Published July 13, 2007

Developers passing more risk to market

New ways of raising funds, like project-linked bonds, lower cost but transfer risk burden to investors


(SINGAPORE) As the property market boom here gathers steam, developers are raising funds for new projects through more innovative means, some of which pass on the risk to the wider capital markets.

The burden of financing such projects has fallen more heavily on the developers' shoulders with the growing popularity of deferred payment schemes.

When buyers pay only a fraction of the property's price upfront, it is left to the construction companies and developers to fund the land purchase and building costs before the money starts rolling in.

Instead of knocking on a bank's door the old-fashioned way, analysts say that developers find themselves increasingly encouraged to issue bonds, for example.

'The only reason why they would not rely on a bank is because the terms are much cheaper in issuing these,' said David Lum at the Daiwa Institute of Research.

Kenneth Ng at CIMB said developers have been able to borrow much more cheaply from the capital markets compared to two or three years ago, 'because there's been more liquidity in the market.'

Large developers in particular have been able to obtain highly favourable borrowing terms because they now have 'a lot of alternative avenues' to raise funds, including spinning off properties into Reits and listing them, he added.

The use of convertible bonds, which give buyers the option to exchange their bonds for shares in the issuing company, have enabled even the smaller developers such as Soilbuild Group to borrow at interest rates as low as one per cent a year.

The embedded stock option - which is especially valuable in a bull market when investors expect share prices to rise further - means that firms can offer such bonds at lower interest rates than ordinary bonds.

Soilbuild said earlier this week that it would issue up to $60 million worth of convertible bonds.

Other developers have raised far bigger sums recently, also through the sale of convertible bonds. CapitaLand raised $1 billion in May, while GuocoLand sold $690 million worth of convertible bonds in April.

The latest data from the Monetary Authority of Singapore (MAS) on the corporate debt market here showed that property-related Sing-dollar debt issues doubled to $4 billion last year from $2 billion in 2005.

In a report published last month, Citi economist Chua Hak Bin estimated that the average debt to equity ratio at Singapore property developers with a market capitalisation of more than $1 billion rose to 61 per cent in the first quarter, from 50 per cent a year earlier.

With homebuyers paying only 10-20 per cent of a property's price upfront in some cases, Dr Chua pointed out: 'Developers, rather than households, are bearing the financing burden of the current property boom phase,' he wrote.

Large developers such as CapitaLand and Keppel Land have also raised funds by selling securities backed by the future payments of homebuyers at specific projects.

Most recently, CapitaLand and Lippo Group raised some US$342 million selling floating-rate bonds linked to the Metropolitan and Scotts HighPark condominiums.

Investors in such asset-backed securities supply upfront working capital for the developer in exchange for regular interest payments, and they bear the risk of losing money if homebuyers in the underlying projects default on their payments.

Unlike bonds issued directly by a developer, investors in these securities have no claim on the developer's remaining assets.

CIMB's Mr Ng said developers selling asset-backed securities linked to specific projects could be trying to manage their own risk exposure.

'My guess is that there's a bigger than normal percentage of investment property buyers for these projects, so they're trying to junk off the risk from their own books.'

Under MAS rules, the sale of such securities is usually restricted to institutions or 'sophisticated' investors only. Since most are privately placed, the buyers are not known, but are believed to include foreign hedge funds keen to gain exposure to the local property sector.

Even so, in the event of a market crash resulting in widespread defaults by homebuyers - a big if for now, say analysts - these investors are likely to be caught out.

Daiwa's Mr Lum said: 'Like the sub-prime situation in the US - they're supposed to be sophisticated, but some of them got wiped out like that. It's always this risk.'

He added: 'Unlike property cycles in the past in which it's the banks that end up with the NPLs (non-performing loans), this time around, it's probably these security holders that would end up taking the hit.'