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UBS Investment Research
Asian real estate—black sky scenario
S tress testing 2012E EPS and NAV
Stress testing our 2012 estimates and running black sky scenarios
UBS analysts globally are stress testing their 2012 estimates based on black sky
scenarios. Under our black sky scenario, if rents/values are above the previous
peak we generally assume declines similar to those in 2008/09. If rents/values are
not yet back to previous peaks, we assume rents/values decline to 2008/09 trough
levels. For Hong Kong and China we also provide detailed sensitivity analysis so
investors can apply their own assumptions.
12%/14% downside risk to EPS/NAV estimates from global recession
In Asia, physical property values fell 25% peak to trough during the global
financial crisis and then recovered 45%. Rents fell 27% peak to trough and
recovered 24%. We estimate our black sky scenario could result in a 12% fall in
2012 EPS and a 14% fall in NAV. Based on current share prices, the universe is
trading at 17X 2012E black sky PE and a 26% discount to black sky NAV. If we
then apply December 2008 pricing (financial dislocation, not just a global
recession) to our black sky NAV we see a 20% fall in current share prices. We
believe a grey sky scenario would show 6-7% downside risk to EPS and NAV.
Some companies have already priced in a global recession
Based on our analysis, the following companies appear to be trading more cheaply
than in 2008/09, even when we take account of lower black sky NAV and apply
December 2008 pricing multiples: Hang Lung Properties, Cheung Kong, DLF and
China Overseas Land (COLI).
Companies that are most expensive and at risk if a global recession hits
The following companies appear most expensive on black sky pricing and at risk if
a global recession and financial dislocation hits: Suntec, CDL Hospitality,
CapitaCommercial and KWG.
Stress testing our 2012 estimates
UBS analysts globally are stress testing their estimates for 2012 based on grey
and black sky scenarios. We have considered potential NAV and EPS impacts
for the Asian property companies under our coverage with market caps
generally above US$2bn.
We consider how far rents and values fell during the 2008/09 global financial
crisis. If rents and values are back above pre-crisis levels, we generally assume
the correction under the black sky scenario is in line with the 2008/09 crisis. If
the recovery in rents/values has been more modest and they have not returned to
previous peak levels, then we assume rents and values more in line with 2008/09
trough levels, effectively re-tracing the recovery. We detail our black sky
assumptions below.
Table 1: Key assumptions and methodology—black sky scenario
Black sky scenario Versus 2008/09 crisis
China Residential prices down 3%, volumes down 15% Similar declines as in 2008
Hong Kong Retail rents & values -10%; office rents & values -30%; residential prices/rent -20% Similar declines as in 2008
Singapore Retail values down 2%; office down 35%, residential down 35% Return to previous trough prices and values
India Revenues down 5%, 3% higher construction costs, 100bp higher finance costs, 2% higher WACC
Philippines Rents fall 10% and residential prices fall 3% Similar declines as in 2008
Source: UBS
To determine whether the current share price is discounting the ‘financial crisis
risk’ we apply December 2008 pricing multiples (discount/premium to NAV and
PE) to our black sky NAV and 2012 EPS estimates.
For the major markets of Hong Kong and China, we also provide sensitivity
analysis, so clients can apply their own assumptions for rents and values/prices
in 2012, and see the resulting impact to EPS and NAV.
Conclusion
Based on the assumptions made above, we estimate potential 12% downside risk
to our 2012 EPS estimates and 14% downside to our NAV estimates if we were
to move into another severe financial/economic crisis.
At current share prices, the universe is offering a 2012 black sky PE of 17X and
is trading at a 26% discount to our black sky NAV estimates.
If we take the PE levels in 2008 and apply them to our black sky earnings, we
estimate there is potentially 39% downside risk to share prices. There is
potentially 21% downside risk to share prices if we apply 2008 NAV pricing to
our black sky NAV.
On an NAV basis, it would appear the China Property and India Property
universes analysed for this note are already pricing in a global recession.
Interestingly, Singapore appears to have the most downside risk to share prices
if we moved into another severe global recession and financial market
dislocation
We highlight that by reducing NAV and EPS to reflect another severe real estate
down-cycle and then applying December 2008 pricing to these lower estimates,
we are in effect looking at the potential downside to a severe financial/economic
crisis. For a mild recession, the outcome is unlikely to be as severe.
For a “grey sky” scenario, there is potentially 6% downside risk to earnings and
only 7% downside risk to NAV.
The table above provides country by country detail and the Asian averages. It
shows the percentage change to our EPS and NAV estimates in a black sky
scenario. We then look at the downside risk to share prices if we apply
December 2008 pricing multiples to the black sky PE and black sky NAV. For
reference, we then provide the December 2008 PE multiple, current multiple,
and the multiple if we use current share prices on black sky earnings. We then
do the same for discount/premium to NAV—providing the NAV discount in
December 2008, current discount, and the discount using current share prices
but black sky NAV.
What happened during the 2008/09 global crisis?
The table below illustrates the peak to trough falls in real estate rents and values
by sector during the 2008/09 financial crisis. We then show the extent of the
recovery to June 2011.
On average (simple average), values fell 25% peak to trough during the 2008/09
crisis, although the degree varied by country. On average, values have recovered
45%, although this is heavily skewed by Hong Kong. Hong Kong, China
residential, Singapore residential and Philippines residential are all above
previous peak values.
