SGP - Is Retail Property Price Peaking? 20240531

The combined favourable factors from capital flight due to the Ukraine/Middle East wars and HK's new national security legislation regime have massively pushed up investment demand for Singapore assets, thereby prompting headlines such as these of late:

>> Jack Ma's wife buys shophouses in ...Tanjong Pagar for $37m (article 1);

>> Bridgewater founder Ray Dalio joins billionaires snapping up Singapore ‘shophouses’ (Article 3)

>> Singapore’s shophouses — hotter than Fifth Avenue? (Article 4)

Whilst the first two headlines might be interpreted as 'smart money' making early moves, the last piece could be read as a sign of peaking market...

We continue to forecast a new macro environment that is different from the good old days of near zero interest rates and continued growth in global trade and productivity gains. Instead, we believe the new reality is one of decoupling, deglobalisation, and debt defaults, thanks to geopolitics and net zero / pandemic measures which not only will drive further inflation, but will undermine high economic growth.

One of the consequences of the combined higher for longer inflation and debt default scenarios is rates staying high, or return to 90s highs, if not even 80s high levels:

Above SGP interbank rates have already broken out of both the blue down trend as well as the lower horizontal resistance over the past two years. If the worse outcome does pan out as we feared, it might not be inconceivable to see rates hit 6.8% or thereabouts in the next 2-3 years.

If Rent/Price moves can't match rate rises?

Using current trajectories in rent and price, we have modeled the near term yield increases, but sadly the rise in yields are not enough to offset the much more dramatic interest rate hikes, resulting in one of the more dramatic widening in retail yield discount vs deposit rates:

As a thought experiment, we believe this is probably as bad as it gets, because we are not factoring in the other capital flight which drove the rates higher - that from bonds. Perhaps the initial crack in bond market (when yields go north of 6%) will be negative for properties, but soon afterwards, the flight from bonds to real assets (may unfold as early 2026) will completely reverse price performances to the upside once more.

Based on this scenario, we think not all investors need to sell their safe haven assets (and indeed SGP shophouses are definitely safe haven in the world we live in now), if they can tolerate the price drops that happen before the final phase of the upcoming yield expansion cycle...

In the meantime, the very anaemic returns on retail property in SGP will continue to be a pain to tolerate, especially for leveraged up owners:

Could SGP retail further outshine HK in next few years?

The above wide gap between yield and funding cost does indeed support our near term bearish outlook on SGP retail assets, but if you look at the technicals vs HK retail property, SGP retail has broken out of the green downtrend, and could be hitting the blue channel top very soon (24% outperformance):

Should that level be also breached, there could be even more upside to the top red resistance (another 135% upside?).

Such a scenario probably can only unfold if HK retail see another major leg down, and that could only be driven by geopolitics rather than vanilla macro economics...

==================Article 1==================

Jack Ma’s Wife Buys Shophouses in Singapore’s Tanjong Pagar at Up to $37M

Beatrice Laforga | 2024/02/23

Despite stamp duties and investigations, wealthy mainland investors are still banking on Singapore properties, with the wife of the country’s best known tech tycoon having purchased a row of shophouses in the Tanjong Pagar area last month for a reported S$45 million to S$50 million ($33.5 million to $37.2 million).

https://www.mingtiandi.com/real-estate/finance/jack-mas-wife-buys-shophouses-in-singapores-tanjong-pagar/

==================Article 2==================

Shophouse sales surge and at higher prices in Q1 as high-net-worth investors return: Knight Frank

Samuel Oh | Fri, May 10, 2024 · 10:38 AM

In 2023, shophouse sales came to 132 units worth S$1.2 billion. The number of units was 31 per cent lower than the 191 units transacted in 2022 worth S$1.6 billion. Shophouse sales have fallen from their peak in 2021, when a total of 254 units worth S$1.94 billion changed hands.

[...]

Knight Frank projects the sales volume of shophouses to be between S$1.1 billion and S$1.2 billion for the rest of 2024.

​https://www.businesstimes.com.sg/property/spotlight-1/shophouse-sales-surge-and-higher-prices-q1-high-net-worth-investors-return-knight-frank

==================Article 3==================

Bridgewater founder Ray Dalio joins billionaires snapping up Singapore ‘shophouses’

Investor’s family office bought two heritage properties for $19mn

Bridgewater Associates founder Ray Dalio’s family office has bought two multimillion-dollar “shophouses” in Singapore, as billionaires snap up the heritage properties in the city-state.

​https://www.ft.com/content/9741784e-f69a-45cf-adf3-cc5b863c873f​​

==================Article 4==================

Singapore’s shophouses — hotter than Fifth Avenue?

Mercedes Ruehl / MAY 24 2024

Amid changing political dynamics in South-East Asia, these colonial-era buildings have become some of the world’s most expensive properties, home to Michelin stars and chichi retailers — and a target for money launderers

https://www.ft.com/content/e1a53cb8-5bf0-408a-91a0-bcdd738c0f11

Is the big rush into Japanese property justified? 20240529

We have heard nothing other than 'we are buying Niseko ski flat' or 'our fund is adding Tokyo hotel' for the past few months, as if the rest of the world is all in the dog house...

Clients familiar with our arguments will know we have been negative for at least 2 years on the Japanese market, so this email seeks to give a more rounded exposition on why.

When crowds scramble one way, we go the other

The recent scramble for adding Japanese exposure (see Article 1) is in line with the concurrent rise in the Topix, but in property land there is even more momentum, especially amongst funds:

Granted, funds have been sitting on their hands in the past 2 years as interest rates globally spiked, and their IRR calculations were thrown into disarray. So the wishful hope that Fed rate cuts will be implemented (now proven wrong), plus a reversal of Japanese asset depreciation has sparked a sudden fad into pumping money into the land of the rising (may be now setting) sun...

