MB was there first but they’re flooding in now. Yesterday we saw Macquarie warn on the residential bubble going bust owing to conversion risks and today it is CLSA:
Chinese FX crackdown could trigger apartment collapse
Andrew Johnson thinks the apartment cycle is on the verge of a sharp decline due to the confluence of a number of catalysts, including the Chinese crackdown on illegal FX transfers and tightening of UnionPay cards. Specifically, in the past few days there new constraints on the use of UnionPay cards to pay for insurance policies (a way of transferring capital). This has now been limited to US$5,000 per transaction.
If the Chinese crackdown continues to tighten as recent events indicate, this could initiate a very messy unwind of the cycle. With the apartment development industry now more fragile than it’s ever been, significant risks are emerging for companies exposed to that sector with the worst case being a downward spiral of falling prices, slowing sales, rising borrowing costs and declining LVRs, constraints on foreign capital (from China and Australia) and settlement defaults.
Downgrade to apartment forecasts
There are a number of key signs that indicate the peak has passed. While these have been emerging over the past few months, the Chinese capital crackdown, in our view, will exacerbate the collapse of the cycle
While apartments did reach peak levels, they saw levels of 131,000 or 25% above our forecast. The following figures show our current forecasts in comparison with what we predicted 18 months ago, and our current forecasts versus what we were previously predicting.
AJ downgrades LLC to Sell given it is most exposed with 60% of earnings over the next few years expected from apartment development. LLC has a whopping $5.15bn (June30) of apartment pre-sales which will settle all the way up until June 2019.
Sell from Opfm …PT$11.00 from $14.00
Similarly, the cut to our apartment forecasts has seen lower earnings forecasts for building materials companies FBU, CSR, ABC and BLD.
Remember to put it together with the mining capex cliff, car manufacturing cliff, global volatility and election uncertainty when considering prospects for the second half “rebalancing”.
Or, if you prefer to be cheered up as the risks mount, don’t miss the Domainfax take:
Thursday was a big day for settlements for many of CBRE’s Mark Wizel’s Chinese property clients.
Mr Wizel received a payment of $14.8 million for one of the development sites he sold at 280 Normanby Road in South Melbourne.
“February 4 is considered a lucky day to deposit money for the Chinese, though not all Chinese adhere to it. Different Chinese people have their own superstitions,” he said.
Thursday, February 4, is the first day of the Chinese spring festival known as “Li Chun” and is considered by some Chinese in the world as a lucky day to deposit money. A deposit on Thursday is said to have the effect of amplifying wealth for the rest of the Chinese new year, which officially starts on February 8.
Boom, baby, BOOM!
