Borrowers are still struggling with declining property values, analysts say

Sales of commercial mortgage- backed securities will likely remain below US$15 billion in 2010 as borrowers struggle with declining property values, according to analysts at Barclays Capital and JPMorgan Chase & Co.

Debt sales backed by skyscraper, hotel and shopping mall loans may be as low as US$10 billion this year, according to Alan Todd, a JPMorgan analyst in New York. Aaron Bryson, a Barclays Capital analyst also in New York, forecasts more transactions, reaching about US$15 billion during the period.

The US government has committed to reviving the US$700 billion commercial-mortgage backed bond market amid plunging property values and a lending pullback. A record US$237 billion of the debt was sold in 2007, compared with US$12 billion in 2008 and US$1.4 billion last year, according to data compiled by JPMorgan. New issuance is not likely to pick up until the second half of this year, Mr Todd said.

‘The banks would like to lend,’ Mr Todd said during an interview at the Commercial Mortgage Securities Association annual conference here. ‘There are fewer properties to lend against.’ Many owners went heavily into debt during the boom years and find it hard to locate properties not already encumbered to lend against, Mr Todd said.

The lack of new loans chokes off funding to borrowers with maturing debt. Two-thirds of loans bundled and sold as securities, amounting to US$410 billion, may require more cash as property values plummet and underwriting standards tighten, according to Deutsche Bank AG data.

US commercial real estate prices are 42.9 per cent below October 2007 peaks, Moody’s data show.

Debt sales dried up in 2008 as the credit crisis sapped demand and the high price investors sought to hold the obligations was too great for Wall Street banks to profitably underwrite and bundle new loans for sale.

The gap, or spread, on top-rated commercial-mortgage backed securities over Treasuries has fallen to about 3.49 percentage points, compared with 9.63 percentage points a year ago, according to Barclays data.

Source: Business Times, 21 Jan 2010

Cheung Kong Holdings also says HK and China’s property markets not in bubble situation

Hong Kong’s luxury home prices may rise as much as 15 per cent this year, and there are no bubbles in the city’s and China’s property markets, said Cheung Kong (Holdings) Ltd, the builder owned by Asia’s second-richest man, Li Ka-shing.

Prices for luxury homes may increase 10-15 per cent this year, and for new mass-market homes 15-20 per cent, said Cheung Kong executive director Justin Chiu in Hong Kong yesterday. Revenue from China home sales may exceed 30 billion yuan (S$6.14 billion) this year, he said. That compares with his September forecast of 1.5 billion yuan for 2009 sales.

‘I don’t really see a bubble,’ Mr Chiu said. ‘There shouldn’t be too much concern about the governments trying to crush the market.’ Mr Chiu’s comments pit him against investor Jim Rogers, who said on Tuesday that real estate prices in the city and Shanghai are in a bubble and ’should decline’. Property prices in 70 cities across China climbed 7.8 per cent in December, the fastest pace in 18 months. Hong Kong’s real estate prices rallied the most among the world’s major housing markets last year, according to property adviser Knight Frank LLP.

Prices in the last six months of 2009 rose by 30 per cent in Hong Kong and 20 per cent in China, leading Mr Chiu to conclude that speculators may be at work.

‘We think that the substantial increase in such a short time, means that there could be a speculation element,’ he said. ‘That’s why I advise buyers to really see whether they have the means to commit to buying an apartment. They should be careful.’

Record new loans fuelled a 75.5 per cent jump in China’s property sales last year. Home prices in Hong Kong, a trading and financial hub for China, are at their highest in almost 12 years, leading the World Economic Forum and Goldman Sachs Group Inc to caution about the formation of asset bubbles.

Homes sales in China, Hong Kong and Singapore by Cheung Kong, the world’s second-biggest developer by market value, may exceed HK$100 billion (S$18 billion) if the company obtains government consent for all projects, Mr Chiu said.

Cheung Kong’s share price fell 1.9 per cent to HK$98.10 as of 2.40 pm in Hong Kong. The stock’s 37 per cent gain last year made it 2009’s worst performer in the six-member Hang Seng Property Index. It has dropped 1.8 per cent this year, compared with the 4.5 per cent decline in the index.

Fred Hu, Goldman Sachs’s chairman for Greater China, said on Jan 18 that property prices in China require monitoring for signs of bubbles forming.

