Renminbi devaluation to woo foreign buyers

By Feily Sofian

/ The Edge Property |

August 22, 2015 9:00 AM SGT

Move a plus for high-end homes, bane for commercial properties

China’s surprise move to devalue the renminbi sent stock markets and Asian currencies tumbling against the US dollar. Does this spell more trouble for Singapore’s ailing property market? In the aftermath of the devaluation, the prospects of the local real estate market would hinge on GDP performance and the resilience of the Singapore dollar against its major trading partners.

Among the variables affecting the property market, GDP growth as the closest relationship with property prices and rents (see chart). For instance, private non-landed home prices fell 31% in 1998 during the Asian financial crisis as GDP contracted 3.6%. In 2008, GDP growth stagnated to 0.3% as a financial crisis engulfed the US and the eurozone. As a result, home prices dipped 5%.

Source: Singapore Department of Statistics, URA, The Edge Property

What is the prognosis for the Singapore economy? China’s devaluation move came shortly after the Ministry of Trade and Industry slashed its GDP growth forecast from between 2% and 4% to between 2% and 2.5% amid a slowdown in global trade. There will be further pressure on export volume with the renminbi having depreciated some 1.1% against the Sing dollar (between Aug 10 and 17), and given that China is one of Singapore’s top export destinations. Fortunately, the impact on isolated basis is expected to be mild although there are more troubling signs coming out of other countries. The renminbi has appreciated strongly over the years and the recent depreciation has brought it back to July levels against the Sing dollar — for now, at least.

The next question is to what extent China will let its currency depreciate. Saktiandi Supaat, Maybank head of foreign exchange research, believes the central bank will intervene to ensure that the market is orderly and capital outflows are kept in check. Between Aug 10 and 17, the renminbi weakened about 3% to 6.40 against the USD. It is expected to depreciate to 6.50 by 3Q2015 before rebounding to 6.40 by year-end, Maybank says in its report.

More worrying signs coming out of Malaysia and Indonesia

“Malaysia and Indonesia could potentially see faster capital outflow compared with China,” says Supaat. Both the Malaysian ringgit and the Indonesian rupiah have been depreciating against the greenback this year on account of waning demand for commodities and declining oil prices. The slowdown of the Chinese economy was not the only factor at play. Sporadic economic recovery in the eurozone, coupled with Greece’s unresolved debt crisis, also weighed on exports.

Further downside to the ringgit and rupiah is on the cards. UOB economist Francis Tan cited “domestic issues”. “Countries with a weak current- account situation, small foreign reserves and debt dominated by foreign currencies and foreign holdings face bigger downside risks to their currencies and faster capital outflows,” says Tan. Malaysia and Indonesia fall in the high-risk zone, based on data mined by UOB. The upcoming hike in the fed funds rate would also make debt servicing more expensive. A pullback in both economies is not welcome news as they are major export destinations for Singapore.

On the flip side, there are reasons to believe the Sing dollar could emerge as one of the most resilient currencies in Asia. Among the 11 Asian countries surveyed by UOB, Singapore had the strongest current-account balance in 2014, at 17.6% of GDP. Indonesia and India ranked the lowest with a negative current-account balance of -3.2% and -2.1% of GDP respectively. Singapore also has minimal foreign currency-denominated government debt over total government debt, while Indonesia and the Philippines have the highest ratios of 37.8% and 39.8% respectively as at March this year.

Maybank forecasts the Sing dollar will weaken against the US dollar from 1.38 pre-renminbi devaluation to 1.43 in 3Q2015, before rebounding to 1.40 by year-end. Paul Ho, chief mortgage consultant at iCompareLoan.com, is sticking to his one-month Sibor, or Singapore Interbank Offered Rate, forecast of between 0.95% and 1.5% at year-end. Last week, IE Singapore trimmed its 2015 growth forecast for non-oil domestic exports to between 1% and 2%, down from 1% to 3% earlier, citing softer regional economic growth in the second half of the year.

Signs of capital inflows into high-end residential segment

The manufacturing-driven industrial and tourism-driven hospitality and retail sectors are likely to bear the biggest brunt of weaker Asian currencies against the Sing dollar. This would also lure local shoppers to other value destinations such as Bangkok, Seoul and Tokyo. In the office sector, oil and gas companies are facing headwinds as crude oil prices slump to a six-year low while bearish market sentiment weighs on hiring and expansion plans.

If the Sing dollar were to stay resilient relative to other Asian currencies, Singapore’s safe haven story should lure funds that flow out of China and the rest of Asia. The high-end residential segment has a strong case to be the biggest beneficiary given that prices have fallen to attractive levels and that Chinese, Indonesian and Malaysian buyers have traditionally been the biggest foreign purchasers in the segment.

There are signs of these happening. Permanent residents and foreigners lodged 183 caveats for non-landed homes in the Core Central Region in 2Q2015, compared with 149 caveats in the same period last year. Hong Kong and Malaysian nationals contributed to the bulk of the increase (see table). The number of caveats by Chinese nationals remained largely unchanged from last year and those by Indonesian purchasers were still trending down.