (2) the government welcomes investments from foreign investors; and (3) following their peers.



11

Japan and India are on developers’ watch list of potential new markets as Japanese assets become more attractive after depreciation of the Japanese yen and India remains an emerging market with a large population.

Gateway cities rather than tier-2 cities in these countries are favoured. New York and Los Angeles in the US, Sydney and Melbourne in Australia, and London in the UK are the most frequently mentioned cities where developers have a presence or are looking for acquisition opportunities. Meanwhile, Johor in Malaysia has been attracting the highest number of developers due to the aggressive foreign direct investment (FDI) policies of the Malaysian government. The UK’s property market has been witnessing more global interest after the decline of the British pound post-Brexit.

Asset class Development projects are still the main focus. Although high-profile core asset purchases in prime locations around the world make the Chapters, those are mostly done by insurance companies. After the China Insurance Regulatory Commission allowed insurers to allocate up to 15% of their assets under management outside China, these firms have been diversifying globally. Some developers have also bought one or two assets as a first step in venturing overseas, but most developers’ focus overseas is still on development projects.

Returns and financingRequire higher estimated returns than domestic projects. Factoring in the higher risks in unfamiliar markets, developers require higher returns in terms of leveraged IRR or net profit margins than domestic projects. Yield-on-cost for investment properties are expected to be at least 5% without leverage. In mature markets, projects that fulfil developers’ return requirements are hard to come by.

Usually more highly leveraged than China projects. To achieve better returns and justify the investment, developers minimise their initial investment and borrow as much as they can from banks. In addition, banks in the US, Hong Kong, Singapore, Malaysia, and Japan finance developers’ land premium and development, in contrast to China where developers are required to use their own capital for land premium.

Chinese banks’ overseas branches play a major role in financing developers’ overseas projects. Although most developers prefer to borrow from local banks, their brands may not be well recognised yet. Even the large ones with a strong balance sheet and brand in China have to rely on local partners to get financing at market rates from local banks. Meanwhile, Chinese banks familiar with these players are actively lending to them and provide the same rates as local banks. However, Chinese banks can only provide smaller loans.

No clawback terms to manage risks. Most overseas markets allow developers to borrow part of the land cost and 100% of development cost. Developers’ projects overseas can

Japan and India are on

developers’ watch list of potential new markets

Gateway cities

Want higher returns

Funding is key


be highly leveraged – up to 95%. To manage the financing risk, developers structure their overseas companies with no clawback terms to the parent company.

Rolling investment for long-term returns planned since it is generally not easy to repatriate money back to China. Since developers will need to pay high taxes if they would like to repatriate funds, e.g. at least 30% tax if they would like to repatriate from the US – assuming good tax planning – developers usually hold a long-term positive view on these local market and will re-invest funds after finishing projects.

Investment structureInvesting through a joint venture with local partners is a common way to enter new markets. Most developers believe they need local partners to access land, process government approvals, execute the project, procure lending/contractors, etc. Selecting strong local partners is a key step for them to control risks. Ideal partners include strong local players with solid brands, a good track record of delivering on projects, and land, etc. Greenland Group and Poly are likely to take control of overseas market to train up their local teams as fast as possible.

Investing via a fund structure is also considered a less risky channel. Fosun and Sino-Ocean are currently investing through funds. One of the benefits of this structure – investing as a limited partnership – is that they collect returns from their overseas assets and accumulate experience in those markets. By polling together funds from individuals and companies that want to invest overseas but can’t do so on their own, these developers can also play the role of the general partner of those funds.

Operations and risk managementUsing local teams to run local projects. The most common way to set up a local team is to assign a team head and key persons in charge of finance, sales, and development from the headquarters and recruit team members locally. The team is usually small. But some companies like Vanke and Fosun believe that country heads should have local experience and hence, prefer to recruit local country heads. The growth potential of Chinese developers’ regional business is attractive to local talent as well. Yet, it is hard to recruit talent as most Chinese developers have a small presence in new markets compared to incumbents.

Most of them limit overseas investments to 10-20% of their annual investments, use local-currency financing for projects, and hire property consultants to help them understand local markets, regulations, taxation, and accounting.

Deal sourcingGovernment referral is one of the ways Chinese developers get deals. Developers mentioned that local partners, property agents, and investment banks are the usual channels through which they source for deals. Government referral and senior management’s personal

Strong local partners

Limiting exposure

connections are also some factors behind a company’s decision to pick one market over another. Greenland, Fosun, Wanda, and Country Garden consider government-referred deals one of the channels through which they get deals.

China’s ‘One Belt, One Road’ and ‘Go Global” policies are other channels. The Chinese government has been encouraging companies in infrastructure, building materials, steel, power, auto, etc. to export their expertise overseas. These companies then in refer overseas projects to Chinese developers, especially in emerging markets. At the same time, Chinese developers that are building mega-sized projects overseas also need the services of Chinese construction and infrastructure companies. Ultimately, China Development Bank has the capacity to provide low-cost funding to deals that are considered critical projects.

Developers’ Comparison

Fosun and Greenland have the largest international exposure. Among the companies we track, at present, Fosun has invested in 13 countries, followed by Greenland, in nine countries. The rest have ventured to no more than three countries.

Vanke has the largest number of projects. Vanke had 31 projects on hand as of mid-2016 in the US, the UK, and Hong Kong, compared with Fosun’s 20 and Greenland’s 16. Although we don’t have the exact number of projects Sino-Ocean’s fund has invested in, we believe the number is large too.

Beijing Capital Land’s and Greenland Holding’s overseas property sales accounted for a larger portion of their annual contracted sales. Greenland Holding’s overseas projects recorded 15 billion yuan in presales in 2015, which was the highest among developers, followed by Beijing Capital Land’s 5 billion yuan, Country Garden’s 3 billion yuan, and Vanke’s 2.8 billion yuan. In terms of contribution to companies’ total sales, Beijing Capital Land’s overseas projects contributed the most, at 16%, followed by Greenland’s 5%. Others are lower than 3%. Country Garden’s Forest City targets to achieve 30 billion yuan in presales in 2016, which, if realised, may top the list for 2016 overseas presales.


13

Friendly policies

Fosun set the clearest and most ambitious target among developers. Most of the developers have not set any hard target for their overseas expansion as they believe that they should prioritise risk management and opportunities over growth. However, Fosun wants to increase its offshore assets as a percentage of its total assets from 20% to 40% by 2020.

Agile, R&F, and Evergrande have no inclination to further invest overseas. Agile and R&F followed Country Garden to Malaysia in 2014. However, they found that slower asset turnover in Malaysia is the largest challenge. They don’t have any plans in the foreseeable future. Evergrande, although having bought one office building in Hong Kong, doesn’t think overseas projects can offer better returns than domestic ones, given that the company’s cost controls and advantages are all onshore. Evergrande has no plans to invest overseas.

Developers’ risk-management strategies include having (1) a focused product strategy; (2) a focused regional strategy; (3) a profitability-driven decision-making process; and (4) an experienced local execution team. We believe Sino-Ocean, China Overseas Land, Fosun, and Vanke’s strategies put them at lower risk overseas, while Wanda, Greenland, Country Garden, and Poly may face higher risks.

Factors likely to drive future growth: (1) Some ventured overseas earlier than peers when land/asset costs were still low; this also allowed them to accumulate more experience; (2)

Limiting exposure

Diagram 7. Existing projects as of mid-2016

Status

BCL Recorded Rmb5bn contracted sales in 2015, accounting for 15.7% of the company's contracted sales

Greenland Record Rmb15bn sales in 2014 compared with Rmb240bn in total sales the group achieved

Vanke 1. All projects have been profitable so far

2. Considered highly sustainable

Fosun n.a.

Country Garden

Four out of five projects started presales; First project expected to contribute revenue in 2016; Overseas projects recorded Rmb5bn and Rmb3bn in contracted sales in 2014 and 2015, respectively

COLI Three office projects in London are in operation; two under parent are being planned

Landsea One project launched for sale (Kingswood)

Sino-Ocean Mainly as an investor in funds and holder of IP

Poly London office: completed project

Agile First project launched for presales in 2015; Second project to be launched in 2017; Earliest possible year to contribute earning is 2018/2019; Gross margin > domestic projects

R&F A project in Malaysia launched for sale in 2014 while a project in Australia was launched in 2015.Source: Company

Timing and risks


risks are more spread out because they own a relatively higher number of projects overseas; (3) projects have entered the presales stage; and (4) overseas projects have been planned to contribute a significant percentage of the company’s sales/assets. Based on our study, we believe Country Garden, Beijing Capital Land, and Greenland’s overseas investments may become their growth driver, providing that risks are well managed. Agile and R&F’s overseas investments are not likely to be their growth driver in the foreseeable future.

Developers that adopt these strategies are more likely to succeed in the longer term: (1) Long-term commitment but no aggressive growth target; (2) focus on several selected market including emerging market; and (3) consolidate resources from China and locally. Based on their strategies, Beijing Capital Land and Landsea are more likely to make their overseas business a main contributor to their revenue and earnings in the longer term. Fosun and Sino-Ocean, through their investment fund, may find it easier to control investment risks.

