Jun 20th 2008 From The Economist Intelligence Unit ViewsWire
China’s property bubble is about to burst
The sizzle is off China’s property markets, and that’s potentially bad news for the country’s social stability.
In the past two years China’s property market has enjoyed a spectacular rise, with average prices in some cities doubling. But that raised a red flag with Chinese economic policymakers, and in late 2007 the central government made controlling the rise of asset prices a policy priority. Since then, the State Council has rolled out a series of regulations—from credit ceilings to a 40% down-payment requirement for second mortgages—in order to combat property speculation.
The effect was immediate. In early 2008 previously soaring housing markets in southern China began to go into a tailspin. The prospects for other key markets are not good either. With China continuing to struggle with high inflation, the central bank is likely to keep tight reins on monetary policy. Indeed, on June 7th it increased commercial banks’ reserve-requirement ratio by 100 basis points, in effect taking out over Rmb400bn (US$58bn) from the financial system.
Holding their breath
Property investors around the country are now holding their breath to see whether markets in other major cities will follow the spectacular tumble in Shenzhen, a city that borders Hong Kong, where the average per-square-metre price of new residential units dropped from over Rmb16,000 in February to Rmb11,000 at the end of May. Reports of last-minute discounts, free renovation, free cars and “cost sharing” for down payments abound, suggesting even bigger concessions to come.
Yet there are few signs of relief in sight. According to the Shenzhen Bureau of Land and Housing Management, some 27m sq metres in housing are under construction in the city. This comes on top of the 5m sq metres in leftover stock from 2007. In sharp contrast, sales of new properties totalled only 1.2m sq metres between January and May. At the current rate (2.88m sq metre per year), it would take developers in Shenzhen more than a decade to sell all this stock of properties. This calculation, moreover, does not take into account the large supply of second-hand units held by investors, who are increasingly eager to dispose of their holdings.
Housing prices are also vulnerable in Beijing, Shanghai, Hangzhou, Ningbo and Haikou on the coast, and Wuhan, Nanning, Xi’an, Lanzhou and Urumqi in the interior. All these cities experienced spectacular growth in 2007. Curiously, though, official figures released by the National Development and Reform Commission (NDRC) do not bear that out. They show flat prices in all of them, with small declines in Lanzhou, Chengdu and Fuzhou.
How reliable are the NDRC data? Not very, it seems. They do not tally with local press reports, and the NDRC’s methodology is vague. Consider its figures on Shenzhen. The NDRC reported that in March the city’s average new residential property price fell 4.9% compared with one month earlier. But the Shenzhen Bureau of Land and Housing Management—presumably with its ear closer to the ground—reported a month-on-month drop of 16.5%. For April the NDRC again reported a decline of 2.2%, while Shenzhen’s own figure was a 12% fall.
Information on the other markets from local sources is not as readily available as that on Shenzhen. But if the discrepancies on the Shenzhen market are any indication, the NDRC’s sanguine numbers probably conceal sizeable tumbles in the other cities. In formerly red-hot markets like Shanghai and Beijing, sales are lagging. In Shanghai, sales volume in terms of square metres was 50% lower in May than a year ago, according to the Oriental Morning Post, a local newspaper. Meanwhile, the average sale price of new residential housing in Shanghai fell 10% month on month in May. If sales continue to be sluggish and new units continue to come on the market, the Shenzhen experience suggests that a steeper fall in prices awaits Shanghai.
Slowing sales are putting developers everywhere in a quandary. Many have aggressively bid for land to develop through the first quarter of this year. However, they now find that banks are reluctant to provide easy financing for construction. At the same time, sluggish sales mean much slower liquidity generation on their own. Unsurprisingly, developers are increasingly resorting to desperate tactics. For example, Zhonghai Real Estate, which had a turnover of Rmb16bn in 2007, rolled out a limited supply of units selling at Rmb5,000 per sq metre in Shenzhen (by comparison, a neighbouring development is selling for Rmb8,000 per sq metre). Likewise, developers in mid-size cities like Wuhan and Changchun are rolling out generous discounts to attract buyers. If the trend spreads, it may trigger a destructive price war that sends everyone’s fortunes in a steep downward spiral.
In order to obtain cash, some developers are turning to overseas investors. Foreign hedge funds, for one, are eager to lend to Chinese property companies. Not only can they charge 25% or more in annual interest rates, foreign lenders can also expect to benefit from the continued appreciation of the renminbi in the coming months. Especially cash-strapped developers are forced to borrow from the domestic curb market at annual interest rates as high as 40%. But the maturity periods of such loans are usually measured in days, so the pressure on the borrower to repay blunts their usefulness. Larger developers have tried to raise money through share offerings. For example, Jianye Property of Henan province listed on the Hong Kong stock exchange (under the name Central China Real Estate) in early June and raised HK$1.37bn or US$175m, but its share price has already dropped below the debut level. If all else fails, developers have no choice but to sell their holdings to a stronger rival or cash-rich investors, at a steep discount of course.