Prices at some luxury residential projects in Shanghai doubled last year, with Shui On Land Ltd’s Casa Lakeview recording sales of 100,000 yuan per square meter in December, Lee Wee Liat, an analyst at Nomura International Hong Kong Ltd, said last week.

Mark Mobius, who oversees US$34 billion of developing-nation assets at Templeton Asset Management Ltd, disagrees with Mr Rogers, saying on Jan 7 that the bubble in China’s property market isn’t about to burst. Gross domestic product rose 10.5 per cent in the fourth quarter from a year earlier, according to the median of 41 forecasts in a Bloomberg News survey for the release scheduled today.

‘The Chinese will act rationally and they’re not going to kill the market,’ he said.

Mr Rogers, author of A Bull in China, said in on Tuesday that real estate in Shanghai and Hong Kong is ‘very overpriced’. Hong Kong ‘Limited’ Garry Evans, head of global equity strategy at HSBC Holdings Plc, said in a Bloomberg Television interview on Tuesday that ‘China is no way near a bubble’. Hong Kong developers, including Kerry Properties Ltd, Shui On and Hang Lung Properties Ltd, are building homes, offices and shopping malls in China to capture market share in the world’s fastest-growing major economy. The strategy will continue even as China acts to cool the property market, analyst Adrian Ngan said.

‘It’s a long-term strategy, it’s a must, because the growth in Hong Kong is very much limited,’ Mr Ngan, a Hong Kong-based analyst at CCB International Ltd, said before Mr Chiu’s comments.

To cool property speculation, China this month reinstated a sales tax on homes sold within five years of their purchase, and the country’s Cabinet on Jan 10 urged strict applications of a 40 per cent down-payment requirement for second homes.

China accounts for about 10 per cent of Hong Kong-based Cheung Kong’s earnings, Mr Ngan said.

Ronnie Chan, chairman of Hong Kong-based Hang Lung Properties Ltd, said the tightening measures in China will not have an impact on the company’s real estate projects in the country because ‘we have zero debt’. Hang Lung’s strategy of focusing only on developing commercial properties in China helps the developer avoid being affected by volatility in residential prices, the target of tightening efforts, Mr Chan said at a financial forum in Hong Kong yesterday.

Hong Kong home prices, where average values climbed 33 per cent, rose the most among the world’s major housing markets last year, according to property adviser Knight Frank LLP. An index of existing homes is at its highest since March 1998, according to a weekly weighted measure developed by Centaline Property Agency Ltd and the City University of Hong Kong.

Billionaire Mr Li, 81, is dubbed ‘Superman’ by Hong Kong’s media because of his track record for investing. He has a 41.7 per cent stake in Cheung Kong after adding to his holdings 29 times since December, stock exchange filings show.

Mr Li, estimated to be worth US$16.2 billion by Forbes magazine in March, correctly predicted in 2007 that China’s stock market was in a ‘bubble’.

Source: Business Times, 21 Jan 2010

China is unlikely to introduce a general property tax this year as it still needs time to prepare for it, a senior government economist said yesterday.

Talk that China could levy an annual withholding tax, which would replace taxes and fees that are mostly payable when a property is bought or sold, has intensified since Beijing started to cool property investment in December.

Zhu Baoliang, chief economist with the State Information Centre, a think-tank under the National Development and Reform Commission, said it was unlikely that China would start collecting the tax this year.

‘Property tax is a very complicated issue and will not be rolled out any time soon,’ he told reporters.

China is already running a trial property tax scheme in 32 cities, counties and districts.

Some industry experts say the tax, once applied, could help bring down China’s property prices as it would dampen market confidence and squeeze investors’ profit margins.

China will be very careful not to over-tighten its real estate policies, Mr Zhu said, adding that it would wait and see the outcome of measures already taken.

Property sales account for more than 10 per cent of the country’s gross domestic product.

Source: Business Times, 21 Jan 2010

THE views are split almost right down the middle. Is there or is there not a bubble in China’s property market? Cheung Kong, one of the largest property developers in Hong Kong, yesterday said that there are no bubbles in either Hong Kong’s or mainland China’s property markets. Said its executive director Justin Chiu: ‘I don’t really see a bubble. There shouldn’t be too much concern about the governments trying to crush the market.’