Case Studies

Case 1: Greenland’s project in Jeju, South KoreaProtests from local residents – and uneasy ties between South Korea and China – held up Greenland’s projects. Its Jeju Dream Tower project faced hiccups after a change in the local government. Greenland had signed an agreement with Lotto, one of the South Korea’s key conglomerates, to jointly develop the 219-meter-tall tower in 2013. In mid-2014, the new governor of Jeju decided that all Chinese property projects in the gambling mecca needed a second look. Greenland’s 6-billion-yuan investment in the mixed-use development was put on hold. Later, the press also reported that Greenland, in order to resume the project, adjusted the height of the building from 56 floors to 38 floors so that the building could blend in more with the landscape.


15

Diagram 8. Key risks to watch for

Decision-making

• Focus on profitability, returns, diversification

• Not for gains in reputation or branding, political expediency, or to win special treatment from local leaders

Political risks

• Although most are aware of political instability as a key risks, government regime changes do cause delays in Chinese developers’ development timeline

• Local objection to foreign investments

Off-balance sheet and higher leverage

• Since most of the developers invest in overseas projects through a joint venture or a fund, the overseas projects’ debts are usually not consolidated

• Banks in some countries like Hong Kong, Singapore, the US, Japan, Singapore, and Malaysia can finance both land and development costs, which allows higher leverage at the project level than projects in China

Partners’ performance or financials

Source: DBS Vickers


Case 2: Wanda’s project in Madrid, SpainRegime change and opposition from local residential contributed to the hiccup. Wanda spent HK$2.28 billion in 2014 to buy the historic Efidicia Espana, a landmark skyscraper located in the centre of Madrid, aiming to renovate it into a complex that includes a luxury hotel and a shopping centre. Objection from Madrid’s new mayor and the public has blocked the plans. Wanda’s decision to redevelop the entire building – as opposed to its initial plan to refurbish the interior – didn’t help matters. After two years, the Spanish government allowed Wanda to retouch the building’s main elevation and side elevation.

Case 3: Country Garden’s Danga Bay projectPolicy change and Malaysia Airlines’ accidents affected presales. Country Garden’s Danga Bay project was very popular among buyers when it was first launched in in 2013, recording over 6 billion yuan in contracted sales in the same year. However, by the end of 2013, Malaysia had introduced tightening policies – increasing the minimal unit price for foreign buyers. Although Johor’s government maintained the prices for Country Garden’s projects, investment demand was affected by the overall tightening. In addition, Malaysia Airlines’ two accidents in 2014 also dented Chinese interest in Malaysia.

Case 4: A Hong Kong developer operating 20 years in Australia and other marketsIt has taken the company 20 years to have 14 projects in 6 cities (in 4 countries) outside Hong Kong. The people we spoke to pointed out that hiring local teams, expanding gradually in those cities, owning similar assets in a city, and familiarity with local tax and legal systems are crucial to establishing a sustainable overseas arm. (1) To generate sustainable earnings and cashflow, increasing intellectual protection and diversifying into more cities in the same country are crucial. (2) local managers who speak the same language, have a similar cultural background, and possess local know-how could facilitate communication with relevant government departments, and play a key crucial in controlling risks. (3) Developers that are familiar with Hong Kong may have an advantage when expanding into Australia and the UK because these jurisdictions have similar tax and legal systems.

But the companies also indicated that at the early stages, Chinese developers may face challenges in getting local financing, managing costs, and bringing in Chinese buyers. (1) Domestic banks may not grant construction loans to overseas developers, especially newcomers without any track record, if they are not able to ascertain their source of funding. Without financial leverage, return-on-equity for property projects would be significantly hit. (2) Some domestic banks may introduce restrictions on the proportion of overseas homebuyers for projects built by new overseas developers. This may affect the marketability of projects to Chinese buyers. (3) Local consultants/contractors are preferred as this could minimise development risks. However, this also makes it difficult, if not impossible, for overseas developers to enjoy cost advantages.

Residential Market Comparison

TStrong fundamentals

Challenges in Singapore, Hong Kong

Steady growth in ASEAN


17

he US’ and Australia’s market fundamentals are better than that of other Asian markets. Although their growth rates are slower, the US and Australia are expanding steadily. Population growth rates are stable and home-ownership

rates are usually between 60% and 70%, with higher affordability. Their real estate markets are also larger than that of emerging markets in Asia, except China.

Hong Kong and Singapore are facing economic challenges but both markets, thought relatively small, have relatively high housing ownership. Singapore’s transaction volume and property prices will likely decline in the coming years, and Hong Kong’s may not see growth either.

Emerging Southeast Asian countries are diverging. Growth in Malaysia, Indonesia, and Thailand is slowing down but they are still expanding more quickly than the developed economies. Although their growth is still slower than that of China’s, their populations are increasing more rapidly and their people are younger. Affordability is reasonable, and while the markets are small, growth has been steady. In the coming year, our analysts estimate that transaction volumes in Thailand and Indonesia are likely to go up, while Malaysia may remain stable with average selling prices (ASP) either steady or increasing.

Favourable for investment Unfavourable for investment

Economic growth Malaysia, Indonesia, China Hong Kong, Singapore

Population growth Singapore, Malaysia, Australia Thailand, China, the UK, Hong Kong

Affordability The US, SG Hong Kong, Indonesia, Australia

Home ownership Indonesia, Malaysia Singapore, Thailand, China

Market size China, the US, the UK, Australia Singapore, Indonesia, Hong Kong, Malaysia

Market trend The US, Australia, Indonesia Hong Kong, Singapore, the UK

Overall The US, Australia, Malaysia, Indonesia Hong Kong, Singapore

Diagram 9. Summary of the economy and residential market outlook

Source: DBS Vickers


Sources: DBS Vickers

Volume trend ASP trend

China

Hong Kong

SG

Malaysia

Indonesia

Thailand

US

Australia

UK

Diagram 10. Economic growth

Diagram 12. Home-ownership

Diagram 14. Market size – Annual transaction value of primary market

Diagram 11. Population growth

Diagram 13. Affordability

Diagram 15. Market trend


19

Market structureHong Kong, Malaysia, Singapore, Indonesia, the UK, and Thailand are relatively concentrated markets with large developers dominating the primary development market, while Australia, the US, and China are fragmented.

Net profit marginsMajor developers in Australia, Hong Kong, and Indonesia report the highest profitability. Among the countries we tracked, developers in Australia, the US, and Thailand are expecting flat margins, while the rest are seeing margin pressure. Major property developers in the UK were expecting margin expansion before Brexit. This is less certain now because of potentially higher labour costs and lower ASP after Brexit.

Tax systemThe tax systems in Hong Kong, Singapore, Australia, Malaysia, and the UK are relatively simple, while those in Thailand, Indonesia, and the US will require developers to plan their taxes carefully to achieve better profitability. Hong Kong and Singapore also enjoy the lowest tax rates. American and Australian companies’ effective tax rates are relatively high. However, in terms of the complexity of tax systems and rates, they are all more favourable than China’s.

Cash-collection cycleCash-collection cycles in foreign countries are generally slower than that in China, due to (1) a longer waiting period from land acquisition to presales; (2) lower down-payment requirements; and (3) backend-loaded or in-stages cash disbursement for mortgages. Hong Kong is the only territory where banks would disburse mortgages to developers within three months, if the latter are not providing first or top-up mortgages. Singaporean and Malaysian banks disburse cash based on construction milestones. Lenders in Indonesia, Thailand, the US, Australia, and the UK will only disburse cash upon delivery. Down-payment requirements range between 5% and 30% in these countries.

Land-cost financingBanks in Hong Kong, Singapore, and the US provide land-cost financing – besides development loans – while Australian and Indonesian lenders do not allow land-cost financing (like in China). Banks in China, Hong Kong, Singapore, and the US can finance 100% of development costs, while those in Australia, Indonesia, Thailand, and Malaysia finance part of the costs. It’s easier for projects in China, Hong Kong, Singapore, and the US to achieve higher IRR.

Funding costsFunding costs of developers in Hong Kong, the UK, and Singapore are very low, followed by Australia, Malaysia, the US, and Thailand, while funding costs of Chinese developers are the highest. Developers in Thailand are the highest leveraged, followed by those in


China. British and Hong Kong developers report net cash and net debt ratio of below 20%, which – we believe – are due to a lack of investment opportunities. Singaporean, Malaysian, American, and Australian developers’ net debt ratios are around 40-50%.

Policies towards foreign buyers/developersAll countries have some rules on foreign ownership but generally do not restrict foreign buyers from their markets. The UK and the US require foreigners to pay a bigger down payment or higher mortgage rates. Hong Kong and Singapore require foreigners to pay higher taxes, which may reduce the interest of Chinese buyers.

Chinese developers are generally welcome. Indonesia requires developers to have local partners. Thailand doesn’t allow foreign operators to own land or landed projects.

Favourable Unfavourable

Competition (Fragmented-favourable; highly concentrated- unfavourable)

Australia, The US, China Hong Kong, Singapore, Malaysia, Thailand, The UK

Net profit margins Australia, Hong Kong, Indonesia China, US, Malaysia, Singapore

Margin trend The US, Australia Hong Kong, Singapore

Tax system Hong Kong, Singapore China, Indonesia, The US

Cash-collection cycle China, Hong Kong Thailand, US, Australia, The UK

Potential leverage to achieve higher IRR

Hong Kong, The US, Singapore China, Indonesia, Australia

Funding cost Hong Kong, The UK, Singapore Indonesia, Australia, Malaysia, The US, China

Policies towards buyers The US, The UK Hong Kong, Singapore

Policies towards foreign developers

Malaysia, Australia Indonesia, Thailand, and Singapore

Overall Australia, Hong Kong, The US Singapore, Indonesia

Diagram 16. Summary of market structure

Source: DBS Vickers

Are Developers in the Right Markets?