In an environment of tightening credit, some banks are colluding with developers to keep the cash tap turned on. Although banks are supposed to demand a 40% down payment from families seeking second mortgages, some turn a blind eye if the loan applicant does not hold another property even if other family members do. Banks also usually do not verify loan applicants’ claim of having a small flat; Chinese regulation allows a 30% down payment for anyone whose current housing falls below the average per-person living space in the city of their residence.
Inevitable consolidation
Despite these tactics, demand remains weak, and no improvement is on the horizon. Beyond the government’s tightening monetary policy, the main problem is that the enormous run-up in prices in 2007 drove developers to build a glut of housing in the market. A major consolidation in the property sector seems inevitable. Indeed, Guo Shiping, an economic advisor for the Shenzhen city government, told the press that he expects 35% of the country’s developers to go bankrupt in the next two years.
If so, the impact will be felt far beyond the property industry alone. China’s financial industry holds over Rmb5trn (US$728bn) in property-related loans. A general decline in property prices also carries worrisome social and political implications. In the latest boom, millions of Chinese families have signed away decades of future incomes to buy homes. As the value of their biggest investments shrinks, their level of discontent will only swell.
ZURICH (Reuters) - Shares in Swiss bank UBS rose nearly 4 percent in early trade on Tuesday and traders referred to market rumours HSBC could make a bid for the world's largest wealth manager.
UBS shares were 1.7 percent higher at 22.44 Swiss franc at 0735 GMT, having risen to 23 francs earlier, outpacing a 0.5 percent rise in the European banking sector index
Market talk that HSBC could bid $80 billion (40.6 billion pounds) for UBS was behind the rise, traders said.
Both banks declined to comment on the rumours.
"Scurrilous rumours of an $80 billion approach from HSBC. I doubt the Swiss would settle for that though," one analyst, who asked not to be named, said.
UBS, so far Europe's biggest casualty of the global credit crisis triggered by risky U.S. home loans, has reported $37 billion in writedowns of investments and posted a loss of some $11.5 billion in the first quarter.
Flashback few months ago; GIC's 9% stake in UBS...
Singapore Investment Arm To Sink Billions Into UBS
Shu-Ching Jean Chen, 12.10.07, 5:32 AM ET
HONG KONG - Over the past few years, Singapore has developed a yen for investing in overseas banks to tap into their long-term growth prospects. On Monday, the city state made its largest bet yet in the sector in UBS.
The Swiss bank is raising a total of 13 billion Swiss francs ($11.48 billion) in fresh capital from two investors. The Government of Singapore Investment Corp., which invests the city-state’s foreign-exchange reserves, will contribute 11 billion Swiss francs ($9.75 billion); the other investor was not identified, but was said by Reuters to be the government of Oman, which has been attempting to diversify its economy away from reliance on oil production.
The two investors would receive convertible notes that pay an annual return of 9% before their conversion into ordinary shares two years after the date of issue. The proceeds would help bolster UBS’s capital adequacy at the most critical level, its Tier 1 capital.
The fund raising by UBS underscores the increasingly powerful role sovereign wealth funds such as GIC, as the state-owned Singaporean investment agency is known, are assuming in the global financial markets and the willingness of these funds to broaden their traditional preference for low-risk assets such as sovereign bonds.
Investment by sovereign wealth funds has also emerged as a counterbalance to global private equity funds, particularly welcomed by companies whose owners insist on retaining control. GIC, for its part, told reporters in Singapore Tuesday afternoon that it is not seeking management control at UBS.
GIC’s deal with UBS is larger than the $7.5 billion investment the Abu Dhabi Investment Authority agreed to make in Citigroup on Nov. 26. Depending on the eventual conversion price, GIC would get about a 9% stake in UBS.
Last year, another Singaporean state investment agency, Temasek Holdings, agreed to spend about 2.2 billion pounds to buy an 11.55% stake in Standard Chartered Bank held by the Singapore-based Khoo family, becoming its largest shareholder.
As one of the world’s oldest sovereign wealth funds, GIC has been making the transition to a more aggressive investment posture far earlier than others. Its strategy is a mix of equity fund management, real estate and private equity, with its portfolio divided along these lines in three subsidiaries: GIC Asset Management, GIC Real Estate and GIC Special Investments. An investment of 11 billion francs in UBS, though, is big even by the standards of sovereign wealth funds. GIC manages well in excess of $100 billion worth of assets in more than 40 countries.
