Daily Thematic: China Housing: Are Prices Rising Faster Or Slower? and more

In this briefing:

1. China Housing: Are Prices Rising Faster Or Slower?
2. UK in Chaos: Brexit Deal Suffers a Crushing Defeat, but There Is No Consensus on the Way Forward
3. Mapletree Industrial Trust Deal Underscores Data Centres’ Impact on Global Industrial Real Estate
4. Indian Telcos: What Not to Expect in 2019
5. China Autos: A Few Thoughts on 2018 Industry Demand and Initial Expectations for 2019

1. China Housing: Are Prices Rising Faster Or Slower?

Today’s data from the National Bureau of Statistics (NBS) on new home prices for 70 major cities shows on average an accelerating year-on-year price growth and a slower month-on-month increase. This contrasts with a picture of a slowing price growth based on a different index from SouFun-CREIS.

2. UK in Chaos: Brexit Deal Suffers a Crushing Defeat, but There Is No Consensus on the Way Forward

Prime Minister Theresa May’s painstakingly-negotiated Withdrawal Agreement from the European Union (EU) was rejected by an overwhelming 432 votes (against) to 202 (for her Brexit agreement). The crushing 230-vote margin is the worst defeat for any government in the history of parliamentary democracy in the UK. In 1924, the ramshackle Ramsay Macdonald government (the first-ever Labour party government, which never had a parliamentary majority) lost three votes by 140-166 votes, but even those defeats are dwarfed by the sheer scale of PM May’s defeat here.  

The FX market responded positively to the defeat, believing that it increases the probability of No Brexit — i.e., a Second Referendum that would result in the British people changing their minds and voting not to leave the EU. However, the moment Theresa May shows support for No Brexit, she will lose the leadership of the Conservative Party, and any confidence vote that is subsequently held in the Commons (as the Brexiters will then turn fully against her). A Second Referendum is also likely to take 6-7 months to organise. 

Today’s No Confidence Motion (introduced by Jeremy Corbyn immediately after yesterday’s defeat of the Withdrawal Agreement) remains likely to be defeated in the Commons, as the DUP’s 10 MPs will stand with the whole Conservative Party delegation in support of the government. (If the No-Confidence motion is passed, either May resigns and the Conservatives quickly elect a new leader, or a new election will be called). A No-Deal Brexit remains a live possibility, as any alternative deal is unlikely to be stitched together in the 72 days remaining before the 29th March deadline for the UK to leave the EU. A No-Deal Brexit will be acceptable to the DUP and Conservative Brexiters, but (since it will restore a border between Northern Ireland and Eire) will destroy the Good Friday Agreement that has maintained peace in Northern Ireland since 1998. Corbyn’s proposal of the UK remaining in the customs union probably has majority support in the Commons, but he withdrew that amendment before yesterday’s vote, as he clearly prefers a general election. Delay and uncertainty are the only certainties for Britain this year. Unlike the early reaction, we believe markets will respond very negatively once it becomes clear just how murky and uncertain the future is for the UK. 

3. Mapletree Industrial Trust Deal Underscores Data Centres’ Impact on Global Industrial Real Estate

• While the amount of real estate needed by data centres is small in comparison with the volumes required for e-commerce, we are seeing that data centres are also impacting the market for industrial real estate in locations around the world. 
• Cloud and mobile computing, plus the Internet of Things are driving demand in the data center industry. According to Cushman & Wakefield, revenue growth at multi-tenant data centres will be 12% to 14% each year for the next two to five years.
• The data centres industry is having, and is positioned to continue to have, a material positive impact on pricing for industrial real estate in many markets around the world. 
• Real estate firm Cushman & Wakefield evaluated ten Asia Pacific markets for a range of factors. Singapore emerged as one of the two most attractive Asia Pacific locations for data centres. Over the past five months, Singapore has seen more than its share of significant data centre announcements. Most recently, Mapletree Industrial Trust disclosed that it would lease one of its buildings to global data centre company Equinix for 25 years.

4. Indian Telcos: What Not to Expect in 2019

Predictions for Indian mobile in 2019 are likely to be as much about what won’t happen as what will! In summary, we do not expect Jio to lift prices and ease pressure on the incumbents. Nor do we expect significant relief from the government towards the private telcos. The environment is likely to remain tough. With this outlook, by the end of 2019, we expect concerns that Vodafone Idea (IDEA IN) will require more capital to resurface. Bharti Airtel (BHARTI IN) is closer to an inflection point in returns and we are confident that unless prices fall again (which we don’t expect), revenues bottomed for Bharti in 2QFY19. The bottom line is that Bharti can live with current pricing while we don’t believe Vodafone IDEA can.

5. China Autos: A Few Thoughts on 2018 Industry Demand and Initial Expectations for 2019

China’s 2018 auto demand came to 27.8m units according to CAAM’s published statistics, bringing the YoY decline to 3.9%.  The results were consistent with our expectations since 1H18, that:

1. In the absence of government stimuli in 2H18, FY18 demand is likely to see a decline, not low single digit growth as consensus was anticipating at the time (see March China Auto Demand: 28.9M SAAR – 2H Could Face Some Headwinds , April China Auto Demand: Implied NEV SAAR Reaches Above 1.0m Units for the Second Time).
2. We also argued that NEV demand growth based on YTD selling rate strength would not be able to compensate for the weakness we were seeing in the ICE segments (see May China Auto Demand: Weak SAAR Leaves Lingering Headwinds for 2H ). 

We estimate that the acquisition tax reduction for 1.6L and smaller engine displacement vehicles in 2016 and 2017 front-loaded about 2.0-2.2m units to PC demand in those two years, similar to the impact of tax reduction effect seen in 2009-10.  This is a segment that saw 1.1m units in volume reduction in 2018 which should be seen as a natural result of the end of the tax subsidies.  In fact we believe that these after-effects of front-loaded demand were most likely more influential on China’s 2018 demand downturn than any headline narratives about negative impacts of trade wars.

Our initial expectations for 2019 are:

1. The 1.6L and smaller engine displacement segment should see stable to slightly lower annual demand, but there is nothing currently in the statistics that suggests that higher segments should also see declines.  This should at least partly be a natural pattern of second and third time car buyers trading up.
2. As we have pointed out in May China Auto Demand: Weak SAAR Leaves Lingering Headwinds for 2H , CV SAAR was unusually strong in 1H18 so this could be an obvious segment of weakness going into 2019, especially if 4Q average CV SAAR of 3.7m units (vs. 4.2m unit FY18 demand) is any indicator of what to expect going forward.

While we expect some residual effects of the 1.6L and lower segment tax subsidy ending in 2017 to remain in effect in 2019 we do not expect its impact to be as large as it was in 2018.  Our low single digit decline scenario considers a lower CV SAAR in YoY terms which appears likely as we head into 2019.