Developers lose, REITs win as Brexit rattles markets

Growth risks will outweigh FX gains.

Local property developers with substantial portfolio exposure in the United Kingdom are expected to take earnings cuts after Britain's decision to leave the European Union.

Analysts say that while overall revenue impact should be modest, developers such as City Developments, Ho Bee and Oxley should still see near-term weakness due to their exposure to the UK.

For instance, RHB Research reckons that the UK market accounted for about 11% of City Developments' assets and 12% of its total revenue. In the same vein, CDL Hospitality Trusts gets 3.9% of its net property income from the UK through Hilton Cambridge City Centre.

Despite heightened risks, RHB noted that the overall impact is well-cushioned by its effective hedging policies and strong balance sheet.

"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," RHB researh said.

Meanwhile, Ho Bee derives 30.5% of its revenue and 34.6% of its non-current assets from the UK. As for Oxley, its $850 million Royal Wharf mixed development project in London is expected to receive its temporary occupation permit in 3Q16 to 3Q17.

While Brexit will likely cause near-term weakness for developers, Maybank Kim Eng reckons that REITs will benefit from the current environment as policymakers are likely to keep interest rates lower for longer.

"As a global asset class, REITs are very cheap relative to long bond yields, although expensive relative to stocks and their own historical yield. Thus we expect REITs to continue to benefit as far as asset allocation decisions go," Maybank Kim Eng noted.

“Lower for longer interest rates will therefore continue to drive allocation towards REITs. SREITs are also relatively cheap compared to other developed REIT markets,” the report added.

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