The property sector may be having a greater impact on equities than we realise. For instance, commercial real estate (CRE) lending comprises between 25% and 30% of the loan portfolio of local banks. Similarly, in China, property and CRE is a large part of Chinese banks’ loan portfolio.
Much has been written about the stress in US CRE, in particular, the office sector. Asia-Pacific CRE is not in the same state as the US, the pundits say. However, there is a slowdown. According to the latest Asia Pacific Capital Trends webinar by MSCI Real Assets, trading of commercial property slumped in the 1Q2023 to the lowest total in over a decade, extending the downturn seen in the 2H2022 due to rising interest rates and an unsettled picture on pricing.
Performance of sub-sectors
The volume of income-producing properties that changed hands totalled US$27.2 billion ($36.06 billion) in 1Q2023, just half the level of the same period a year ago, says the report. Of the major markets, only Singapore and Hong Kong had megadeals. Retail properties posted the shallowest decline across the various sectors, supported by the Mercatus transaction. The sale of Jurong Point and Swing By @ Thomson Plaza was completed in 1Q2023; the sale of 50% of NEX to Frasers Centrepoint Trust and Frasers Property was also completed in 1Q2023. Even with this transaction, retail asset transactions fell more than 25% to US$7.3 billion compared to a year ago. Retail assets came into this downturn at relatively more attractive pricing levels while sellers have been more willing to adjust prices compared with other sectors, MSCI says.
In many markets, yields of industrial property had compressed by more than 100 basis points since the start of the pandemic and the reversal from those lows has been modest. Deal volume sank by 63% year on year to US$4.6 billion.
Offices remained the largest asset class for investment, despite a halving of activity to US$10.6 billion. The largest deal in the quarter was the sale of the Goldin Financial Global Centre for US$830 million in Hong Kong. “The transaction was not necessarily a positive sign: the price achieved was substantially lower than the price offered by a buyer over two years ago before the asset fell into receivership,” MSCI says.
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Deal activity in China was stronger than in Southeast Asia during the first quarter, with US$7.7 billion in sales. However, the pace of distressed asset sales has picked up pace and Shanghai deal activity dropped close to 70% relative to a year earlier.
Since the property sector is a large part of China’s economy, its sombre performance is reflected in the Lion-OCBC Securities China Leaders ETF as it includes banks and insurance companies. The ETF last traded at $1.608, a support breakdown level. A breakdown would provide for a downside objective of $1.48.
Can Seatrium catch up?
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On the flip side, offshore oil and gas activities continue to improve and gain momentum. Many oil and gas companies have achieved sustained good results and are confident in pushing ahead with selected projects with clear deliverables, says an outlook statement by Dyna-Mac Holdings. Its share price is up 71% this year. Although short-term indicators are overbought, the trend remains upward for Dyna-Mac.
According to Dyna-Mac’s outlook statement, it plans to ramp up production capacities to meet growing demand. “Our team will continue to meet customers’ requirements by completing projects on schedule, within budget, and meet the high standards of quality, safety and reliability. We will also be looking to expand our yard operations,” the company says. Dyna-Mac has a net order book of $338.1 million as at end-March.
Seatrium’s share price is probably weighed down by its billions of shares outstanding. Perhaps, its next task is to consolidate those shares in a ratio of at least 10 to 1.
