OIR BITES: Developers and S-REITs – Impact of CNY devaluation largely contained

Pic Credits : wsj.com
The PBOC’s decision to devalue the CNY has cast the spotlight on developers and REITs which have significant operations in China, given the possible negative impact on earnings, valuations and dividends.

A weaker CNY will likely have a forex translation impact in terms of asset valuations and earnings for property developers who have diversified their geographical exposure into China significantly. In particular, China is a key market for CapitaLand who has 45% of its total assets based there (as at end June 2015), with Singapore coming in second at 39%.

Also, Global Logistics Properties also focuses on China as a primary market and has 57% of its net asset value exposure in China as at end June 2015. Other large-cap developers such as City Developments and UOL have also diversified into China albeit much more cautiously and their Chinese exposure takes up less than 20% of total assets. While a weaker CNY will have a negative forex impact, the concurrent trend of falling interest rates in China will generally have the effect of compressing cap rates and supporting asset valuations, and a weaker CNY will aid also in boosting Chinese exports and its decelerating economy.

For S-REITs under OIR’s coverage, we believe CapitaLand Retail China Trust (CRCT) [HOLD; FV: S$1.64], Mapletree Greater China Commercial Trust (MGCCT) [BUY; FV: S$1.10] and Ascott Residence Trust (ART) [BUY; FV: S$1.44] have the largest exposure to China as a percentage of their portfolio. CRCT derives 100% of its income from China, while its distributions are denominated in SGD. We understand that CRCT does not hedge its estimated distributable income as it is difficult to time the remittance back to Singapore. However, it hedges its non-CNY denominated term loans via non-deliverable forwards to match its underlying assets which are denominated in CNY.

For MGCCT, management has hedged 63% of its forecasted FY16 distributable income for both HKD and CNY, but did not disclose the breakdown between the two. 18.3% of ART’s 2Q15 gross revenue was contributed by its China assets; we believe there is minimal CNY hedging as hedges are put in place largely on distribution income derived in EUR, GBP and JPY.

Other REITs under our coverage which have operations in China but exposure is relatively insignificant include Cache Logistics Trust, Starhill Global REIT, Mapletree Logistics Trust and Ascendas REIT.

We have a NEUTRAL rating on the S-REITs sector, with a bias towards the downside.

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Tuesday, 11 August 2015
- OCBC Treasury & Strategy Research Research

Source : OCBC Investment Research

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