Brexit hits developer earnings, benefits REITs

Analysts expect local property developers with significant exposure in the UK to take earning cuts, following Britain’s exit from the European Union, reported Singapore Business Review.
Given their significant level of exposure in the UK, developers like Oxley, Ho Bee and City Developments should see near-term weakness, although overall revenue impact may be modest.
RHB Research believes the UK market accounts for around 11 percent of City Developments’ assets and 12 percent of its total revenue. Similarly, 3.9 percent of CDL Hospitality Trusts’ net property income is generated by Hilton Cambridge City Centre in the UK.
RHB noted that despite the heightened risks, the overall impact on CDL is cushioned by the company’s strong balance sheet and effective hedging policies.
“While Brexit could pose near-term headwinds for its UK properties in terms of demand and prices, CDL’s healthy balance sheet (net gearing of 0.26x) provides good holding power for timing future project launches. Additionally, it could also tap into distress opportunities in the UK property market arising from the fallout of Brexit,” it said.
Meanwhile, Ho Bee receives 34.6 percent of its non-current assets and 30.5 percent of its revenue from the UK. Oxley, on the other hand, expects its S$850 million Royal Wharf project in London to obtain temporary occupation permit (TOP) between Q3 2016 and Q3 2017.
Although Brexit may cause near-term weakness for property developers, Maybank Kim Eng expects REITs to benefit from the current situation, as interest rates are likely to remain lower for longer.
“As a global asset class, REITs are very cheap relative to long-bond yields, although (they are) expensive relative to stocks and their own historical yield. Thus, we expect REITs to continue to benefit as far as asset allocation decisions go,” said Maybank Kim Eng in a report.
“Lower-for-longer interest rates will therefore continue to drive allocation towards REITs. SREITs are also relatively cheap compared to other developed REIT markets,” it added.
Cheryl Marie Tay, Senior Journalist at PropertyGuru, edited this story. To contact her about this or other stories, email cheryl@propertyguru.com.sg

More from PropertyGuru:
Property agent beats cancer, climbs Mount Kinabalu
Private rental market to soften further
Homeowners not liable for damage to neighbour’s property
Letter to the editor: Brexit a step into the unknown