Throughout its 26-year history, GIC has been headed by Singapore’s founder Lee Kuan Yew, who now holds the official title of “minister mentor,” as chairman of the board. It recently appointed as group managing director Lim Siong Guan, a career bureaucrat who doubles as chairman of the country’s Economic Development Board. Lim succeeded Lee Ek Tieng in September, after Lee retired from managing the company’s investments for 18 years.
When it celebrated its 25th anniversary last year, it disclosed that the annual rate of return on the foreign reserves it managed averaged 9.5% in U.S. dollar terms and 8.2% in Singapore dollar terms, compared with an average real rate of return of 5.3% per year.
Its recent investments included a 1.1 billion Australian dollar (U.S.$965 million) investment made jointly in July with Australia’s Myer family, of the Myer retail chain, to redevelop the premier shopping center in Melbourne and a joint venture investment announced in May with the aim of spending up to 150 billion yen ($1.34 billion) on urban retail properties in Japan with Sumitomo Corp.
GIC's deputy chairman and executive director, Tony Tan Keng Yam, told reporters in Singapore that "we made this significant investment in UBS because we have confidence in the long-term growth potential of the bank's businesses, particularly its global wealth management business.” He added, "GIC's preferred practice in respect of our public equity investments is to take relatively small stakes in companies for portfolio diversification. However, we made this significant investment in UBS because we have confidence in the long-term growth potential of the bank's businesses, particularly its global wealth management business."
Tan defended sovereign wealth funds, detailing remarks made in his press conference. He said sovereigh wealth funds "could be seen as contributing to financial stability because of their focus on well-diversified portfolios, long-term returns, and virtually no leverage. On the other hand, for example, global hedge funds, operating with substantial leverage, control larger assets than SWFs and tend to trade actively." He said Singapore will strive to promote sovereign wealth funds by participating "actively in efforts to formulate a set of principles and best practices for sovereign wealth funds. GIC believes that it can contribute in a positive way to the framework for greater disclosure."
UBS’s prestige in the wealth management business should help Singapore entrench its success in becoming a top player in serving the financial needs of the wealthy clients in the region.
3 comments:
Boom to bust
Jun 20th 2008
From The Economist Intelligence Unit ViewsWire
China’s property bubble is about to burst
The sizzle is off China’s property markets, and that’s potentially bad news for the country’s social stability.
In the past two years China’s property market has enjoyed a spectacular rise, with average prices in some cities doubling. But that raised a red flag with Chinese economic policymakers, and in late 2007 the central government made controlling the rise of asset prices a policy priority. Since then, the State Council has rolled out a series of regulations—from credit ceilings to a 40% down-payment requirement for second mortgages—in order to combat property speculation.
The effect was immediate. In early 2008 previously soaring housing markets in southern China began to go into a tailspin. The prospects for other key markets are not good either. With China continuing to struggle with high inflation, the central bank is likely to keep tight reins on monetary policy. Indeed, on June 7th it increased commercial banks’ reserve-requirement ratio by 100 basis points, in effect taking out over Rmb400bn (US$58bn) from the financial system.
Holding their breath
Property investors around the country are now holding their breath to see whether markets in other major cities will follow the spectacular tumble in Shenzhen, a city that borders Hong Kong, where the average per-square-metre price of new residential units dropped from over Rmb16,000 in February to Rmb11,000 at the end of May. Reports of last-minute discounts, free renovation, free cars and “cost sharing” for down payments abound, suggesting even bigger concessions to come.
Yet there are few signs of relief in sight. According to the Shenzhen Bureau of Land and Housing Management, some 27m sq metres in housing are under construction in the city. This comes on top of the 5m sq metres in leftover stock from 2007. In sharp contrast, sales of new properties totalled only 1.2m sq metres between January and May. At the current rate (2.88m sq metre per year), it would take developers in Shenzhen more than a decade to sell all this stock of properties. This calculation, moreover, does not take into account the large supply of second-hand units held by investors, who are increasingly eager to dispose of their holdings.
Housing prices are also vulnerable in Beijing, Shanghai, Hangzhou, Ningbo and Haikou on the coast, and Wuhan, Nanning, Xi’an, Lanzhou and Urumqi in the interior. All these cities experienced spectacular growth in 2007. Curiously, though, official figures released by the National Development and Reform Commission (NDRC) do not bear that out. They show flat prices in all of them, with small declines in Lanzhou, Chengdu and Fuzhou.