The US, Australia, and Malaysia are worth exploring. Based on our analysis, the US and Australia are the most attractive markets – with a favourable demand-and-supply outlook and investment environment. Malaysia enjoys a favourable long-term outlook, with a neutral investment environment.

Indonesia, Hong Kong, and Thailand are not so attractive. Indonesia has a favourable long-term outlook but an unfavourable investment environment. Hong Kong has an unfavourable long-term outlook but a favourable investment environment. Thailand didn’t stand out.

The UK may have speculative opportunities. Its outlook is highly uncertain, but there may be investment opportunities because of potential fluctuations in property prices and policies.


21

Tax rate Comments

China 1. Corporate income tax: 25%

2. VAT: 11% and deduct input tax

3. LAT: progressive tax rate

Complicated system and high tax rates

US Effective tax rate for six major homebuilders range from 32.3% to 39.5% and averaged 35.2% in FY15.

Federal taxes plus state taxes equate to high taxes

Australia Corporate income tax: about 30%; 1/11 GTS on gross profit

Simple system but high tax rates

Indonesia 1. Property sales (all types): 5% of sales

2. Leases (all types): 10% of revenue from lease

3. Hotel operation: 25% of pre-tax profit (same as business income tax); Wide range of effective tax rates for major developers

Multiple taxes based on revenue

UK Effective tax rates for top five major homebuilders range from 17% to 22% and averaged 19.6% in FY15. Statuory rate: 20%

Simple system and low tax rates

Malaysia Corporate income tax: 24% Simple system and medium taxes

Thailand 1. Corporate income tax: 20%

2. Special business tax: 3.3%

3. Transfer fee: 20% Major developers' effective tax rate: about 20%

Multiple taxes but actual effective tax rate not very high

Singapore Corporate income tax: 17% Simple system and low tax rates

Hong Kong Corporate income tax: 16.5% Simple system and low tax rates

Diagram 17. Tax rates

Source: DBS Vickers

The US, Australia, and Malaysia


Singapore should be avoided due to an unfavourable long-term outlook and investment environment for foreign developers.

Developers are generally in the right territories. From the map below, we found that the US, Australia, and Malaysia have been attracting the highest number of Chinese developers. Only Vanke and Fantasia have exposure to Singapore. Hong Kong has been attracting a number of Chinese developers, mainly due to its friendly investment environment and operational convenience.

Diagram 18. Who’s in the right markets?

Strong market or friendly investment environment, or bothNeutral/unfavourable market outlook or investment environmentWeak/uncertain market

LondonGreenlandVankeWanda

Kuala LumpurAgileCountry Garden

SingaporeVankeFantasia

MelbourneGreenlandPoly CN

JohorR&FCountry GardenGreenland

JejuGreenland

Hong KongVanke YuexiuCOLI Sino-OceanShimao Poly CN

MacauCOLIPattaya

Greenland

SydneyGreenland Poly CNBeijing Capital Land WandaCountry Garden COLI's parentco

Los AngelesGreenlandLandseaWanda

San FranciscoVankeLandsea

TorontoGreenland

BostonLandsea

New YorkGreenlandVankeLandsea

ChicagoWanda

Source: DBS Vickers

Recovering economy

Growing demand

Supply is lagging demand

The United States

Economy and demographicsAfter a severe recession, the US economy is finally showing signs of recovery. Real GDP grew 2.4% in 2015 and is expected to expand 1.2% and 2.2% in 2016 and 2017, respectively (according to the National Association of Realtors). Unemployment decreased to 5.3% in 2015 and is expected to edge down to 4.8% and 4.6% in 2016 and 2017, respectively. Annual population growth has been relatively stable at 0.75-0.79% over the past five years and the trend is likely to continue. Personal income per capita and disposable income per capita has increased 3-4% over the past two years.

Property market review and outlookAccording to the National Association of Realtors, new single-family home sales rose 13% in the first nine months of 2016 from the same period in 2015. Home builders remain optimistic about the market. New single-family home sales grew 14.6% in 2015 and are expected to grow 7.2% and 10.8% in 2016 and 2017, respectively. The growth in the Northeast and West will likely outpace that of the South and the Mid-west. Housing ownership has been declining since 2005 and stood at 63.7% at the end of 2015.

The inventory of new homes was 243,000 units at the end of April 2016. The number of months to digest inventory was 4.7 months, compared to the average of 4.9 months since 2013. Supply is still expected to lag demand.

While housing prices are still rising, housing remains affordable, thanks to low mortgage rates. Monthly mortgage payments as a percentage of family income was 14.8% in March 2016, against an average of 16.7% since 2005. Yet affordability will worsen if mortgage rates rebounded and prices continued rising.

Demand has been holding steady while there’s been a shortage of supply, which will likely push prices up. Median prices of new single-family homes increased 4.8% in 2015 and is expected to grow 2.7% and 2.4% in 2016 and 2017, respectively.

Key policies The mortgage rate has fallen to 2.69% for a 15-year fixed-rate loan, the lowest since World War II.

Foreign buyers may be required to pay a larger down payment but no restriction on developers. Foreigners are generally allowed to buy properties in the US. But mortgage policies for foreign buyers are strict, and foreign buyers have to pay a much bigger down payment and higher mortgage rates than local home buyers. There isn’t any barrier for Chinese developers, but government-controlled developers with limited transparency are not welcome, due to national security concerns.


23

Property is affordable

Volume and ASP on upward trend

The key policy is still mortgage policy

Project leverage can be high

Slow cash collection

Market is consolidating


Players’ profitability and cash collectionHighly competitive market with single-digit net profit margins. Gross margins of the six largest home builders (D.R. Horton, Lennar Corp, PulteGroup, NVR, Toll Brothers, and CalAtlantic Homes) ranged from 20.3% to 24.4% in financial year 2015, with an average of 22.6%. Market consensus expects gross margins to edge down to 22% in financial year 2016 and 21.9% in financial year 2017. Net margin in financial year 2015 ranged from 5.1% to 8.7%.

Average funding costs ranged from 4-6%, among the six home builders. Based on our calculation ((financing costs + capitalised interest costs)/financial year 2014-15 average borrowings), home builders’ average funding costs ranged from 3.9% to 6.3% and averaged 5.5% in financial year 2015. Net gearing ratio ranged from 14% to 93% and averaged 52%.

Banking loans at the project level could be as high as 65-75% (loan-to-value). Land financing is allowed.

Corporate tax rates are high. The corporate tax consists of a federal tax of 35% and a combined state tax. The effective tax rates for the six major homebuilders ranged from 32.3% to 39.5% and averaged 35.2% in financial year 2015.

Presales approval varies in different states. In key gateway cities, presales are usually allowed after a year. However, even after presales, home builders can only collect a small deposit, which needs to go into the regulatory account and cannot be used for development/construction. Sales proceeds will be collected only after homes are built. The usual development cycle for one project is 3-4 years.

CompetitivenessAccording to National Association of Home Builders (NAHB), the top 10 builders controlled 26.4% of the market share in 2015, in terms of new single-family home sales. The largest player is Horton with 6.5% of the market, followed by Lennar (4.8%), Pulte (3.9%), and NVR (2.7%).

The US market is mature and transparent. Big players usually have better access to funding, stronger land holding power, as well as economies of scale in land, centralised procurement, and marketing. Supplementary to organic growth, merger & acquisition (M&A) capability is also important for top players. The most prevalent channel to get land is the open market. Local developers use multiple sources of funding such as bank loans, corporate bonds, private equity, and real estate investment trusts.

Top players’ brands are usually easily recognised nationwide. However, small builders are usually better positioned to address local needs as their local knowledge allows them to customise their products.

Assumptions: income as measured by median family income, down payment = 20%

Gross margins


25

Diagram 19. Population and growth rate

Diagram 21. Affordability – monthly mortgage payment to income

Diagram 20. No. of households versus no. of existing houses

Diagram 22. Property price over average annual household income

Sources: US Census Bureau, DBS Vickers

Assumptions: income as measured by median family income, down payment = 20% Sources: National Association of Realtors, DBS Vickers

Demand may fall


The United Kingdom

Economy and demographicsBefore Brexit, real GDP was projected (by Organizational Economics, the International Monetary Fund, HM Treasury, and Consensus Economics) to grow 1.8% in 2016 and 2.2% in 2017, driven by domestic demand. The unemployment rate has stabilised at 5.1% and weekly household income has continued to pick up. Post-Brexit, the average revised real GDP forecast fell to 1.7% in 2016 and 0.9% in 2017. The new relationship between the UK and Europe may result in slower economic expansion, lower wage growth, and poor employment prospects.

Property market review and outlookHousing demand driven by growing population; net migration may slow down. Population growth ranged from 0.6-0.8% during 2005-2015. According to the UK government, total households in England (84% of the UK’s total in 2012) is projected to grow to 24.5 million by 2022, an increase of 2.2 million or 10% from the 2012 number. The annual average household increase is projected to be 220,000 per year during 2012-2022, about 14% of which will be driven by net migration. Post-Brexit, net migration may fall significantly, but would still lead to an annual increase in the number of households of more than 190,000. Historical home-ownership rate averaged 65.2% over 1980-2013.