The comments are in direct contrast with that of renowned investor Jim Rogers. Though a very vocal China bull, Mr Rogers cautioned on Tuesday that real estate prices in Hong Kong and Shanghai are in bubble territory and ’should decline’. Efforts to restrain lending underscore the government’s attempt to take ’some of the heat out of the economy’, he said in an interview with Bloomberg. The rest of the Chinese economy, however, is ‘hardly in a bubble’, he added.

Views differ among investment analysts and asset managers as well. Mark Mobius, who oversees US$34 billion of emerging market assets at Templeton Asset Management, said two weeks back that China’s property market isn’t about to crash. ‘The Chinese will act rationally. They are not going to kill the market,’ he said. By contrast, former Morgan Stanley chief Asian economist, and now an independent economist based in Shanghai, Andy Xie is unambiguously bearish, describing China’s asset markets today as ‘a big bubble’.

The numbers give us a clue as to what is going on. Record new loans fuelled a 75.5 per cent jump in China’s property sales last year. Property prices in 70 cities across China climbed 7.8 per cent in December, the fastest pace in 18 months. But in places such as Shanghai and Beijing, prices of new apartments leapt by 50-60 per cent during 2009.

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One should certainly be circumspect when taking in the comments of politicians, stock analysts and fund managers. They may have their own agendas. A good judging yardstick, however, is perhaps the actions (not words) of people in the property business. They seem to be of the opinion that there is genuine demand for properties. On Monday, CapitaLand announced it is buying over the real estate business of Hong Kong-listed Orient Overseas (International) for US$2.2 billion. The purchase includes seven sites in Shanghai, Kunshan and Tianjin, with about 1.48 million square metres of floor space. Meanwhile, Hong Kong developers including Cheung Kong, Kerry Properties, Shui On and Hang Lung Properties are not slowing down their pace of development in China either. Even SOHO China, one of the leading private developers on the mainland, is not stepping back despite saying that it sees a lot of asset bubbles. Its strategy instead is to turn around its developments faster.

The good thing is that China’s government is vigilant and has already imposed a number of measures to cool down the market. Actions from property developers seem to suggest that while the cooling measures may stall the market temporarily, in the longer term, the inevitable trend is up.

Source: Business Times, 21 Jan 2010

K-REIT Asia is looking to add to its portfolio and may take a stake in the upcoming Marina Bay Financial Centre (MBFC).

The commercial real estate investment trust said this yesterday after releasing its results. Net property income was $13.4 million for the fourth quarter ended Dec 31, 2009 – up 13.8 per cent from a year ago.

Earnings were lifted by positive rental revisions and contributions from newly purchased strata floors in Prudential Tower. Distributable income to unitholders also rose, by 11.4 per cent to $19.4 million.

However, distribution per unit (DPU) fell as the unit base grew from a $620 million rights issue in November last year. DPU in Q4 was 1.45 cents, down 45.7 per cent from 2.67 cents a year ago. Adjusting for the rights issue, DPU in Q4 last year would have been 1.32 cents, reflecting a 9.8 per cent increase.

K-Reit will pay out 2.77 cents per unit on Feb 25, for July 1 to Dec 31.

At a press briefing, K-Reit manager CEO Ng Hsueh Ling said that the trust is actively looking at acquisition opportunities. She told BT that a stake in MBFC held by its parent Keppel Land is under consideration. This confirms what several analysts have been deducing in the past few months.

The Reit has not struck a deal because the first phase of MBFC is still on its way to completion. ‘We will only look at it when there is greater stability of income,’ Ms Ng said.

And because a deal between K-Reit and Keppel Land would be an interested party transaction, both sides will have to work on getting the ‘right and best value’ for their investors, she added.

K-Reit has considerable capacity for acquisitions because of the rights issue. As at end-December, its aggregate leverage was 27.7 per cent, almost the same as that a year ago. This could drop to 9.1 per cent should it pay off a loan due to Kephinance Investment.

Its debt headroom would be about $438-648 million, assuming an aggregate leverage of 30-40 per cent.

K-Reit’s portfolio value stood at $2.1 billion as at Dec 31, which works out to an average of $1,616 per sq ft (psf). This is 5.3 per cent lower than a year ago.