How reliable are the NDRC data? Not very, it seems. They do not tally with local press reports, and the NDRC’s methodology is vague. Consider its figures on Shenzhen. The NDRC reported that in March the city’s average new residential property price fell 4.9% compared with one month earlier. But the Shenzhen Bureau of Land and Housing Management—presumably with its ear closer to the ground—reported a month-on-month drop of 16.5%. For April the NDRC again reported a decline of 2.2%, while Shenzhen’s own figure was a 12% fall.
Information on the other markets from local sources is not as readily available as that on Shenzhen. But if the discrepancies on the Shenzhen market are any indication, the NDRC’s sanguine numbers probably conceal sizeable tumbles in the other cities. In formerly red-hot markets like Shanghai and Beijing, sales are lagging. In Shanghai, sales volume in terms of square metres was 50% lower in May than a year ago, according to the Oriental Morning Post, a local newspaper. Meanwhile, the average sale price of new residential housing in Shanghai fell 10% month on month in May. If sales continue to be sluggish and new units continue to come on the market, the Shenzhen experience suggests that a steeper fall in prices awaits Shanghai.
Slowing sales are putting developers everywhere in a quandary. Many have aggressively bid for land to develop through the first quarter of this year. However, they now find that banks are reluctant to provide easy financing for construction. At the same time, sluggish sales mean much slower liquidity generation on their own. Unsurprisingly, developers are increasingly resorting to desperate tactics. For example, Zhonghai Real Estate, which had a turnover of Rmb16bn in 2007, rolled out a limited supply of units selling at Rmb5,000 per sq metre in Shenzhen (by comparison, a neighbouring development is selling for Rmb8,000 per sq metre). Likewise, developers in mid-size cities like Wuhan and Changchun are rolling out generous discounts to attract buyers. If the trend spreads, it may trigger a destructive price war that sends everyone’s fortunes in a steep downward spiral.
In order to obtain cash, some developers are turning to overseas investors. Foreign hedge funds, for one, are eager to lend to Chinese property companies. Not only can they charge 25% or more in annual interest rates, foreign lenders can also expect to benefit from the continued appreciation of the renminbi in the coming months. Especially cash-strapped developers are forced to borrow from the domestic curb market at annual interest rates as high as 40%. But the maturity periods of such loans are usually measured in days, so the pressure on the borrower to repay blunts their usefulness. Larger developers have tried to raise money through share offerings. For example, Jianye Property of Henan province listed on the Hong Kong stock exchange (under the name Central China Real Estate) in early June and raised HK$1.37bn or US$175m, but its share price has already dropped below the debut level. If all else fails, developers have no choice but to sell their holdings to a stronger rival or cash-rich investors, at a steep discount of course.
In an environment of tightening credit, some banks are colluding with developers to keep the cash tap turned on. Although banks are supposed to demand a 40% down payment from families seeking second mortgages, some turn a blind eye if the loan applicant does not hold another property even if other family members do. Banks also usually do not verify loan applicants’ claim of having a small flat; Chinese regulation allows a 30% down payment for anyone whose current housing falls below the average per-person living space in the city of their residence.
Inevitable consolidation
Despite these tactics, demand remains weak, and no improvement is on the horizon. Beyond the government’s tightening monetary policy, the main problem is that the enormous run-up in prices in 2007 drove developers to build a glut of housing in the market. A major consolidation in the property sector seems inevitable. Indeed, Guo Shiping, an economic advisor for the Shenzhen city government, told the press that he expects 35% of the country’s developers to go bankrupt in the next two years.
If so, the impact will be felt far beyond the property industry alone. China’s financial industry holds over Rmb5trn (US$728bn) in property-related loans. A general decline in property prices also carries worrisome social and political implications. In the latest boom, millions of Chinese families have signed away decades of future incomes to buy homes. As the value of their biggest investments shrinks, their level of discontent will only swell.
UBS shares up on talk of HSBC takeover bid
Tue Jun 24, 2008 9:48am BST
ZURICH (Reuters) - Shares in Swiss bank UBS rose nearly 4 percent in early trade on Tuesday and traders referred to market rumours HSBC could make a bid for the world's largest wealth manager.
UBS shares were 1.7 percent higher at 22.44 Swiss franc at 0735 GMT, having risen to 23 francs earlier, outpacing a 0.5 percent rise in the European banking sector index
Market talk that HSBC could bid $80 billion (40.6 billion pounds) for UBS was behind the rise, traders said.
Both banks declined to comment on the rumours.
"Scurrilous rumours of an $80 billion approach from HSBC. I doubt the Swiss would settle for that though," one analyst, who asked not to be named, said.