Lower affordability due to rising house prices. According to the Department for Communities and Local Government, the ratio of lower-quartile house prices to lower-quartile earnings edged up to 7.02x in England in 2015, from 6.95x in 2014, versus its peak of 7.25x in 2007. The ratio of median house price to median earnings increased to 7.49x in 2015 from 7.25x in 2014 versus 7.23x in 2007.

Public housing accounts for about one-fifth of the existing housing stock. Three types of public housing are provided in the UK (by the housing association, by local authorities, and other government agencies). Public housing accounted for 18% of total housing in 2013.

There’s still a shortage in housing supply. Total housing starts (including private and public) in the UK totalled 166,000 units during the second half of 2014 and the first half of 2015. During the same period, total housing completion and private housing completion was 158,000 and 122,000, respectively. Housing supply has been edging up lately, but it is still lower than the projected annual increase in the number of households. Uncertainties in the overall economy may put pressure on the land market and reduce housing deliveries.

Declining affordability

Shortage in supply

The weaker pound has prompted international buyers to seek out property, especially in prime locations

Brexit

As of March 2016, London was the English region with the highest average house price (£552,000) and the Northeast, the lowest (£158,000). Homes in London, the Southeast, and the East of England were more expensive than the UK’s average of £292,000. Uncertainties after Brexit have slowed property sales. Although many expect a big adjustment in property prices, sellers have not trimmed their asking prices significantly so far. The weaker pound has prompted international buyers to seek out property, especially in prime locations. In the longer term, the government’s policies are likely to be the main driver of property prices.

Key policies Construction and house building are important in stimulating the economy. The government is encouraging the industry to build more homes. On the demand side, the 3% additional stamp-duty charge for additional home purchases was implemented on April 1 2016. Brexit has made house building and construction more important to the economy. Along with potentially more interest-rate cuts, policy may turn more favourable for the property market.

Foreign buyers are allowed to buy but will need to work in the UK to obtain mortgages. The UK is open for investments and foreigners can buy properties there. Currently, non-residents cannot obtain a mortgage. Hence, foreign home buyers need to borrow overseas or use their own funds. There is no general barrier for foreign developers.

Players’ profitability and cash collectionProfitability better than in China, but upward trend may reverse. For the five largest developers, gross margin ranged from 19-29.8% in financial year 2015, with an average of 24.7%. Market consensus expects gross margins to go up to 26% in 2016, mainly due to faster growth in ASP than land value. Net margins ranged from 12-18% and averaged 15.6%. Depreciation of the pound may push up costs of building materials. A decrease in net migration may cause a labour shortage, delay the pace of construction, and increase labour costs. Market consensus has revised down forecasts of gross margins for 2017 after the Brexit vote by 0.7 percentage points and expects a slight decline in gross margins in 2017.

Land costs account for a relatively lower percentage of ASP. Land costs as a percentage of residential ASP ranged from 12.7-18.5% among the major listed firms in financial year 2015, averaging 16.4%. It is still declining, due to the relative lack of competition in the land market. According to the latest Savills land market survey, urban land values and greenfield land values both increased 1% in the first quarter of 2016 from the previous quarter. Construction costs as a percentage of residential ASP averaged 55.8% among the major listed companies in financial year 2015. Post-Brexit, the land market has slowed down due to uncertainties. Land prices may slip further.

Effective corporate tax rates for the five largest listed companies ranged from 17.1-21.5% and averaged 19.6%, largely reflecting the UK’s statutory rate.


27

High prices cannot be sustained?

No barrier for foreigners

Land prices


Cashflow is back-end loaded. Under rules introduced in 2014 and enforced by the Financial Policy Committee, lenders must give out no more than 15% of loans at a loan-to-income ratio of 4.5 or higher each quarter. It usually takes 3-5 years to complete a project in the UK after a land purchase. The national average of first-time buyer deposit is about 21% of the price. Developers will collect the balance upon completion.

CompetitivenessTop players are all listed, including Barratt, Taylor Wimpey, Persimmon, Bellway, Berkeley, Bovis, Redrow, and Crest Nicholson.

In addition, top developers can usually hold more strategic land (acquired without planning permission, strategic land sites tend to be large and earn higher margins). Managers are looking to maximise returns rather than volume growth or market share. Buying land through the open market has been the most prevalent channel through which developers obtain land.

Major funding access is still banking loans. Yet, major listed companies in the UK are still using internal cash resources to fund new projects. Those companies are either in a net cash position or lowly geared.

Land holdings

Diagram 23. New property price and growth Diagram 24. Property price over average annual household income

Source: CEIC Source: Department for Communities and Local Government, DBS Vickers

Given the steady population growth and improving employment outlook, overall demand will remain

stable in the medium term

Australia

Economy and demographicsAmid slowing global demand for commodities, Australia’s economy has remained largely stable, with its GDP expanding by 3% year-on-year (y-o-y) in 2015. That was better than what the market expected. The Reserve Bank of Australia (RBA) has been keeping monetary policy loose which should support stable economic growth. The International Monetary Fund forecasts an average 2.9% growth for Australia between 2016 and 2020. Population growth is stable at 1.38% in the first three months of 2016 compared with 1.44% in 2014 and 1.59% in 2015.

Property market review and outlookSteady population growth, a stable economy, and solid employment numbers are supporting housing demand. Given the steady population growth of 1-2% and improving employment outlook, overall demand will remain stable in the medium term. The Property Council of Australia estimates that 171,000-173,000 households are being formed per year through to 2025, higher than 2016’s 169,474. According to the 2011 census, home ownership in Australia was 67%. Net overseas immigration (NOM) also supports the market. The Department of Immigration and Border Protection (TDIBP) is forecasting NOM of 187,200 for the year ending March 2016 and 237,000 for the year ending June 2019.

According to the Housing Industry Association (HIA), from 84.4 at end-2014 to 81.9.9 in the second quarter of 2016 mainly due to the pickup in property prices. Affordability is defined in accordance with the long-standing premise that affordability in core cities has deteriorated since the first quarter of 2015, with the affordability index declining mortgage repayment becomes excessive if it exceeds 30% of household income. The 30% threshold is also used as a guide by lenders when assessing loan serviceability. According to a survey by ABC News in March 2015, households spend an average of 31.5% of their income on mortgage repayment.

Supply is picking up but not outpacing demand. In April 2016, total house listings (including the primary and secondary markets) rose 6.4% y-o-y; apartment listings were up 15.1%.

Public housing meets only a small portion of demand. Supply of public housing is limited in Australia. Estimates by ABC News indicate that there is a shortage of 400,000 affordable housing units across the country. As of 2015, Australia had 427,000 social housing dwellings out of the country’s total housing stock of more than 9 million units.

According to Jones Lang LaSalle, Australian home buyers are still confident, with sales remaining high on the east coast due to a positive employment outlook for 2016. The market is expecting ASP growth to slow but volumes to remain stable.


29

Stable growth

Affordability is declining

Volume likely to be stable or inch higher


Residential ASP at end-Jun 2016 was 33% higher than that at end-2011. Between June 2015 and June 2016, residential property prices rose in Melbourne (+8.2%), Canberra (+6%), Hobart (+4.9%), Brisbane (+4.3%), Sydney (+3.6%), and Adelaide (+3.5%), and fell in Darwin (-6.5%) and Perth (-4.8%). The percentage change in the Residential Property Price Index of the weighted average of eight capital cities in the first quarter of 2016 from the first quarter of 2015 was 4.8% but slowed down to 4.1% in the second quarter of 2016.

Key policies Immigration policies in Australia require Chinese investors to invest A$5 million in the country, with A$1.5 million to be invested into small-cap equity funds and A$3 million in managed funds across Australian listed securities, corporate bonds, annuities, and properties. However, foreign non-residents are only allowed to buy new properties and vacant land in Australia. Since mid-2015, the government has also put up more regulations by investigating foreign investors who illegally bought Australian real estate. In the state of Victoria, the government requires non-resident property buyers to pay a 3% additional stamp duty (effective July 1 2015) and an absentee land tax (if the owner leaves the land vacant) of 0.5%, which became effective in 2016. The Foreign Investment Review Board (FIRB) also set up new guidelines in late-2015 which states that a single home built to replace a demolished home would not be considered a new dwelling, meaning that foreign investors are not allowed to buy such properties as they are only allowed to buy new ones.

Foreign investments favoured by easing of overseas investment policies in Australia. In June 2015, the China-Australia Free Trade Agreement was officially signed, raising the threshold for Chinese investors having to go to the FIRB (for approval) from A$248 million to A$1.07 billion. This effectively removed the need for prior approval for most foreign investments.

Players’ profitability and cash collectionGross margins and operating margins are higher than that of Chinese projects. Profitability of Australian developers has improved, following the pick-up in the residential market over the past two years. In financial year 2014 and 2015, average operating margins of the two major Australian developers, Mirvac and Stockland, was about 29% while net margins, on average, were 24%. Average return-on-equity (ROE) was at 10.1% and 12.5% in financial year 2014 and 2015, respectively. Mirvac’s cost of goods sold (COGS), selling, general & administrative expenses (SG&A), and taxes accounted for 46%, 2%, and 11% of their revenue in financial year 2015. Stockland’s COGS, SG&A, and taxes accounted for 46%, 12%, and 13%. Developers, in general, do not use secured loans to fund new land acquisitions, but they can fund 65-75% of the projects’ capital expenditure with local bank loans and they can do pre-sales at early stages of construction.

