Unless you have been living under a rock for the past 18 months, you should know that interest rates have been soaring.
The US Federal Reserve embarked on its sharpest-ever rate hike cycle to combat high inflation in the US.
Property is one of the sectors that will be the most impacted by rising rates as the purchase of real estate involves taking up mortgage loans.
As interest rates soar, buyers will need to cough up more money to service their loans, thus discouraging them from purchasing an investment property.
Back in August, new private home sales plunged 72% month-on-month to just 394 units and were down 10% year-on-year, according to data from the Urban Redevelopment Authority (URA).
The numbers for September were equally dismal at just 217 private homes, down another 45% month-on-month.
It was also a sharp 78% year-on-year plunge from the 987 units sold in September 2022.
As for home prices, they grew at 3.6% year on year for the first nine months of 2023, slower than the 8.2% increase in the same period last year.
We profile four stocks that could be impacted by the combination of high interest rates and falling home sales.
City Developments Limited (SGX: C09)
City Developments Limited, or CDL, is a leading global property company with a presence in 28 countries and regions.
The blue-chip group has exposure to the Singapore residential property market as it has a current launch pipeline of more than 1,100 units as of 6 August 2023.
Some of these launches include an executive condominium (EC) at Bukit Batok West Avenue 5 and a 246-unit condominium called Newport Residences.
These launches will take place in 2024 or later and could be impacted by weak sales volume and continued high-interest rates.
Investors, however, will be pleased to know that CDL is well-diversified.
It owns private-rented sector (PRS) and purpose-built student accommodation (PBSA) units in the UK as well as PRS units in both Japan and Australia.
Just last month, the property giant spent nearly S$322 million to purchase a portfolio of 25 PRS assets in Tokyo, Japan.
Frasers Property Limited (SGX: TQ5)
Frasers Property Limited, or FPL, is a real estate developer and investor with assets of approximately S$40.1 billion as of 31 March 2023.
For its latest business update for the quarter ending 30 June 2023, FPL saw a total of 105 Singapore residential units sold in the first nine months of the fiscal year.
It also had around S$900 million of unrecognised revenue with 625 contracts on hand.
The group does not expect the recent increase in Additional Buyer’s Stamp Duty to have a material impact on current projects.
FPL is on track to complete the construction of Parc Greenwich EC in 2024 and Sky Eden @ Bedok in 2026.
However, investors should note that FPL had a net debt of S$14.3 billion as of 30 June 2023 with a net interest cover of just three times.
The group also released a profit warning stating that its net profit for fiscal 2023 ending 30 September 2023 will be significantly lower because of fair value, and non-cash losses on a portfolio of its portfolio of investment properties.
PropNex Ltd (SGX: OYY) and APAC Realty Ltd (SGX: CLN)
Property brokerages thrive on sales volumes as they collect commissions from property transactions.
Hence, a sharp fall in sales volume may negatively impact both PropNex and APAC Realty.
For the first half of 2023 (1H 2023), PropNex saw revenue fall 23% year on year to S$364.3 million with net profit declining by 18.4% year on year to S$22.1 million.
APAC Realty reported a downbeat performance too, with total revenue falling by 24.2% year on year to S$259.6 million.
Net profit plunged 70% year on year to S$5 million.
Both real estate brokerages also drastically reduced their dividends.
PropNex paid out an interim dividend of S$0.025, down from the S$0.055 last year.
For APAC Realty, the group reduced its interim dividend from S$0.035 to S$0.01.
However, both brokerages are not sitting still.
PropNex announced a new leadership master plan to strengthen nimbleness and ensure relevance.
It also plans to enhance the scale and efficiency of its sales team.
Meanwhile, APAC Realty is expanding into Australia.
The group granted Queensland 888 exclusive rights to operate the ERA member broker offices in Queensland, Australia.
This agreement is for an initial term of 15 years and is APAC Realty’s second significant franchise agreement this year, with the first being an agreement to expand its franchise in Laos.
Hence, investors should take comfort that both companies are taking steps to mitigate the impact of this April’s property cooling measures and diversify their sources of revenue.
By the time your child grows up, inflation will have gobbled up their savings. If you not only want to protect their money but also grow it, there are 3 SGX stocks you can consider buying. One has already proven to give a 55.8% dividend pay rise. Get all the details in our latest special FREE report. Just click here.
Disclosure: Royston Yang does not own shares in any of the companies mentioned.