The portfolio occupancy rate slipped to 95 per cent from 99 per cent over the same period. On a brighter note, the average portfolio rent in December last year inched up to $8.16 psf.

For FY2009, K-Reit’s net property income grew 23.3 per cent to $48.9 million. Distributable income to unitholders also increased 21.1 per cent to $70.5 million.

Annualised DPU was 5.28 cents – 40.7 per cent less than the 8.91 cents a year ago. The annualised distribution yield would be 4.8 per cent based on K-Reit’s closing unit price of $1.10 as at Dec 31.

Annualised DPU would have risen 19.7 per cent year-on-year if the FY2008 figure was adjusted for the rights issue to 4.41 cents.

K-Reit units gained two cents yesterday to close at $1.20.

Source: Business Times, 21 Jan 2010

IT HAS been quite a journey for the Housing and Development Board (HDB).

When it was set up in 1960, Singapore was mired in a housing crisis, but today the country has one of the highest home ownership rates in the world. Public homeownership in Singapore is 80 per cent.

To share its achievements – and mark its 50th anniversary – the HDB is hosting the International Housing Conference from next Tuesday to Friday.

The event will bring a host of housing experts to Singapore, with many of them no doubt keen to pick up some pointers.

The HDB’s development and procurement director, Mr Fong Chun Wah, told The Straits Times the board hopes to ’share stories from this long journey’, with not just Singaporeans but also an international audience.

More than 30 speakers and experts, including housing ministers from Finland and Spain, will attend the conference along with an estimated 500 local and foreign delegates.

The HDB will share its practices in planning housing estates – such as in design and construction and in fostering human interaction.

These include technology breakthroughs in construction, the use of alternative energy sources such as solar and universal design catering to residents of all capabilities, said Mr Fong.

To some extent, certain aspects of the Singapore model can be replicated in emerging countries such as China, and the HDB hopes to share this experience, he said.

‘But there is much more to learn from others,’ he added. ‘We hope to gain some new ideas and concepts from the speakers, and find areas of collaboration.’

The conference will also feature a special session with Minister Mentor Lee Kuan Yew, who was prime minister at the time of the HDB’s inception and who conceived the home ownership programme implemented in 1964.

The HDB’s golden jubilee ‘is not just an occasion for (it) to celebrate its success’, said Mr Fong, who has been with the organisation for more than two decades.

‘It’s also a time for us to focus on realising our vision for the next five decades – and to rise to the challenge of meeting the housing aspirations of a new generation of Singaporeans.’

The conference will focus on the theme of sustainability – something that the HDB has embraced in its mission for the past 50 years ‘before the word became fashionable’, said Mr Fong.

‘The topic is very current, and sustainable housing is part of a bigger sustainable development trend happening around the world now.’

The deputy director of the HDB’s housing administration department, Mr Norman Chee, added: ‘It goes beyond the ‘hard- ware’ into the ‘heartware’ – providing not just housing but a town with facilities that are easily accessible, and social spaces where people can interact.’

Mr Fong said the HDB will face challenging issues such as land scarcity, changing aspirations and lifestyle of residents, and an ageing population over the next 50 years.

‘The board will be reflecting on how to tackle these challenges even as we look back on what we’ve achieved in the past five decades – we hope the conference will help to discuss some of these issues.’

Source: Straits Times, 21 Jan 2010

It is selling Robinson Point, looking at Starhub Centre redevelopment

OFFICE Reit CapitaCommercial Trust (CCT) wrote down the value of its investment properties by another $327.6 million and unveiled plans to revamp its portfolio.

The trust also said yesterday that it will receive $9.3 million from parent company CapitaLand to make up for a shortfall in income from One George Street.

CapitaLand sold One George Street to CCT in 2008 with a yield protection clause in case the net property income from the property is less than $49.5 million a year. The developer was required to pay for the shortfall for 2009, which resulted from lower operating performance as a result of global economic slowdown as well as the low rental rates for some of the existing leases that have not expired, CCT said.

The Reit also said it will sell Robinson Point to a private fund managed by AEW Asia for $203.3 million. CCT will book a gain of $19.2 million from the sale.

The trust is also looking at redeveloping Starhub Centre at Cuppage Road. The property is currently zoned for purely commercial use but CCT is hoping to convert it into a residential and commercial development.

