Exit of deferred payments not a fatal blow: Goldman

Mid to mass market may be hardest hit as some projects see 50% opt for scheme

(SINGAPORE) The withdrawal of the deferred payment scheme (DPS) for property purchases may quell demand in the short term, but will not deal a fatal blow to Singapore’s residential market, says Goldman Sachs.

The investment bank also expects negative investor sentiment on property developers in the short term, but kept its ‘buy’ on GuocoLand and a positive view on real estate investment trusts (Reits).

Goldman Sachs Global Investment Research’s report is among the first to be made available after the government announced last Friday that it was removing a scheme that allowed the bulk of payments for property purchases to be deferred till the project was completed.

Goldman said that parties that are likely to be affected by the move include property speculators, foreigners buying Singapore properties here and ‘buyers who are stretching their affordability to buy a property’.

The bank says that the key test bed for the negative impact is the mid to mass market, even though the prime to luxury end of the residential market will be affected as well.

This is because ‘there are projects in this segment where over 50 per cent of purchases are accounted for by buyers opting for the DPS route’, and ‘the need to secure financing upfront will cause buyers in this segment to hesitate in committing to buying’.

However, its analysts see certain mitigating factors like strong job creation and economic growth, which supports a positive long-term outlook on this segment.

In the short run, the pace of new launches and take-up of new launches are expected to slow over the next three to six months as property prices are likely to come under marginal pressure.

Goldman said that this would result from undiscounted selling prices, which could have been set higher using DPS, negative impact on certain pools of demand and negative impact on sentiment.

Indeed, the removal of DPS raises the risk of government intervention to curb rising property prices, the report added.

‘Given such a backdrop, we foresee developers being less aggressive in recycling monies earned from successful launches into beefing up residential land banks,’ it said.

Hence, its analysts have trimmed their forecast residential selling prices by around 3-4 per cent, assuming flat prices in 2008 as well as slower growth going forward.

‘We also remove the 10 per cent premium to return on net asset value, where applicable, to reflect a more murky picture on developers recycling capital to expand land bank.’

Against this backdrop, Goldman kept its ‘buy’ on GuocoLand with a price target of $6.20 as ‘we continue to like the China projects and find valuation attractive’.

Also, it maintains its ‘neutral’ stance on CapitaLand, City Developments and Keppel Land with price targets of $8.30, $15.70 and $8.90 respectively.

 

Source: Business Times 29 Oct 07

Inflation fears mar Vietnam’s economic boom

(HANOI) Vietnam’s blistering economic growth is attracting foreign investors, but the boom is proving costly for households, which face big rises in the price of basic products such as rice.

Consumer prices rose 9.34 per cent year-on-year in October, after an 8.8 per cent increase in September, according to the General Statistics Office.

Inflation is worrying Hanoi, which aims to keep the rate below the growth in gross domestic product.

Vietnam’s economy grew by 8.16 per cent in the first nine months of the year.

The alarm bells grew louder last week as the national assembly seized on the issue, with Prime Minister Nguyen Tan Dung saying: ‘We want a higher economic growth and a lower inflation rate.’

The price of food, which forms more than 40 per cent of the basket of goods used to calculate Vietnam’s inflation rate, rose 13.94 per cent in October. The cost of rice and other grains alone increased by 15.98 per cent.

‘Global rice prices are high and global rice prices stay high as long as oil prices are high, because farmers need to buy fertiliser and fertiliser is a by-product of natural gas,’ said Jonathan Pincus, economist with the UN Development Programme (UNDP).

Vietnam joined the World Trade Organisation in January, and is opening its markets up to the world.

Dao Viet Dung of the Asian Development Bank warned this means ‘it is also more open to external shocks like the increase in oil prices…resulting in the increase of pressure on prices.’

He also pointed to the property fever gripping Vietnam, from northern Hanoi to the southern economic centre of Ho Chi Minh City, the former Saigon.

The price of construction materials such as steel and cement rose by 11.72 per cent in October.

Economists say pressure is increased by the huge inflow of foreign direct investment and the increasing use of credit (up 25 per cent in 2006 and 35 per cent by mid-2007, according to the World Bank), both for consumption and business lending.

‘It’s not good for the poor at all and it’s probably one of the reasons why the government is so keen to keep inflation under control,’ said Mr Pincus.

He added that while there was no immediate problem for investors, there was a risk that inflation would give rise to concern about Vietnam’s competitiveness.

‘If inflation is going up, people will demand higher wages, it’s natural,’ he added.

Hanoi has taken measures to curb price pressures, selling bonds and increasing bank reserves to mop up liquidity.But Mr Pincus said it would have to go further and increase interest rates to encourage saving.