The cash-collection cycle is long due to the low down-payment requirement. Residential projects in Australia can be launched for presales shortly before construction starts. It

ASP still on uptrend

More restrictions on foreign buyers

Attractive margins

requires buyers to pay only 10% down-payment up-front and the remainder at delivery. The whole construction period usually takes 3-4 years.

CompetitivenessWith over 40 years’ experience in the property market, Stockland and Mirvac Group are more sophisticated in acquisition, execution, and sourcing funding. Australian developers have also diversified into the office, commercial, and hotel sectors in Australia and overseas.

Their years of experience in the market have also helped them to establish strong brands locally. Hence, obtaining financing from banks is also easier.

Chinese developers usually have stronger financial backing, which allows them to outbid local developers when acquiring assets. And their brands in mainland China allow them to sell to Chinese home buyers in Australia. However, a dedicated investment team with sound execution ability is needed to pick assets at the right locations, as demand can vary a lot across different locations. In some cities, there is oversupply after Chinese developers increased their investment.


31

Sophisticated, fragmented market

Diagram 25. Affordability – Mortgage payment to income ratio

Diagram 26. Price index trend

(1) Mortgage payment (Monthly)

(2) Household income

(Monthly)

(1)/(2)

2013 2,314 3,856 60%

2014 2,495 3,992 63%

2015 2,484 3,992 62%

Sources: CEIC, DBS Vickers


Hong Kong

Economy and demographicsHong Kong’s economy is slowing, no thanks to falling exports and private investments, declining inbound tourism, and a lacklustre retail market. GDP growth moderated to 0.8% in the first quarter of 2016 from the peak of 3.1% in the second quarter of 2015 but rebounded strongly to 1.7% in the second quarter of 2016. The property sector is still considered one of the key sectors of the economy. Meanwhile. population growth slowed to 0.7% per year on average from 2005-2015, from 0.9% in 1995-2005. The number of people aged between 20 and 50 started to decline since 2001.

Property market review and outlookFirst home and upgrading demand are underpinning the housing market. Demand from the growing number of small households, coupled with upgrading demand, should underpin the overall housing market. From 1996-2015, the annual take-up averaged 18,300 units every year in the primary market. The proportion of domestic households that own their homes was 68% in 2014. The housing affordability ratio (for private homes) improved to 47-48% in July 2016 from its previous peak of 54% in the middle of 2015.

Government pushing for additional supply of both private and public housing. The government has been accelerating land supply in recent years. Hence, primary housing supply is set to normalise in the coming years. We forecast new home completion will reach about 18,000-19,000 units per year on average in 2016-19. Starting from financial year 2015-16, the government is targeting to build 20,000 public rental housing units and 8,000 subsidised housing units for sale on average per year for the next ten years. Hong Kong’s market size, in terms of transaction volume, is around half that of Beijing and smaller than that of Shenzhen.

Stable home price and transaction volume. In 2016, the transaction volume in the primary market has remained largely stable, with residential prices staying flat.

Key policies Hong Kong’s property market is driven by government policies, in addition to economic and demographic fundamentals. Key policies currently in place to cool the market include: 1) Special Stamp Duty: 10-20% of property value for residential properties resold within three years; 2) Buyer’s Stamp Duty: 15% of property value on top of existing stamp duty for anyone who’s not a Hong Kong permanent resident and corporate buyers; 3) Double Stamp Duty: Stamp duty for second or subsequent property doubled to as much as 8.5% of the purchase price.

Foreigners are required to pay Buyers’ Stamp Duty and Double Stamp Duty when buying properties in Hong Kong; no particular policy targeted at foreign developers. Hong Kong’s

Slow economy, ageing population

Demand

Stamp duties

property market is relatively market-oriented. Chinese developers have been active in Hong Kong’s land market for years, with no intervention from the government.

Players’ profitability and cash collectionOperating margins are higher than that of Chinese projects but they are falling. In 2015, average operating margins of major Hong Kong developers was about 25%. Net profit margins stood at about 20%.

Land is the major cost in Hong Kong, and banks can finance part of that cost. Land, construction, and financial costs are the major development costs. For mass-market projects, land costs account for 40-50% of total development costs. For luxury projects, that can be much higher. Construction costs range from about HK$4,000 per square foot for mass-market projects to HK$7,000-8,000 per square foot for luxury developments. SG&A, financial costs, and taxes are generally low in Hong Kong.

Simple tax structure in Hong Kong. Profit tax of 16.5% on pre-tax profit is the only tax developers will need to pay in Hong Kong.

The cash-collection cycle is long – up to three years or more. It usually takes five years for developers to finish a project – from buying land to completing construction. Developers usually start presales after 2-3.5 years after purchasing a piece of land. Usually, developers can receive all of the proceeds about three months after a home is sold, assuming they do not provide any first or top-up mortgage to the buyer and the buyer chooses to pay in cash. Developers who provide top-up or first mortgages will prolong the cash-collection period.

CompetitivenessHong Kong’s property market is highly consolidated, led by these major players: Sun Hung Kai Properties, Cheung Kong Property, Henderson Land, New World Development, Sino Land, and Wheelock.

Access to land and understanding of sub-markets make these well-known developers very competitive in Hong Kong. Developers could acquire land and old buildings from the government, the urban redevelopment authority, the MTR Corp (all through tenders). Those with farmland could redevelop the land at lower costs. Large developers can obtain very cheap financing as banks are more interested in lending to high-quality developers. Some developers such as Sun Hung Kai have built very good brands through the years, enabling them to command higher prices.

Low-cost bank loans are readily available to Hong Kong’s developers. For developers that prefer to lengthen their debt maturity, bonds are often used. They also tap the equity market for funding when it is hot.


33

Top players

Hong Kong’s property

market is highly consolidated,

led by a few big players


Diagram 27. Primary residential property

Diagram 29. Affordability - monthly mortgage

Diagram 28. Residential price and growth

Diagram 30. Property price over annual household income

* Assuming a gross unit size of 600 sf, home price of HK$6.3mn and monthly household income of HK$34,100

Source: Centaline

* Assuming a unit size of 600sf, loan to value of 60%, 20-year mortgage loanSource: Centaline

Source: CentalineSource: Centaline

Singapore

Economy and demographicsGiven that Singapore is an open economy, its economic outlook is largely tied to the performance of economies in the region, and especially her key trading partners in the US, Europe, and China. Singapore’s growth has slowed to 1.5-2.0%, almost half the 5-6% seen over the past decade. This is mainly due to ongoing restrictions of foreign labour and a focus on productivity gains. Its shift to higher-value added manufacturing is also dampening the outlook for the manufacturing sector, which contributes about 20% of GDP. Singapore’s property sector outlook is closely intertwined with its economic outlook and labour market. Its population growth is slowing to about 1.3% after government curbs on foreign labour, meaning that the outlook for home prices is likely to remain muted.

Property market review and outlookPrimary sales have declined from over 12,000 units per year to about 7,500-8,000, which is reflective of underlying demand for public housing (mainly household formation i.e. marriages, upgraders). Speculative activity (measured by subsale volumes) is minimal in today’s market. The high ownership rate – thanks to a successful public-housing programme – means that more than 90% of households own their homes.

A recent increase of household income limits to S$12,000 for new public housing flats and S$14,000 for executive condominiums (hybrid private-public housing) means that 85% and 71% of all households can buy new flats directly from the government. This is also the reason for high home-ownership in Singapore.

Overall affordability is stable for first homes; with mortgages forming about 25-30% of household income, while mortgage lending limits of 60% reduces the likelihood of over-leverage in households. The current average unit price is estimated to be 5.3 years of disposable income.

Potential supply is abundant while the government is slowing down land supply. There were nearly 60,000 new private residential units and another 100,000 new public housing units under construction at the end of the first quarter of 2016. This represents a growth rate of close to 12%, based on existing total stock of 1.3 million residential units in Singapore (private and public). Availability of new land for sale is controlled by the government and, given the high number of homes coming onto the market, the government has been selling less land. While developers are able to acquire land in the private market, tight rules governing completion timelines and hefty penalties for holding inventory mean that developers continue to buy land selectively.

Volumes to remain low. We expect volumes to remain low at 7,500-8,000 units per year, reflecting underlying demand for homes on the back of new household formation.


35

Economic restructuring

Genuine demand driving a shrinking

market

Successful public housing system

Good and stable affordability


The luxury market is bottoming out, while suburban residential prices are expected to decline in 2017. The market is expected to move along two gears: (i) The high-end luxury market, after a 15% drop in prices and almost minimal transactions over the past five years, is expected to bottom out and stabilise, while (ii) suburban home prices may drop 5% in 2017, weighed down by high supply.

Key policies The Singapore property market is dependent on a stable job market and policies governing lending. Ongoing policies that have sent transactions tumbling are:

(1) Affordability: (a) Total Debt Servicing Ratio (TDSR) which limits total payments (including car loans, credit cards) to 60% of monthly gross income. (b) Down payment for a second property purchase is at least 50%. (c) Additional Buyer Stamp Duties (ABSD) of 7% and 10% for Singaporeans; foreigners pay 15% tax. This is on top of the 3% stamp duty for property purchases. (d) Seller Stamp Duties levied on sellers if they sell within one/two/three/four years of purchase is 16%/12%/8%/4% of the selling price.