On average (simple average) rents fell 27% peak to trough in the 2008/09
financial crisis. They have since recovered 24% from their trough. Hong Kong
retail, Hong Kong residential and Singapore industrial rents are back above
previous peak levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asian real estate—black sky scenario
S tress testing 2012E EPS and NAV
Stress testing our 2012 estimates and running black sky scenarios
UBS analysts globally are stress testing their 2012 estimates based on black sky
scenarios. Under our black sky scenario, if rents/values are above the previous
peak we generally assume declines similar to those in 2008/09. If rents/values are
not yet back to previous peaks, we assume rents/values decline to 2008/09 trough
levels. For Hong Kong and China we also provide detailed sensitivity analysis so
investors can apply their own assumptions.
12%/14% downside risk to EPS/NAV estimates from global recession
In Asia, physical property values fell 25% peak to trough during the global
financial crisis and then recovered 45%. Rents fell 27% peak to trough and
recovered 24%. We estimate our black sky scenario could result in a 12% fall in
2012 EPS and a 14% fall in NAV. Based on current share prices, the universe is
trading at 17X 2012E black sky PE and a 26% discount to black sky NAV. If we
then apply December 2008 pricing (financial dislocation, not just a global
recession) to our black sky NAV we see a 20% fall in current share prices. We
believe a grey sky scenario would show 6-7% downside risk to EPS and NAV.
Some companies have already priced in a global recession
Based on our analysis, the following companies appear to be trading more cheaply
than in 2008/09, even when we take account of lower black sky NAV and apply
December 2008 pricing multiples: Hang Lung Properties, Cheung Kong, DLF and
China Overseas Land (COLI).
Companies that are most expensive and at risk if a global recession hits
The following companies appear most expensive on black sky pricing and at risk if
a global recession and financial dislocation hits: Suntec, CDL Hospitality,
CapitaCommercial and KWG.
Stress testing our 2012 estimates
UBS analysts globally are stress testing their estimates for 2012 based on grey
and black sky scenarios. We have considered potential NAV and EPS impacts
for the Asian property companies under our coverage with market caps
generally above US$2bn.
We consider how far rents and values fell during the 2008/09 global financial
crisis. If rents and values are back above pre-crisis levels, we generally assume
the correction under the black sky scenario is in line with the 2008/09 crisis. If
the recovery in rents/values has been more modest and they have not returned to
previous peak levels, then we assume rents and values more in line with 2008/09
trough levels, effectively re-tracing the recovery. We detail our black sky
assumptions below.
Table 1: Key assumptions and methodology—black sky scenario
Black sky scenario Versus 2008/09 crisis
China Residential prices down 3%, volumes down 15% Similar declines as in 2008
Hong Kong Retail rents & values -10%; office rents & values -30%; residential prices/rent -20% Similar declines as in 2008
Singapore Retail values down 2%; office down 35%, residential down 35% Return to previous trough prices and values
India Revenues down 5%, 3% higher construction costs, 100bp higher finance costs, 2% higher WACC
Philippines Rents fall 10% and residential prices fall 3% Similar declines as in 2008
Source: UBS
To determine whether the current share price is discounting the ‘financial crisis
risk’ we apply December 2008 pricing multiples (discount/premium to NAV and
PE) to our black sky NAV and 2012 EPS estimates.
For the major markets of Hong Kong and China, we also provide sensitivity
analysis, so clients can apply their own assumptions for rents and values/prices
in 2012, and see the resulting impact to EPS and NAV.
Conclusion
Based on the assumptions made above, we estimate potential 12% downside risk
to our 2012 EPS estimates and 14% downside to our NAV estimates if we were
to move into another severe financial/economic crisis.
At current share prices, the universe is offering a 2012 black sky PE of 17X and
is trading at a 26% discount to our black sky NAV estimates.
If we take the PE levels in 2008 and apply them to our black sky earnings, we
estimate there is potentially 39% downside risk to share prices. There is
potentially 21% downside risk to share prices if we apply 2008 NAV pricing to
our black sky NAV.
On an NAV basis, it would appear the China Property and India Property
universes analysed for this note are already pricing in a global recession.
Interestingly, Singapore appears to have the most downside risk to share prices
if we moved into another severe global recession and financial market
dislocation
We highlight that by reducing NAV and EPS to reflect another severe real estate
down-cycle and then applying December 2008 pricing to these lower estimates,
we are in effect looking at the potential downside to a severe financial/economic
crisis. For a mild recession, the outcome is unlikely to be as severe.
For a “grey sky” scenario, there is potentially 6% downside risk to earnings and
only 7% downside risk to NAV.
The table above provides country by country detail and the Asian averages. It
shows the percentage change to our EPS and NAV estimates in a black sky
scenario. We then look at the downside risk to share prices if we apply
December 2008 pricing multiples to the black sky PE and black sky NAV. For
reference, we then provide the December 2008 PE multiple, current multiple,
and the multiple if we use current share prices on black sky earnings. We then
do the same for discount/premium to NAV—providing the NAV discount in
December 2008, current discount, and the discount using current share prices
but black sky NAV.
What happened during the 2008/09 global crisis?
The table below illustrates the peak to trough falls in real estate rents and values
by sector during the 2008/09 financial crisis. We then show the extent of the
recovery to June 2011.
On average (simple average), values fell 25% peak to trough during the 2008/09
crisis, although the degree varied by country. On average, values have recovered
45%, although this is heavily skewed by Hong Kong. Hong Kong, China
residential, Singapore residential and Philippines residential are all above
previous peak values.
On average (simple average) rents fell 27% peak to trough in the 2008/09
financial crisis. They have since recovered 24% from their trough. Hong Kong
retail, Hong Kong residential and Singapore industrial rents are back above
previous peak levels.
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