We are very wary of the much more significant risk of Yen devaluation against whatever puny asset appreciation in the currency in the coming years however, and would prefer other jurisdictions where BOTH currency and asset prices will rise (regular readers will know where that is!).

FX should be central in investment decisions

The point of making price gains but adding translation losses is best illustrated with a view to history:

As shown above, during the haydays of Japanese industrial and cultural ascent, both asset prices in local currency (LC) and exchange rates were on the rise - see left green arrow. The combined effect for foreign investors is even stronger returns in USD terms (red line) than locals (blue line), shown by the purple enlarging triangle.

In the subsequent lost 2 decades, Yen basically went sideways (2nd green arrow), with price drops very comparable in LC and USD (purple parallelogram).

We are now probably into the next leg of Yen derating (see 3rd green arrow) thanks to shrinking population - see Article 3 - and the resurgent commodities complex when all input materials see price spirals. Unsurprisingly, since 2010, despite LC price gains, USD denominated values fell (purple trapezium).

We expect the next (final) down leg in Yen (4th green arrow) to unfold in the next 3 years or so, which can also destroy value for overseas investors (ie down red arrow despite up blue arrow).

To put it in numbers terms, below is a table showing the impact of Yen weakness (red shades) vs USD denominated Tokyo home prices:

Of course, the 2025-29 projections above are purely based on the arrows in chart above and may not play out the way we projected, but the risk that you get negative USD returns (2nd column from right) is very real indeed.

Macro picture for Japan: far from rosy

By the combined will to reintroduce inflation and to inflate away the mountains of govt debt (highest in OECD), the Japanese work force has been earning negative real income for the past two years:

In the meantime, the cost of living crisis left private consumption down for 4 quarters in a row, with little help to exports (net exports were increasingly negative in recent quarters) to contribute to GDP growth:

In the meantime, the geopolitical tensions between China and US is causing the rate environment to surge further, due to:

1) loss of demand for US debts by big traditional owners like China (fr 8.9% to 2.2% in 13 yrs) and HK, in fact Japan has also been falling in total proportion of US treasury holdings (fr 9.5% to 3.4% now):

2) Ukraine/Middle East conflicts likely to trigger more input price inflation, eg oil prices - and as a resource poor but manufacturing intensive economy, higher oil prices (blue line, down is higher prices) will tend to trigger economic contractions (red area). The green line is merely projecting prices returning to $150/barrel, which can easily be exceeded should international wars flare up again:

The result would be grim for Japanese economy. If wars spread to the APAC region, there is an added strong chance of capital flight from Japan given its recent militarisation movements might scare foreign investors away:

3) bond rout will impact Japan more than US - as US fiscal profligacy continues (yes, by adding $3.5tr debt in one year), long bond yields have nowhere to go but up (orange line), this will drag JGBs up with it (green line). Assuming totally benign geopolitical/sovereign debt calm conditions, the laughable 0.87% JGB yield will still nearly triple to 2.5%, and this 'benign' expansion of US-JP yield spread may trigger further capital outflows as money seeks higher returns in the US:

The result? Yen could drop another 25% to the 200 mark.

If this Yen drop becomes disorderly, it could result in JGBs trading at premium to TBs, leading to the much more nightmarish outcome of 10.5% JGBs vs say 8.5% TBs:

Such an outcome would mean Yen has to return to 270+ levels, much against the wishful sub-150 levels the 'anchoring biased' talking heads out there could imagine... or a 45%+ drop from current levels.

Real yields also too low to be attractive

Back to our usual real property yield table - Sydney/Singapore/Tokyo are some of the lowest returning markets on inflation adjusted basis (3rd column from right), compared to Phnom Penh/Athens which are our preferred investment destinations:

In a bond rout outcome, both European and Japanese markets will suddenly look much worse as US becomes the safe haven, thereby helping HK/NYC (2nd column from right).

Based on these various factors, we will only touch Japan if: a) long term fixed rate borrowing can be locked in; b) Yen leverage and/or hedge are put in place. But how many even the big institutions are taking these precautionary measures? We doubt many. On this note it is interesting to demonstrate how institutions are mere humans, however smart they otherwise appear: see Article 2.

==================Article 1==================

Interest in Japanese real estate grows despite rate rise prospects

Mar 8, 2024

Institutions and family offices are backing real estate for another strong year, despite the prospect of the country’s first interest rate rise since 2007.

​https://www.asianinvestor.net/article/interest-in-japanese-real-estate-grows-despite-rate-rise-prospects/494795​

==================Article 2==================

Hidden billions in Tokyo real estate lure activist hedge funds

Apr 16, 2024

The long-concealed market value of Tokyo’s largest skyscrapers is being unveiled by activist investors.

​https://www.japantimes.co.jp/business/2024/04/16/companies/headge-funds-urge-japan-real-estate-sales/​

==================Article 3==================

Japan’s Population Declines Again: Seniors 75 and Over Top 20 Million for First Time

Apr 24, 2024

An estimate published by Japan’s Ministry of Internal Affairs and Communications shows that the total population as of October 1, 2023, was 124,352,000. This was a drop of 595,000 (0.48%) from the previous year. It is the thirteenth consecutive year that the population decreased. The population of Japanese citizens was 121,193,000, for a record year-on-year decrease of 837,000, or 0.69%.

​https://www.nippon.com/en/japan-data/h01967/