(2) Supply: Government has been ramping up the supply of public housing/hybrid housing i.e. Executive Condominiums. Close to 100,000 new units are expected to be completed over 2016-2019. This represents an increase of close to 8% of total supply.

Foreigners are generally allowed to buy properties in Singapore. But any purchase will be subject to an additional buyer stamp duty of 15%.

Foreign developers are generally welcome to bid for land. Foreign developers are required to apply for a “Qualifying Certificate” when they buy private residential land for development. The rules require the developer to then complete the project within five years and fully sell all units two years after that. Developers failing to do so will incur an extension charge of 8%/16%/24% for an extension of one, two, or three years. This rule is to prevent foreign developers from hogging land in Singapore.

Players’ profitability and cash collectionFacing margin compression due to falling ASP and increasing land and construction cost. In 2015, average gross margins of Singapore-listed developers was 12-15% and average net profit margins were 8-10%; gross margins used to be more than 20%. Margins have been falling due to higher land prices and construction costs even as selling prices have either been static or falling.

Sector IRR has been fairly low at 5-6%, given limited land banking by most developers.

Land cost, construction cost, financial cost, SG&A, and taxes are the major costs developers have to pay. Land, construction cost, and SG&A account for 40%, 30%, and 10% of developers’ total costs. Developers’ average funding cost ranges from 2.5-3% and have remained fairly

Singapore’s property sector

outlook is closely intertwined with

its economic outlook and

labour market

Friendly to foreigners

Declining margins

stable. Given the limited opportunities to land-bank in Singapore, most developers have looked to build a commercial portfolio for recurring income or acquire selectively in Europe. Developers are highly taxed in Singapore at a corporate tax rate of 17%.

Presales allowed but cash collection is a gradual process spreading over three years. It usually takes 9-12 months from land acquisition to sales launch (sales permits). When signing the sales contract, developers can get a 20% down payment; they collect the remaining 80% in phases, subject to construction milestones. Developers recognise revenue on profit-and-loss once they hit construction milestones (i.e. percentage of completion).

Players’ competitivenessIn terms of sales, Far East Organisation, City Developments, and MCL Land are ranked the top developers in Singapore. In terms of picks of equity investors, City Developments is a proxy to Singapore’s residential market, given the group has the highest exposure to the residential sector among all developers. Wing Tai and Wheelock focus on the luxury segment, while Frasers Centrepoint focuses on the suburban and mid-tier market.

Access to low-cost land and cheap funding are the main advantages of top players. Some of the leading developers have land acquired at low cost, which means that margins have remained high. Apart from that, size and scale will allow these developers to take on bigger and more land tenders; smaller developers have typically resorted to forming joint ventures in land bids. Their access to cheaper funding domestically also benefits them.

Land and funding are generally available through public tenders (highest price wins) and in the private market (private treaty), but the difference is the cost. Developers can also explore M&A of private or listed players in order to gain access to land. Funding is available from major banks in Singapore. Typically, developers depend on a range of methods – medium-term notes, bonds, and bank lending, which is widely available.


37

Highly concentrated market

Costs and funding

Diagram 31. Primary residential property transaction volume and growth

Diagram 32. Residential price index and growth

Sources: Real Estate Developers’ Association of Singapore


Malaysia

Economy and demographicsThe Malaysian economy grew 5% in 2015, supported by domestic demand. 2016’s GDP is expected to grow 4-4.5%, with inflation running between 2.5% and 3.5%. The property sector is one of the key sectors in the economy, given the banking system’s reliance on it. Population growth has come down gradually to about 1.3%, but overall demographics remain favourable; about 85% of the population are younger than 55 years old.

Property market review and outlookHousing demand is underpinned by a young and growing population, increasing urbanisation, and shrinking households. Based on the latest census in 2010, home ownership was 59%. Affordability has worsened across Malaysia’s key states as gains in home prices have outpaced income growth over the past few years. Properties in Kuala Lumpur and Pulau Pinang are severely unaffordable given the scarcity of land. The average price of a home has increased to six years of disposable income in 2015.

Mainly relying on commodity housing market rather than public housing system to fulfil the country’s housing needs. The Malaysian government has only stepped up on public housing initiatives in recent years to increase supply by government agencies, although the current supply is unlikely to meet demand. There is an inadequate supply of affordable homes despite a substantial 35% increase in Malaysia’s housing stock since 2005. Annual completion of houses has been lagging the average net increase in the number of households over the past five years.

Property sales will be pressured by softer market sentiment amidst rising unaffordability, although prices are likely to remain firm because of cost-push factors. The strong appreciation in house prices over the past few years, largely driven by cheap liquidity, is unlikely to recur in the near future. Following a plunge in primary market sales so far this year, we estimate that sales volume will remain stable in 2017. Property price gains are likely to remain subdued, converging into a long-term average growth rate of about 5%.

Key policies and those on foreign buyers/developersThe market is highly policy driven, with recent policy turning from tightening to loosening. Major tightening measures include 1) the removal of developers’ interest-bearing scheme, which requires purchasers to service mortgage interest during the construction of their homes; 2) higher real property gains tax to discourage speculative buying; 3) stringent lending guidelines to address high household debt; and 4) reduction of loan tenure to a maximum of 35 years. After primary market property sales plunged in the first half of 2016, the government rolled out various financing schemes to help Malaysians buy their first homes. They also mulled higher Employees Provident Fund withdrawal for first-time homebuyers.

Young and growing population

Weak sentiment

Friendly immigration policies and encouraging foreign developers to invest in the country. Foreigners are allowed to buy properties priced above 1 million Malaysian ringgit and foreign developers are welcome to invest in Malaysia.

Players’ profitability and cash collectionNet profit margins range from 5-15%. Margins have been falling due to rising construction costs and land prices even as selling prices have been stagnant. Construction costs, compliance costs, financial costs, and land costs are typically the major cost components. Malaysia’s tax structure is simple but the tax rate is higher than that of other ASEAN countries. The corporate tax rate is 24%.

Cash collection cycle is long even with low presales standard. Cash collection is based on progressive completion of projects. High rise is typically completed over three years while landed properties are completed within two years. Revenue recognition is also based on progressive milestones.

Players’ competitivenessRelatively concentrated market with Eco World, Mah Sing, and SP Setia being the largest developers in Malaysia in terms of property sales. Their collective market share in 2015 was around 45%.

Having an established land bank is a key advantage. Most of the large developers in Malaysia have a substantial land bank that they built over the years. They also have bigger financial muscles to pursue land banking activities as land prices continued to rise. These players have strong brands in Malaysia, given their strong execution ability and innovative product offerings. The open market is the primary channel through which they acquire land while state/federal governments do release land from time to time for property development on a smaller scale. Funding largely comes from financing facilities from banks.


39

Most of the large developers in Malaysia have a substantial land bank that they built over the years

Rising costs


Diagram 33. Population growth rate



Diagram 36. Residential price and growth index

Sources: National Property Information Centre

*household monthly income/monthly instalment of average house priceSource: Bank Negara Malaysia, National Property Information Centre,

Department of Statistics

Source: Department of Statistics

Indonesia

Economy and demographicsDespite a slowdown, Indonesia is still growing faster than other ASEAN countries. Low global commodity prices have affected consumption and subsequently dented GDP growth over the past two years. In 2015, Indonesia’s economy grew at its slowest pace since 2009 – just 4.79%. Contribution of mortgages to GDP remains low at 3.2%, even as it grew at a CAGR of 11% between 2010 and 2015.

Growing population with a large proportion of young people. Favourable demographics – about 45% of the population is below 24 years old – and urbanisation will continue to drive housing demand in Indonesia’s big cities.

Property market review and outlookThe middle class is considered the pillar of the property market. Sustained macroeconomic weakness and a slew of regulations contributed to a massive slowdown in property purchases in 2015. Developers have been forced to re-think and re-jig their targeted markets to cater to the “sweet-spot” that reflects the buying power of Indonesia’s growing middle class (i.e. unit price between 750 million Indonesian rupiah and 1.5 billion rupiah). Overall affordability is worsening and will arrest any potential surge in property purchases. The current property price-to-income ratio (in Greater Jakarta as proxy) is at an all-time high after the 2010-2013 property boom. In addition, the rule of thumb for banks is that the maximum loan facilities they can disburse is equivalent to one-third of household monthly income.

The public-housing system is not a major source of housing. The government is trying to solve the housing backlog issue by launching the “1 Million Houses Programme” to meet the estimated annual demand of 800,000 new housing units. The homes are essentially subsidised housing (funded by state-owned companies) for the low-income segment. However, not many listed developers are serving this market; they prefer to serve the growing middle-class population.

Major listed developers have significant land holdings for their development over the next few years, and they are focusing on projects in key cities like Greater Jakarta and Surabaya. As there is no strict regulation on how long developers can hold their sites, developers are effectively “controlling” the supply of homes.

Price appreciation expected, while volume to be flat or up slightly. We expect aggregate sales for property developers under our coverage (a proxy to the Indonesian property market) to grow 9% y-o-y in 2017, driven largely by price appreciation (7%) rather than volume (in square metres) growth (2.4%). We think aggregate sales are plateauing at 2013’s level (the peak of the property boom). Over the longer term, a conservative estimate would be 8% per annum (driven by increase in land price rather than volume).


