On a broad top-down view, an OCBC Credit Research report dated Dec 6, in its outlook for 2025, points out that spreads on SGD credits are trading “tight in the secondary market” relative to historical levels. “Interest rates are expected to remain flat or decline in 2025,” the report states.
The report says the proposed changes for S-REITs by the Monetary Authority of Singapore to rationalise leverage requirements with a minimum interest coverage ratio of 1.5x and a single aggregate leverage limit of 50% on all REITs is a friendly move as S-REIT managers will have higher flexibility in managing their capital and a higher debt headroom for executing growth plans.
”We expect the market’s comfort level for aggregate leverage to stabilise at 43%-44% over time and an ICR of around 1.8x to be the market’s new “line in the sand”. Investors are likely to favour S-REIT managers that practise financial discipline and uphold the market’s expectation of S-REITs as lower risk vehicles that generate stable income to pay its capital providers, the OCBC Credit Research report says.
Elsewhere, developers’ profitability and interest coverage should improve with lower cost and lower interest rates, though the trajectory of credit metrics is dependent on their willingness to leverage their balance sheets, reads the OCBC report.
Among the developers, Bloomberg has reported that Hongkong Land may or may not divest MCL Land at a premium to its book value of $1.1 billion.
According to OCBC Credit Research, MCL Land has an extensive portfolio of prime residential properties, mainly in Singapore and partly in Malaysia.
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Notable developments include Copen Grand, Piccadilly Grand, Leedon Green, Parc Esta and Margaret Ville in Singapore, as well as Sfera, Quinn, Seri Riana and Riana Green East in Wangsa Maju, Kuala Lumpur, Malaysia.
Following a strategic review, Hongkong Land announced on Oct 29 it planned to exit property development, focusing instead on recurring income from investment properties, and the possibility recurring income from a more active asset management business.
The large exposure of development properties in China has been dragging down the financial performance and capital of Hongkong Land, OCBC Credit Research says. For instance, its net asset value ha been inching lower over the past five years, from US$16.30 in 2018 to US$14.49 as at Dec 31, 2023.
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As of June 30, Hongkong Land’s Investment Properties and Development Properties assets were US$31.7 billion and US$9.6 billion respectively. Hongkong Land’s Development Properties assets were located in mainland China (82%), Southeast Asia (16%) that is primarily in Singapore, and Hong Kong (2%) as at Dec 31, 2023.
Technically, the Straits Times Index (STI) rose by 45 points week-on-week during the week of Dec 2-6, ending at 3,796.
On Dec 5, the STI made a new six-year high of 3,822. The previous occasion the STI was this high was in 2018, when it tested 3,876.
The negative divergences that have appeared between the STI and its short-term Relative Strength Index (RSI) is not a worrying sign as RSI has not fallen below a support.
Quarterly momentum has also formed a negative divergence with the index but it too, has not moved below an uptrend. If these indicators fall below important supports, that would be a sign of weakness.
An earlier breakout of 3,640 on Nov 7 indicated a measuring object of 3,980, and this remains valid. Support has been raised to 3,660.