 

Source: AFP (Business Times 29 Oct 07)

HK monetary chief warns of bubble

He urges investors to act with caution as Hang Seng surges over 40% in 2 mths

IN HONG KONG

HONG Kong’s monetary chief Joseph Yam has added a cautionary voice to a growing chorus of warnings in the city by observers who fear a bubble market has formed as stocks remain at giddy highs.

The Hang Seng Index has surged more than 40 per cent in just two months, reflecting a stellar appetite for China focused firms as China’s markets trade at new highs, and an expectation that mainland investors will soon be able to invest in the city’s market.

Some, however, fear that valuations are overstretched, with an asset bubble forming. And as punters continue to wade into the China boom story, they worry a serious correction could have a potent effect.

The bull run first started gathering pace on the heels of an Aug 20 announcement from Beijing that it would allow mainlanders to invest directly in Hong Kong stocks. This prompted an expectation of a fierce flow of cash from across the border.

In his weekly Viewpoint column on the Hong Kong Monetary Authority’s website, Mr Yam warns of ‘risks ahead’, particularly given the uncertain economic and financial outlooks for both China and the United States.

‘A sharp spike in the delinquency rate of sub-prime mortgages in the US has led to great tension in the money markets of Europe and the US, and a general credit tightening,’ Mr Yam notes.

He warned the possibility of a recession in the US cannot be ruled out, with adverse implications for cities such as Hong Kong.

Mr Yam also points to China’s macro monetary conditions as a cause for concern. With large foreign reserves, cooling down measures have been implemented by the Chinese central bank. At the same time, inflation is climbing to ‘uncomfortable levels’, he stresses.

Although China has announced it will allow residents to invest outside China, this has not yet happened and a heightened demand for stocks has pushed prices higher, ‘causing concerns about the possibility of a stock market bubble’.

Any market adjustment would have serious implications for financial stability in Hong Kong, he notes.

Against this backdrop, he urged Hong Kong to be cautious ‘despite the different and bullish signals that our financial markets are sending us’, Mr Yam says.

‘Irrational exuberance or not, investors should act with caution.’

Corporate governance activist David Webb has also sounded a note of caution, arguing that the mainland stock bubble is sure to burst. When it does, it will ‘certainly take the Hong Kong market down with it, since most of the market capitalisation is now either mainland stocks or stocks with a large component of mainland business’, he says on his website.

‘It would not be at all unreasonable to visit 15,000 or even 12,000 again on the Hang Seng Index, despite the depreciation of the dollar and the time value of money since we were last at those levels,’ he notes.

He says Hong Kong will be able to sustain any bursting of the bubble, ‘and mainland companies will still come here to list’. He urged Hong Kong policy-makers to shift their attention to improving the city’s competitive advantage in the meantime, by beefing up the regulatory framework.

 

Source: Business Times 29 Oct 07

Central bank unlikely to change interest rates

But RBI may raise lenders’ reserve requirement again

(MUMBAI) India’s central bank is expected to maintain steady interest rates in a quarterly review this week, but may ask lenders to set aside more cash as reserve to cut a surge in money supply, economists say.

They said the Reserve Bank of India (RBI), slated to announce its latest stand on interest rates this Tuesday at 0630 GMT, will likely sound less ‘hawkish’ on prices with inflation at a five-year low.

But economists say the central bank may act to ease the impact of billions of dollars from abroad flowing into the stock market and other investments in the fast-growing economy to ensure a slowdown in lending and a recent move to limit overseas fund stock market purchases takes effect.

‘Moderating inflation, easing credit growth and a slowdown in global growth will likely make the RBI less hawkish in its policy pronouncements,’ said Rajeev Malik, Asia economist with JP Morgan Chase bank, based in Singapore.

In July this year, the central bank kept its benchmark rate at a four-year high of 7.75 per cent in an effort to tame inflation.

The tight policy stance has had an impact with annual price rises now at 3.07 per cent, compared to 6.7 per cent in February, well below the 5 per cent upper limit targeted by the central bank.

‘We expect the RBI to keep key rates unchanged on Tuesday, with inflation and credit growth tapering,’ said Manika Premsingh, an economist with brokerage Edelweiss Capital.

Loans by banks have grown about 23 per cent in the current year ending March 2008, a slowdown from 30 per cent in the previous year as consumers shied away from higher interest rates for car, home and personal credit.

But analysts said despite that, a hike in the amount of money commercial banks must set aside as reserves – or the cash reserve ratio (CRR), currently 7 per cent – is likely as it would help cut the potential impact of a record of nearly US$18 billion invested in stocks by overseas funds this year.

‘I expect a CRR hike of about 35 basis points in the coming weeks,’ said housing lender HDFC Bank’s chief economist Abheek Barua.

Mr Barua said that a move by the Securities and Exchange Board of India (SEBI) last week to phase out the anonymous buying of shares by foreign investors would reduce some of the cash flowing into India, but the central bank may want to limit money supply aggressively.

JP Morgan’s Malik also expects a higher cash reserve requirement.