41

Still growing

Developer-controlled supply

Burgeoning middle class

Overall affordability is worsening and will arrest any potential surge

in property purchases


Key policies Measures governing the lending rate, loan-to-value restrictions (including disbursement restriction from banks) are the policies that drive the property market. Key policies that affect the property sector: 1) Restriction on fund disbursement by banks to property developers, so that buyers are protected, introduced in September 2013: funding from banks is allowed to be disbursed after certain milestones as opposed to given upfront. This has tightened developers’ cashflow since especially those with more high-rise projects. 2) Potential reduction in property transaction taxes as the government tries to rejuvenate the sector. For developers, their final property sales tax might be reduced to 2.5% of sales (from 5% currently). For buyers, their transfer title tax might be reduced to 2.5% of sales (from 5%). 3) Potential tax incentives to promote REITs in Indonesia.

Some restrictions on foreign buyers, while foreign developers will need to team up with local players to enter the market. The revision in early 2016 on housing ownership by foreigners residing in Indonesia is not drastic. Foreigners are still required to live and work in Indonesia to be eligible to own property under “rights to use” with a maximum 80 years’ tenure (30 years initially, with an option to renew for another 20 years, and subsequently another 30 years). Foreign developers need to have local domestic partners.

Players’ profitability and cash collectionGross margins vary across developers, depending on their portfolio: 1) Landed houses (land plus building): Average of 65%; and 2) Apartments and offices: Average of 45%.

What is unique about Indonesia’s developers is that their land margins will most probably continue to be stable (or even rise) as land costs are based on historical value (there is no requirement for property developers to revalue their existing assets annually and pay capital gain taxes for asset revaluation).

However, the sector on average is facing profitability pressure (starting at the beginning of 2014) due to financing costs as developers need to borrow more (i.e. cashflow is getting tighter).

Land and construction costs, financial costs, SG&A, and taxes are the major costs developers have to pay. On average, land and construction costs, as well as SG&A account for 42% and 20% of developers’ revenue. Developers’ average funding costs range from 3-11% of revenue and are creeping up. Unrealised foreign exchange loss from US-dollar debt negatively affected developers’ profitability in 2015. There are two accounting methods for revenue recognition: 1) Landed houses and commercial shophouses: Recognised after unit handover (on average, this would take around 18-24 months); 2) Apartments and offices: Recognised based on milestones (staggered revenue recognition during construction, which normally takes around 3-4 years).

Restrictions on foreigners

Good profitability

Developers are mainly taxed on revenue rather than profits. 1) Property sales (all types): 5% of sales; 2) Leases (all types): 10% of revenue from lease; and 3) Hotel operation: 25% of pre-tax profit (same as business income tax).

Cash-collection cycle spreads over 2-4 years. Developers in Indonesia have been acquiring land since 1990s. There is no firm timeline from their land purchase to launch/marketing (or contract signing). From sales (assuming the project is sold out) to handover: 1) Landed houses: Ranging from 18-24 months; 2) Apartments: Ranging from 3-4 years). Developers require a down payment of 30% (or more) when the contract is signed and collect the remaining 70% when the homes or apartments are being built. This applies to mortgage payments and cash instalments – both paid directly to developers. Loan facilities cannot be used to acquire land but they can be used to finance construction costs. Construction cost payments are also based on milestones but a large portion is normally loaded at the end.

CompetitivenessIn terms of sales (from property development, excluding other non-property core businesses), Ciputra Development, Bumi Serpong Damai, and Summarecon Agung are the top three. In terms of investors’ preference, Pakuwon Jati, Ciputra Development, and Bumi Serpong Damai stand out. Indonesia’s property developers are categorised as small- and medium-cap in the Jakarta Composite Index (i.e. the biggest player is Bumi Serpong Damai with a market cap of about US$2.5 billion).

Having a low-cost land bank is a key advantage. Most Indonesia’s listed developers are private companies, which compete mainly on the size and locations of their land bank. Major listed developers started accumulating land rights in strategic areas about 2-3 decades ago. Hence, they are the ones best placed capitalise on the property boom witnessed between 2011 and 2014.

Domestic bonds and loan facilities are the preferred financial channels. Indonesian developers, which have tapped overseas bond markets since 2012, are now favouring domestic bond and loan facilities, given the weakness in the rupiah over the past two years. Funds raised via domestic bond issuances, which tend to have longer maturities, could be flexibly deployed. Loan facilities, which have shorter maturities, can only be used for construction.

Developers with concentrated (and long-term development) projects have better efficiency operationally than those with multiple ongoing projects with shorter time horizon.


43

Payment schedule

Mostly private players

Developers favour large, multi-phase

projects


Diagram 37. Population ageing between 20 to 50



* Note: The forecast number s is based on our estimates.Source: ASRI, APLN, BSDE, CTRA, SMRA, LPKR and PWON

* Assuming 90 sm/unit; Based on Net disposable family income defined as 1.5* average net salary and price psm is average of price psm in city center

and outside city centerSource: Numbeo

Source: World Bank


45

Thailand

Economy and demographicsThailand’s economy has been plagued by political instability over the past decade. GDP growth slowed from 7.5% in 2010 to 2.8% in 2015. The property sector is still considered one of the key sectors, accounting for 6.8% of the country’s GDP. Population growth eased to about 0.1% per year in 2015, with the number of people older than 60 years old rising sharply from 6.8% of the total population in 1994 to as high as 14.9% in 2014.

Property market review and outlookDemand growth in 2016 has been limited by slowing economic growth and high-household-debt-to-GDP ratio. Household debt has risen from 40% of GDP in 2013 to 82% in the fourth quarter of 2015. Also, the poorest group (bottom quintile in terms of income) has the highest debt-service ratio (about 50%), so the low-end market should be particularly vulnerable.

The public housing system serves a tiny portion of the population. The government has two organisations that provide affordable public housing to lower-income groups. They are the National Housing Authority (NHA) and the Community Organizations Development Institute (CODI). NHA focuses on large-scale public-housing projects and filling the housing gap for low-income citizens. These subsidised-low cost housing projects are called “Baan Eua Arthorn”. CODI is the public organisation that handles communities’ housing by involving the communities and raising funds through cooperatives. The projects by CODI are called “Baan Mankong”. To date, it is estimated that the share of public housing in Thailand – via NHA and CODI – is only 3.5%.

In 2015, condominium unit launches in Bangkok continued to outpace sales, resulting in a 6% increase in unsold units; the inventory of condo units has risen at a six-year CAGR of 16% (from 2009). The situation is worse outside Bangkok as there have been cancellations and price discounts in the condominium markets. The market for landed property is in a better shape as demand remains healthy and increases in supply from big developers are crowding out smaller non-listed developers.

Fast property price gains have dampened affordability. Average prices of new housing launches jumped 33% in 2015 in Bangkok as developers switched their focus to more luxury offerings to avoid the impact of the slowdown in the low-end market. Consequently, the median house price rose to 3.49 million Thai baht in 2015 from 3.19 million baht in 2014 and 3.08 million baht in 2013. Affordability ratio (price-to-annual income) also deteriorated to 7.09 years in 2015 from 5.95 years in 2013.

Expect single-digit growth in volume and stable ASP in 2016 and over the longer term. From now till 2020, we expect average annual sales volume of 132,000 units and ASP

Political instability

Demand growth is limited

Supply has outpaced sales


growth of 0-3%. The ASP will likely rise in 2017 as land prices are still rising, albeit at a slower rate according to some firms, and most developers continue avoiding the low-end market and focusing more on selling mid-range to high-end products. With a marked slowdown in the mass market and developers’ continued focus on more expensive products, sales volume (in term of units sold) should be flat at best.

Key policiesThe government’s policy of cutting the transfer fee from 2% to 0.01% and the mortgage fee from 1% to 0.01% lasted from October 2015 to April 2016. There is no extension so far. The Bank of Thailand has specified since 2010 that the loan-to-value ratio cannot be above 90% for condominium projects and 95% for landed property.

Restrictions on foreign buyers and developers are in place, especially for land and landed properties. Foreigners are not allowed to own land and landed property in Thailand, and there is a limit of 49% foreign ownership of total units in a condominium project. Foreign operators are not allowed to own land and landed property. Foreign developers, most of which are Japanese, have joint ventures with local partners.

Players’ profitability and cash collectionIn 2015, average residential gross margins of the top ten developers listed on the Stock Exchange of Thailand was 34.3% and average net profit margins was 14%. Developers’ pricing power has been low since 2015 due to the slowing growth and high household debt. Construction costs began to fall slightly (1-2%) this year. Normal IRR for the sector is 18%.

Land and construction costs make up the majority of costs. Land cost, construction cost, financial cost, SG&A, and taxes are the major costs developers have to pay. Land, construction cost, and SG&A account for 40%, 30%, and 15% of the total cost. Developers’ average funding cost ranges from 3.5-5.5%.

Developers are subject to multiple taxes. The corporate tax rate is 20%. Developers are also subject to a special business tax (3.3% of transfers) and a transfer fee (2% of transfers, usually equally split between buyers and sellers).