It has obtained outline planning permission from the Urban Redevelopment Authority to change the use of the property, but the change of use is still subject to other government authorities’ approval. CCT will only decide on the next course of action after all relevant approvals are received, it said.

Both Robinson Point and Starhub Centre are non-Grade A properties, which the trust said have not performed as well as its Grade A projects in the current downturn.

‘Our Grade A offices continue to show resilience by recording an increased average occupancy rate in Q4 2009 to 98.7 per cent, significantly higher than the Grade A office market occupancy rate of 93.8 per cent,’ said Lynette Leong, chief executive of CCT’s manager. In comparison, the overall portfolio occupancy stood at 94.8 per cent in Q4.

Robinson Point was identified as being ripe for divestment. Selling it will allow CCT to re-invest in a Grade A property instead, Ms Leong said. Starhub Centre, which now suffers from lower than usual occupancy, could be given a revamp.

CCT also reported a downward revaluation of its properties from $6.03 billion in May 2009 to $5.7 billion at end 2009. The write-down follows an earlier one in May, where the value of CCT’s portfolio was reduced from $6.71 billion in December 2008.

CCT reported a 39 per cent climb in distributable income to $52.9 million for Q4 2009, from $38 million a year ago. Distribution per unit (DPU) – adjusted for rights units – rose to 1.88 cents from 1.36 cents.

For the full 2009 financial year, CCT reported a distributable income of $198.5 million, up 30 per cent from $153 million in 2008. The full year DPU (adjusted for rights units) of 7.06 cents is a 29 per cent year-on-year increase from 2008 DPU of 5.48 cents.

Source: Business Times, 21 Jan 2010

I REFER to yesterday’s report, ‘Proposed law changes to protect clients in property deals’. I doubt the proposed law changes will prevent the problem of lawyers running off with their clients’ money.

I find the new proposals time-consuming and cumbersome without getting to the root of the problem – stakeholder status of law firms. The chain of events in the new proposals creates duplication. The labyrinth of administrative procedure does not address the ‘parking bay’ of transaction proceeds right from the start.

Under the new proposals, who pays to monitor each step of withdrawals during the whole period of transaction? How to ensure no conflicts in approval between client and lawyer to hold up to $5,000 to meet many miscellaneous expenses (ME) in a short time? There could be more questions than answers.

The basic elements in property transaction equation are transaction proceeds (TP), ME, and interest of buyer and seller. Abuse can occur when proceeds are paid into the accounts of the law firm as stakeholder money, and the law firm has full control over its use. If payments for ME are separated from TP, the interest of buyer and seller will be safely protected in the transaction equation.

The key is isolating the client’s money in property transactions from law firms. Strictly speaking, the proceeds have nothing to do with the law firms. The duty of law firms is to administer the process and disbursements. Using a neutral party as stakeholder will eliminate the risk.

I think it is feasible to create a new rule that stipulates that 95 per cent of the proceeds go direct into a conveyancing account in an approved bank as stakeholder until completion, while the balance 5 per cent is administered by the law firm. Disbursements for ME are approved by both parties’ lawyers. It is neat and simple.

This way, the bulk of clients’ money is isolated and protected in the bank. The risk of running off with clients’ money is isolated. The role of the bank is to disburse payments with clear instructions from both parties’ lawyers. This simple tweak to the current procedure will effectively protect clients in property deals.

Paul Chan

Source: Straits Times, 21 Jan 2010

THE strong recovery in private home prices during the course of last year pushed down HDB upgraders’ share of private home purchases to 33.8 per cent in Q4 2009 from a high of 56.2 per cent in Q1 last year, shows the latest caveats analysis by Jones Lang LaSalle.

HDB upgraders accounted for 44.4 per cent of private home purchases in Q2 last year, with the share slipping to 37.9 per cent in Q3.

DTZ executive director Ong Choon Fah says: ‘Whenever the market is down, for instance in Q1 last year, you tend to see more buying activity by HDB upgraders. When prices go up, HDB upgraders pull back, as they are very price sensitive. And there’s no strong push factor for them to buy a private home since they already have a very good-quality roof over their heads.’