UBS, so far Europe's biggest casualty of the global credit crisis triggered by risky U.S. home loans, has reported $37 billion in writedowns of investments and posted a loss of some $11.5 billion in the first quarter.
Flashback few months ago; GIC's 9% stake in UBS...
Singapore Investment Arm To Sink Billions Into UBS
Shu-Ching Jean Chen, 12.10.07, 5:32 AM ET
HONG KONG - Over the past few years, Singapore has developed a yen for investing in overseas banks to tap into their long-term growth prospects. On Monday, the city state made its largest bet yet in the sector in UBS.
The Swiss bank is raising a total of 13 billion Swiss francs ($11.48 billion) in fresh capital from two investors. The Government of Singapore Investment Corp., which invests the city-state’s foreign-exchange reserves, will contribute 11 billion Swiss francs ($9.75 billion); the other investor was not identified, but was said by Reuters to be the government of Oman, which has been attempting to diversify its economy away from reliance on oil production.
The two investors would receive convertible notes that pay an annual return of 9% before their conversion into ordinary shares two years after the date of issue. The proceeds would help bolster UBS’s capital adequacy at the most critical level, its Tier 1 capital.
The fund raising by UBS underscores the increasingly powerful role sovereign wealth funds such as GIC, as the state-owned Singaporean investment agency is known, are assuming in the global financial markets and the willingness of these funds to broaden their traditional preference for low-risk assets such as sovereign bonds.
Investment by sovereign wealth funds has also emerged as a counterbalance to global private equity funds, particularly welcomed by companies whose owners insist on retaining control. GIC, for its part, told reporters in Singapore Tuesday afternoon that it is not seeking management control at UBS.
GIC’s deal with UBS is larger than the $7.5 billion investment the Abu Dhabi Investment Authority agreed to make in Citigroup on Nov. 26. Depending on the eventual conversion price, GIC would get about a 9% stake in UBS.
Last year, another Singaporean state investment agency, Temasek Holdings, agreed to spend about 2.2 billion pounds to buy an 11.55% stake in Standard Chartered Bank held by the Singapore-based Khoo family, becoming its largest shareholder.
As one of the world’s oldest sovereign wealth funds, GIC has been making the transition to a more aggressive investment posture far earlier than others. Its strategy is a mix of equity fund management, real estate and private equity, with its portfolio divided along these lines in three subsidiaries: GIC Asset Management, GIC Real Estate and GIC Special Investments. An investment of 11 billion francs in UBS, though, is big even by the standards of sovereign wealth funds. GIC manages well in excess of $100 billion worth of assets in more than 40 countries.
Throughout its 26-year history, GIC has been headed by Singapore’s founder Lee Kuan Yew, who now holds the official title of “minister mentor,” as chairman of the board. It recently appointed as group managing director Lim Siong Guan, a career bureaucrat who doubles as chairman of the country’s Economic Development Board. Lim succeeded Lee Ek Tieng in September, after Lee retired from managing the company’s investments for 18 years.
When it celebrated its 25th anniversary last year, it disclosed that the annual rate of return on the foreign reserves it managed averaged 9.5% in U.S. dollar terms and 8.2% in Singapore dollar terms, compared with an average real rate of return of 5.3% per year.
Its recent investments included a 1.1 billion Australian dollar (U.S.$965 million) investment made jointly in July with Australia’s Myer family, of the Myer retail chain, to redevelop the premier shopping center in Melbourne and a joint venture investment announced in May with the aim of spending up to 150 billion yen ($1.34 billion) on urban retail properties in Japan with Sumitomo Corp.
GIC's deputy chairman and executive director, Tony Tan Keng Yam, told reporters in Singapore that "we made this significant investment in UBS because we have confidence in the long-term growth potential of the bank's businesses, particularly its global wealth management business.” He added, "GIC's preferred practice in respect of our public equity investments is to take relatively small stakes in companies for portfolio diversification. However, we made this significant investment in UBS because we have confidence in the long-term growth potential of the bank's businesses, particularly its global wealth management business."
Tan defended sovereign wealth funds, detailing remarks made in his press conference. He said sovereigh wealth funds "could be seen as contributing to financial stability because of their focus on well-diversified portfolios, long-term returns, and virtually no leverage. On the other hand, for example, global hedge funds, operating with substantial leverage, control larger assets than SWFs and tend to trade actively." He said Singapore will strive to promote sovereign wealth funds by participating "actively in efforts to formulate a set of principles and best practices for sovereign wealth funds. GIC believes that it can contribute in a positive way to the framework for greater disclosure."
UBS’s prestige in the wealth management business should help Singapore entrench its success in becoming a top player in serving the financial needs of the wealthy clients in the region.
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