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Monday Market Memo | Getting serious about the student sector, the Canadian bubble & Saudi market stimulus
February 19, 2018Article by Paul Avery
STUDENT HALLS AWASH IN SOVERIGN WEALTH
Sovereign wealth funds nearly quadrupled the share of their investment into student accommodation in 2016 – a striking vote of mainstream confidence in the fledgling asset class. Student digs in Europe and the US represented 4% of worldwide SWF spending in the years between 2011 and 2015, before jumping to more than 15% of the total in 2016, according to new figures. The shift represents a bet on the emerging middle class of developing countries who increasingly send their children to study abroad.
CHINESE RENTAL SECTOR AWAKENS
Property prices in Chinese cities having roughly quadrupled this century, the government has repeatedly stepped in with (largely ineffectual) market-slowing measures. Its latest and most promising idea is to build up the comparatively undeveloped rental market. Because home ownership confers important rights in China, renting is largely confined to low-income households who generate low yields relative to skyrocketing prices, meaning investors often prefer to hold vacant stock than let it out. So the government plans to shore up rental supply – by offering deep discounts on land to rental sector developers, and demand – by offering school places and other vital incentives to renters as well as owners. Speculation is unlikely to dry up overnight, but a healthier rental market would be a cause for celebration in its own right.
CANADIAN ECONOMY INCREASINGLY AT RISK FROM HOUSING BUBBLE
As household debt breaches 100% of Canada’s GDP, the stakes of a possible housing crash have been raised. Because Canadian mortgages are typically renewed every five years or less, the central bank’s three interest rate rises since last July are making refinancing a less viable option and future payments ever more expensive. Meanwhile the proportion of new loans that are uninsured increased from two-thirds in 2014 to three-quarters in 2017 (and over 90% in Vancouver, where prices have doubled this decade). And it is not only over-leveraged borrowers who are left exposed: investment in property by pension funds has more than doubled since 2013. Confidence in a controlled end to the current cycle remains relatively high, but the alternative scenario is becoming more frightening.
STIMULUS FOR THE SAUDI MARKET
Saudi Arabia has begun to implement the spate of reforms it introduced last year to diversify the economy and modernise its housing market. A $19bn stimulus package for small businesses, investors, and housing construction is expected to lift economic growth above last year’s slight oil-price-induced contraction and bring home ownership above 52% by 2020. A tax on vacant plots introduced last year has caused land prices to drop by 18.5% on average, in turn spurring high levels of developer interest and the listing of eight new REITs on the Saudi Stock Exchange.
SINGAPORE STAMP DUTY HIKE
From tomorrow, Singapore will apply a new top marginal rate of 4% stamp duty on the most expensive homes (S$1m, or around £550,000). The move is expected to dampen the recent enthusiasm for sales of entire residential buildings, of which S$8.13bn were transacted last year – the highest since 2007. The relatively slight increase is unlikely to deter individual buyers and investors. 2017 saw Singapore’s first annual average price increase in four years, at 1.1%.