On Dec 15, the US Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) meeting pointed to three rate hikes in 2022, two rate hikes in 2023, and a further three hikes in 2024. “That’s a 3-2-3,” says Carmen Lee, head of OCBC Investment Research on Dec 16. This is in reference to the Fed’s intention for three interest rate hikes in 2022, two rate hikes in 2023 and three rate hikes in 2024.
Lee admitted to having a late night on Dec 15, when she was hit with a double whammy. On top of the Fed’s announcement, the Singapore government also announced a slew of property cooling measures.
“The agencies have done extremely well this year and outperformed property stocks. The discrepancy was unwarranted,” she adds, in reference to the gains made by PropNex and APAC Realty. Both companies run agencies and their revenue is tied to the value of property transactions done by their agents. PropNex and APAC Realty are up 116% and 70% year-to-date.
In contrast, so far this year, City Developments (CDL) is down 12%, Frasers Property is down 8% and UOL Group is down 9%. Only CapitaLand Investment is up 16% from its listing price on Sept 20.
However, following the announcement of the additional property measures — which adds from five basic points (bps) to 10 bps to additional buyers stamp duty (ABSD) and adjusts total debt servicing ratios downwards — the two listed agencies fell more than the developers.
After the announcement, and by mid-day on Dec 16, Propnex was down by 6% and APAC Realty lost 8.5%. In contrast, CDL lost 3%, FPL 1.7% and UOL eased 1.3%.
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“You can see the measures hit these agencies more than the property companies because they are more transactional based, and a lot more sensitive to people buying their second or third property,” Lee continues.
Property companies are more shielded because they are diversified both geographically and by asset class. On the whole, she reckons the impact is likely to be less impactful than earlier measures and people are used to paying ABSD.
In an update, RHB Research agrees that the measures will affect the agencies more than the developers. “The anticipated sharp slowdown in sales volumes will have a major negative impact on real estate agencies, compared to developers. APAC Realty will be the most impacted from measures, among stocks under our coverage,” it says. “For CDL, while the measures will have a slight negative impact, the strong unbilled sales from launched projects, as well as recovery in the investment property and hospitality segment provides cushion. The stock is also trading at a steep discount of 60% to its revalued net asset value, indicating that most of the negatives are likely priced in,” the RHB report further notes.
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In the US, the Fed’s board turned a lot more hawkish compared to their September meeting.
“Our own projections are modestly lower than the Fed’s updated view: we anticipate two rate hikes next year if inflation decelerates sequentially in coming quarters as projected. This would require the current torrid demand conditions to come off the boil and supply chain problems to improve. Ultimately, we also expect the Fed will be unable to hike the Fed funds rate as high over this cycle as they are currently projecting, anticipating the fed funds rate is likely to top out below 2%,” states a commentary by PGIM’s Fixed Income team.
OCBC Investment Research’s Lee says the key beneficiaries are usually the banks. There are no real victims but some sectors are negatively impacted, she notes. Since mortgage rates are pegged to interest rates, property transactions could fall.
“If rates continue to go up then it becomes [more] challenging to service the mortgage,” Lee observes, suggesting that the property sector is likely to be affected. “The property sector will compete with REITs which don’t perform well in high interest rate environments. So, you must differentiate between the REITs. There are high growth REITs which can make earnings accretive assets and these could negate the impact from the dilution from higher interest expenses.”
She also adds that she prefers industrial REITs with long weighted average debt expiries and long weighted average lease expires. “For data centres, Keppel DC REIT used to be our favourite but now there are more data centres REITs which is a growth area and another segment we like.”
Finally, Lee also says that OCBC Investment Research’s 2022 Strategy does not include many manufacturing and heavy industries which have heavy capital expenditure demands. “Smaller SMEs could be more vulnerable because business may not be as robust and in a high interest rate environment, the smaller companies could be impacted but they are not a significant portion of the Singapore market.”
