Here’s why developers shouldn’t be too scared of rising interest rates

Investors’ fears are overblown, analysts say.

Property developer stocks are trading at unjustifiably cheap prices due to the threat of rising interest rates, but analysts at UOB Kay Hian have reason to believe that these fears are overblown.

UOB Kay Hian said in a report that higher interest rates have minimal direct impact on developers, as financing costs account for less than 10% of total development costs.

Another key fear is that buyer demand will drop sharply as mortgage rates rise. However, UOB Kay Hian said that affordability will remain manageable despite an interest rate hike.

"Our sensitivity analysis [indicates] that approximately every 1ppt rise in interest rates would result in about S$582 monthly increase in monthly mortgage payment on a S$1m property loan with a tenure of 25 years," UOB Kay Hian said.

This scenario would result in about 3.8ppt worsening of the affordability ratio--measured as monthly mortgage payment divided by monthly household income--from 32.0% to 35.8%.

"We reckon this is palatable to most households, especially against a backdrop of stretched levels of 60-70% during the 1996-97 period," the report noted.