Backend-loaded cash collection for developers. It usually takes 6-12 months from land acquisitions to presales; as some developers prefer to wait for Environmental Impact Assessment (EIA) approval before launching the projects. Buyers pay a down payment of 5-20%, in instalments during the construction of the homes which takes about 1-6 months for low-rise houses and 12-24 months for condominiums. The remaining 80-95% is paid upon title transfer.

CompetitivenessHousing in Thailand is primarily provided by private developers and dominated by listed companies and their subsidiaries. Listed companies and their subsidiaries account for 66% of

Supportive policies

Gross margins may remain stable

total housing sold in Greater Bangkok. Pruksa Real Estate (PS) was the number-one player in 2015 in term of residential transfers (51.2 billion baht), followed by Sansiri (35.2 billion baht), and Land & Houses (24.2 billion baht). However, Land & Houses is still number one in terms of net profit, thanks to its rental income from hotels and associate & dividend income from investments in other companies such as LH Financial Group, Homepro, and Quality Houses.

Leading developers in Thailand have a set of common advantages, including (1) economies of scale and bargaining power with suppliers/contractors; (2) strong brands and perceived quality; and (3) access to the bond market. The open market is the most common channel through which they get land.

Preferred funding channels, in order, are (1) the domestic bond market (cheapest, high flexibility, tax-deductible, longer maturity); (2) project financing (low cost, tax deductible); (3) joint ventures; and (4) injection of rental assets into property funds/REITs. Most listed developers are able to borrow from banks, at average cost of about 3-5%.

Manpower has become less of a problem these days for two main reasons. Most developers are now turning to prefab concrete, which allows them to use less labour, and they are using more foreign labour, particularly in construction.

The top ten developers in term of market share have stronger brands than the rest of the market and this translates into lower marketing costs. Land & Houses, LPN Development, and Supalai Public Company have strong brands and have managed to use that advantage to keep marketing expenses low at around 1% of transfers. Other developers usually spend 3-4% of transfers/presales on marketing.

Fast asset turnover makes some companies stand out as well. LPN, the leader of mass-market condominiums, is known for finishing projects quickly and high return-on-assets. Supalai is known for having superior gross margins (about 40%) and high return-on-assets, thanks to its ability to save on construction and design.


47

Strong brands



Diagram 42. Affordability – mortgage to monthly payment

Diagram 41. Residential price and growth

Diagram 43. Affordability – home price to income

Sources: National Statistical Office, Thailand; DBS Vickers

Sources: Agency for Real Estate Affairs

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Comparison of Market Segments

Office

The commercial sub-segment in the US and Australia are more promising than that in emerging markets. Office rents – as well as asset value – in the gateway cities of the US and Australia are expected to rise. Although some observers think that prices in these countries are becoming too expensive, their outlook remains promising. The two markets also have more high-quality assets available.

The outlook for the UK’s office market has reversed after the Brexit vote. Average rents were expected to rise, with vacancy remaining low. However, the Brexit vote has clouded the market’s outlook, no thanks to uncertainties surrounding the new relationship between the UK and the European Union.

Thailand’s office market is the best among the Asian markets we track due to rising rents, declining vacancy, stable capitalisation rates, and availability of good assets. However, the market does not allow foreign investors to buy landed projects. Due to political instability, many developers are not considering this market.

Hong Kong’s office market is the second best. This explains why developers are actively buying assets in Hong Kong, even in non-core areas. However, high-quality assets available for sale tend to be smaller. Singapore faces the largest challenge, with rents expected to decline 15-20% due to new supply.


49

Source: Company

Mixed outlook

Rental Vacancy Cap rate Availability of good assets

Hong Kong Up Stable Compress Limited; transactions are mainly non-core assets

Singapore Down Up Expand Yes

Malaysia Stagnant Stable Stable Yes

Indonesia Stagnant Up Compress Limited

Thailand Up Decline Stable Yes

US Up Decline Compress Yes

UK, mainly London Flat Up from low level Increase Increase

Australia Up Decline or flat Compress Yes

Diagram 44. Comparison of office markets


% Effective yield

Effective Risk

PremiumAsia

Ho Chi Minh City 8.97 2.04

Hanoi 8.63 1.81

Manila 7.21 3.60

Chengdu 6.69 3.52

Jakarta 5.99 2.60

Beijing 4.55 1.62

Seoul 4.34 2.91

Shanghai 4.04 1.19

Singapore 4.00 1.90

Guangzhou 3.98 1.09

Shenzhen 3.89 1.13

Tokyo 3.21 3.62

Hong Kong 2.48 1.44

Taipei 1.89 1.17

Europe

Dublin 4.98 4.08

Brussels 4.75 4.52

Warsaw 4.68 1.44

Milan 4.08 2.80

Cologne 3.90 4.05

Dusseldorf 3.90 4.02

Hamburg 3.80 3.94

Frankfurt 3.73 3.93

Berlin 3.61 3.87

Munich 3.52 3.08

Madrid 3.46 2.28

London Docklands 3.04

Paris 2.92 2.72

% Effective yield

Effective Risk

Premiumcont.

London West End 2.54

US

Houston 5.87 4.85

Boston 5.12 3.84

Denver 5.04 4.12

Tampa Bay 5.04 3.69

Philadelphia 4.83 3.57

Miami 4.42 3.12

Chicago 4.21 2.96

Dallas 4.10 2.64

LA Downtown 3.99 2.55

San Francisco 3.99 2.76

New Jersey 3.92 2.65

LA West 3.67 2.29

Washington DC 3.65 2.20

San Diego 3.57 2.12

Atlanta 3.56 2.27

New York Downtown

3.28 2.03

New York Midtown

3.26 1.90

Australia

Adelaide 6.13 4.28

Melbourne 4.32 2.47

Canberra 4.27 2.38

Perth 4.20 (2.74)

Sydney 3.93 2.08

Brisbane 3.63 1.75

Diagram 45. Office market yields in 2H16

Source: Savills

Hospitality

Similar to the office segment, the outlook for developed markets’ hospitality sector is diverse as well. The UK may see revenue per available room decline due to new supply, the US market may fluctuate in the short term, while Australia may see room rates increase but vacancy may spike due to new supply.

Among the emerging markets, Thailand’s outlook is the best as tourist arrivals continue to rise and developers continue to invest in the market. However, very few hotel owners are looking to sell.

The outlook for the hospitality segment is dim. Some Chinese developers that invest in foreign hotels are generally looking beyond investment returns; they seek to build their brands. Greenland and Wanda own the most hotels overseas. Their investment destinations tend to track where Chinese outbound tourists are headed.


51

Diagram 46. Who’s in the right market?

Strong marketStable marketWeakening or uncertain market

LondonPoly CNCOLIGreenland

MilanFosun

Hong KongCOLIEvergrandeYuexiu

TokyoFosun

SydneyFosun

New YorkFosun

Source: DBS Vickers

Thailand leads


Source: Company

Rent Vacancy Availability of good assets

Hong Kong Down Increase slightly Limited

Singapore Down Stable Yes

Malaysia Flat Flat Limited

Indonesia Stagnant Remain high Limited

Thailand Increase Down Limited

US Fluctuate in short term but up in mid-term

Flat overall; but may increase in NY and Miami

Yes

UK, mainly London Down due to new supply Low at less than 18% and may go up due to new suply

Limited

Australia Up Increase slightly due to new supply

Yes

Diagram 47. Comparison of hospitality markets



LondonWanda

FrankfurtGreenland

MadridWanda

Hong Kong

SydneyGreenlandWanda

Shimao

ChicagoWanda

Los Angeles

GreenlandWanda

PattayaGreenland

Source: DBS Vickers

Retail

The retail property markets of the US and Australia are more promising than that of emerging markets. Retail rents in the gateway cities of the US and Australia are expected to be stable or increase, though they are less attractive than office rents. The lack of expertise needed to run retail spaces has been the major barrier for Chinese developers or other investors that want to enter this market. Capitalisation rates are expected to be stable.

After the Brexit vote, a weaker pound drew international visitors to London and lifted retail sales. However, domestic consumer confidence has been declining due worries over the UK’s economic growth. Rental growth is expected to slow, while vacancy and capitalisation rates remain uncertain.

Among the emerging markets, Indonesia’s outlook is the best among the Asian markets we track due to increasing rents, declining vacancy rates, and improving asset values. However, the stock of quality assets is limited.

Hong Kong’s retail market is the most difficult, and we expect a 10-15% decline in rents and increasing vacancy as Chinese tourists shun the city in favour of destinations such as Thailand and Vietnam.

Since running malls requires more local knowledge and expertise, the entry barrier is high. Chinese developers’ overseas expansion in this segment has been slow.


53

Source: Company

Rental Vacancy Cap rate Availability of good assets

Hong Kong Down significantly Increase Down Limited

Singapore Stable Stable Stable Limited

Malaysia Resilient Stable Stable Limited

Indonesia Resilient Decline Compress No

Thailand Up slightly Increase Up No

US Up Decline Compress Yes

UK Flat Unclear Unclear No

Australia Stable Stable but increase slightly due to redevelopment

6.5% and stable Yes

Diagram 49. Comparison of retail markets

Weak pound draws visitors




New YorkCOLI’s parent company

Source: DBS Vickers


55


Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.

The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.


57

www.dbs.com

Living, Breathing Asia

ner - DBS Bank China surpassed Singapore as the top source of Asian outbound investment in that period, accounting for 60% of total outbound investment from the region. Current State

Documents