‘A hike in the cash reserve ratio cannot be totally ruled out if capital inflows continue to overwhelm the central bank,’ he adds.

 

Source: AFP (Business Times 29 Oct 07)

Australia faces turbulence from US meltdown: PM

(SYDNEY) Australia, one of the best-performing advanced economies, faces looming economic turbulence from the sub-prime lending meltdown in the United States, Prime Minister John Howard warned yesterday.

Last Friday, Australian Treasurer Peter Costello had warned of an approaching international financial ‘tsunami’, with China at its epicentre.

‘We are entering a more difficult time of economic management. There are storm clouds on the international economic horizon,’ Mr Howard told Channel 9 television yesterday.

He was speaking on the campaign trail for Australia’s federal election on Nov 24, which the coalition government is fighting largely on its economic credentials.

Battling poor opinion polls, Mr Howard faces the prospect of an official interest rate increase by the Reserve Bank on Nov 6, during the election campaign.

‘I don’t think it’s panicking anybody to say that the sub-prime meltdown in the United States, which has already had an impact on market interest rates, because of the globalised nature of our economy, is going to have an effect,’ he said.

In an interview with the Sydney Morning Herald last Friday, Mr Costello said global financial markets face a ‘huge tsunami’.

The US economy would weaken in the wake of its sub-prime mortgage meltdown, and the breakneck pace of Chinese growth also could not continue, Mr Costello said.

At some stage, likely to coincide with a move to a floating of the Chinese currency, China would unleash greater instability on global markets than the United States had, he said.

‘That will be a wild ride when it happens. That will set off a huge tsunami that will go through world financial markets,’ said Mr Costello, one of Australia’s longest-serving treasurers.

Yesterday, Mr Howard pledged to keep interest rates down in Australia, but admitted that rates could rise.

‘The (Reserve) Bank will make a decision on interest rates . . . Interest rate changes happen, they go up and they go down, according to economic circumstances,’ he said.

 

Source: Reuters (Business Times 29 Oct 07)

US retail stocks hit by housing, credit crisis

(NEW YORK) When home builders’ stocks plunged in 2006, Wall Street was confident that the problems would not spill over into the larger economy. Exhibit A – department store stocks rose steadily despite the housing woes.

Not this time around. Housing stocks have fallen again and this time, the department store stocks have marched down with them.

Since April, when investors voiced optimism that the housing slide had been contained, shares of the country’s biggest department store chains have fallen by about 30 per cent.

With the sagging prices, investors have rendered a harsh judgment on the coming holiday shopping season, predicting that consumers will severely cut back on spending.

The gloom since April 20 has been spread evenly across the big chains: shares of JC Penney are down 33 per cent, Macy’s by 27 per cent, Kohl’s by 28 per cent and Sears by 28 per cent.

Robert J Barbera, the chief economist of Investment Technology Group, said: ‘The conventional wisdom of a year ago was that we would have a soft landing in housing.’

But today, ‘the stock market message is a hard landing for housing, with clear damage to consumer discretionary spending’.

In interviews, retail executives conceded that the slumping housing market was taking its toll. ‘We are in the window covering business, and you don’t cover windows in houses you don’t build,’ said Myron E Ullman III, the chief executive of JC Penney.

But some executives remained at least a little upbeat, complaining that investors are lumping the department stores together.

‘I believe in the fourth quarter, people will continue to buy,’ said Terry J Lundgren, the chief executive of Macy’s. Analysts, he said, ‘are speculating that the consumer is going to withdraw and not spend at the same levels as she has in the past several seasons’.

And over at Saks, the view is that the housing and credit crisis is somebody else’s problem. ‘The underlying strength in the luxury market is there,’ said Stephen I Sadove, the chief executive. ‘That consumer is driven more by confidence in the stock market than in the housing market.’ Investors appeared less certain that Saks will suffer. Its shares are off just 7 per cent since April 20.

Still, the stocks of other higher-priced department store chains, which have been largely immune to housing market troubles over the last several years, have plunged this year. Nordstrom is down almost a third.

Economic slowdowns traditionally hurt stores catering to a less affluent customer base, like Wal-Mart and Target. But in a reversal, those discount chains have not done as poorly as department stores.

‘The problems have crept up the consumer food chain,’ said Bill Dreher, an analyst at Deutsche Bank Securities.

Behind the falling stock prices are slipping sales at stores. After a strong performance early this year, sales at department stores open at least a year have fallen three of the last six months, according to Deutsche Bank.

The stores have blamed a variety of factors, like an unseasonably warm August and September, which hurt back-to-school clothing sales, and poor sales of household goods, tied to the slowing housing market.

Sales at Macy’s and JC Penney have fallen five of the last six months. Kohl’s sales have fallen four of the last six.

 

Source: NYT (Business Times 29 Oct 07)