CHINA REGULATORY RISK
After allowing Chinese technology companies relatively free rein to operate, innovate and build industry leading platforms for the last two decades, Chinese regulators have increased its scrutiny in a meaningful way. Initially in 2020 the Ant Financial IPO was pulled at the last minute, but we have now seen further tightening in sectors such as ecommerce, payments, food delivery, ride hailing and more recently education and music streaming platforms. While the increased scrutiny is partially regulators playing catchup, the reach of the Chinese communist government and the lack of recourse for these companies against a judgement, has shaken the investment community and resulted in a fierce market sell off.
In the United States (U.S.), scrutiny over U.S. listed Chinese companies have continued with bipartisan support, with the recent Didi IPO scandal further infuriating U.S. law makers. While the operational impact on the Chinese BAT (Baidu, Alibaba, Tencent) companies remains somewhat limited, the market appears to be pricing in further restrictive regulation to emerge in future. The question remains however, whether regulators will stint the growth of these companies and reduce the positive economic and technological contributions they make to the Chinese economy, or whether regulators are only playing catchup and trying to create a more equal competitive landscape.
The heavy hand of the Chinese regulator in the after-school tutoring market in China also sparked renewed fears regarding the use of Variable Interest Entities (VIEs), which resulted in a steep decline in Naspers/Prosus during the month.
The focal point in the oil market was the OPEC+ meeting outcome at the start of the month. The meeting ended at an impasse, with the UAE said to be requesting a higher production baseline. Oil prices became volatile as the impasse stoked fears of a market share war, such as that in April 2020, while the lack of an agreement continued to tighten markets as inventories draw down. A compromise was agreed to two weeks later, where OPEC+ members would gradually increase production for the remainder of the year.
Further Covid-19 waves remain a downside risk for oil demand and the OPEC+ agreement aims to limit the fallout in such a scenario by keeping the market in a mild deficit. US shale producers are cautiously adding oil rigs, looking to benefit from higher prices, while staying watchful of the OPEC+ spare capacity threat.
HOUSE PRICE INFLATION – IS IT DIFFERENT THIS TIME?
In the U.S., we have seen many affluent consumers managing to materially increase their savings recently, stemming from the combination of stimulus cheques received and limited avenues for spending given lockdown restrictions, in addition to the sharp recovery in financial markets. This accumulation of savings combined with ultra-supportive monetary policy, where homebuyers can lock in 2-3% fixed rate 30-year mortgages, has resulted in insatiable demand for housing.
The latest median sales price of an existing home was up 27.3% in June versus a year earlier in the U.S., a remarkably high number. In the United Kingdom, house prices were up 13.4% in June versus a year earlier. This was the largest increase since November 2004. So far in the U.S., supply has yet to catch up with demand, which saw lumber prices reach a record high of $1,670 per thousand board feet more recently. The work from home movement has also caused a shift of demand from inner city homes to surrounding suburbs. A softer housing market will be a key performance indicator going forward to assess the trajectory of the economic recovery in the U.S.
CIVIL UNREST AND LOOTING
The civil unrest that took place in South Africa in the month of July 2021 left a significant dent in the economy, notably in the property sector. Several shopping centres, industrial properties (warehouses and storage facilities) and educational facilities, located primarily in Kwazulu-Natal and Gauteng, experienced significant trading interruptions due to looting and civil unrest.
In the week of July 12th, the All Property Index (J803) fell 5% from its highs of the previous week. REITS with retail properties in the affected regions were slow to announce the impact it had on their premises. Most have not yet quantified the damage sustained given the lengthy clean-up process required. SAPOA’s published preliminary estimates of the damaged caused currently stands at an unsettling R50bn impact on national GDP. The count of retailers’ stores impacted and damaged stood at 1,787 stores including 200 shopping centres, excluding vehicles.
The extent of insurance cover across the retailers and landlords will be company specific as some may have reduced cover to cut costs amid the pandemic. Landlords are challenged by both the foregone rent for the period that properties are repaired, as well as costs for the repairs (to the extent not covered by insurance or SASRIA).
Property owners who suffered severe damage during the unrest are entitled to some relief as municipalities are obliged to adjust valuations of affected properties according to legal provisions. These reassessments of valuations will be informed by the extent of the damage and the expected time to repair the properties. Once repairs are completed, properties will be revalued again.
SASRIA appears to have extensive catastrophe reinsurance in place which is triggered for events where damage exceeds R500m. This reinsurance is placed with large, global reinsurers including Swiss Re, Lloyds, Hannover RE, Munich RE, and SCOR Africa.
The outlook for the property sector over the medium to long-term remains opaque as it is dependent on the amount of time it will take to restore buildings and tenant trading back to historic norms.