Urban Redevelopment Authority’s price index for private homes contracted 18 per cent in the first half of 2009 (from end-2008 level) but recovered 24.2 per cent in the second half.

JLL’s SE Asia research head Chua Yang Liang points out that the gap between prices of private condos/apartments and Housing & Development Board flats has widened since 2008. ‘As such, we expect HDB upgraders’ ‘participation’ in private home purchases to continue to pull back moderately before picking up again as more mass-market condo projects are launched when the government tenders out more sites during the course of this year.’

‘I reckon HDB upgraders’ share of private home purchases could hover around 35-40 per cent by end-2010,’ he added.

Source: Business Times, 21 Jan 2010

A higher proportion of private home buyers turned to the resale market in Q4 2009 to pick up their dream homes instead of visiting a developer’s showflat. Fewer launches by developers in Q4 and the removal of the interest absorption scheme in September last year probably contributed to this shift.

Jones Lang LaSalle (JLL)’s analysis of private housing transactions shows that the number of caveats lodged fell in all categories – primary market (or developer sales), resale and subsale markets – in Q4 2009 compared with the preceding quarter.

However, in percentage terms, the decline was bigger for developer sales at 68.8 per cent, compared with drops of 53.1 per cent for subsales and 39.3 per cent for resales.

As a result, the resale market accounted for 62 per cent of private residential caveats lodged in Q4, up from a 49 per cent share in Q3. Conversely, developers saw their share of total private home sales slide from 40 per cent in Q3 to 26 per cent in Q4.

Subsales’ share of total transactions remained unchanged at 11 per cent. Subsales and resales are secondary market transactions; subsales involve projects that have yet to receive Certificate of Statutory Completion (CSC), while resales refer to developments with CSC.

The most popular projects that changed hands in the resale market in Q4 were The Sail @ Marina Bay (51 caveats at a median $1,901 psf), followed by Caribbean at Keppel Bay (49 deals at a $1,355 psf median price). Landed homes in Serangoon Gardens Estate were also much sought after, with 44 caveats lodged at a median price of $592 psf of land area. Melville Park in Simei saw 35 transactions at a median $529 psf in Q4, according to JLL’s analysis of caveats captured in the URA Realis system.

In the subsale market, the top seller was Ferraria Park Condo in the Upper Changi area (32 units at $734 psf median price). Other popular subsale projects in Q4 include The Centris next to Boon Lay MRT Station, Casa Merah near Tanah Merah MRT Station, Botannia in the West Coast area and One Amber.

When it came to buying directly from developers, buyers’ top picks in Q4 were Hundred Trees (310 units at median price of $941 psf), The Interlace (148 units at $1,049 psf median price), Suites @ Guillemard, Cyan and Elliot at the East Coast.

‘The proportion of resale has edged up at the expense of new sales. One reason for this shift is the government’s termination of interest absorption scheme (IAS) and interest only loans (IOL) in September 2009, which had been offered for primary market sales,’ says JLL’s head of research (SE Asia) Chua Yang Liang.

‘Speculators who had been depending on this form of financial leveraging – they only needed to pay 10-20 per cent of the purchase price upfront and could defer paying the rest of the price till the project’s completion – have effectively been removed from the market.’

For more genuine owner occupiers and investors too, the removal of IAS and IOL has cut their incentive to pick up a home from a developer vis-a-vis the secondary market, Dr Chua says.

Also contributing to the rise in resale proportion in Q4 was the completion of 3,930 private homes in Q3 2009, one of the highest quarterly completions since 2000. ‘A corresponding increase in resale transaction volume is to be expected as more buyers are motivated to put their money down for a completed asset,’ Dr Chua says.

Agreeing, DTZ executive director (consulting) Ong Choon Fah, says: ‘Generally, you can pick up a home for relatively less in the resale market than in the primary market, and you can live in it or rent it out straight away.’

Also, developers launched fewer homes in Q4 than in the preceding two quarters, so house hunters had much less choice in the primary market, she adds.

Dr Chua says that he expects the proportion of resale activity to retreat by year-end given the lower projected completion of private homes this year.

Knight Frank managing director (residential services) Peter Ow also points out that as property launches revive this year, the absolute number of homes sold in the primary market, as well as their share of total private housing deals, will pick up.

Source: Business Times, 21 Jan 2010