Published May 17, 2008

Developers face higher funding costs


PROPERTY developers in Asia face a 'double whammy' of rising credit spreads on loans and banks lending less against the value of new projects, a senior Asian property fund manager said yesterday.

And the wider interest margins that banks have been demanding on loans since the start of the financial market turmoil are likely to be sustained, said Olivier Lim, chief financial officer of CapitaLand, South-east Asia's largest developer.

Mr Lim and Ng Beng Tiong, the Singapore-based director of operations at ARA Asia Dragon Fund, were speaking at a panel discussion on the last day of a conference organised by Merrill Lynch that started on Tuesday.

Mr Ng said that although benchmark interest rates in Singapore and Hong Kong have fallen, 'what we've seen is that the margins have shot up tremendously - more than double in many cases'.

Before the US sub-prime mortgage crisis broke, property companies in Asia could borrow at spreads of less than 100 basis points or one percentage point above interbank lending rates, Mr Ng said.

'Now banks are quoting 200, 300 and for some smaller developers we understand that they're being quoted 400' basis-point spreads.

Besides paying higher interest rate spreads on loans, developers are also finding that the proportion of a project's value that banks are willing to fund - the loan-to-value (LTV) ratio - has shrunk, he said.

'In the bullish days, we were seeing 70-80 per cent LTV. Now banks are quoting 50-60 per cent, so it's a double whammy for project financing.'

ARA Asia Dragon Fund is the flagship private real estate fund of ARA Asset Management, an affiliate of Hong Kong's Cheung Kong Group. At the end of last year, the fund, which invests in major cities throughout Asia, had more than US$1.5 billion of capital from institutional investors worldwide, including Calpers, the largest US public pension fund.

CapitaLand's Mr Lim said the first quarter saw 'the worst credit market situation I've seen in my 19-year career'.

Although spreads have since narrowed slightly, 'I think the blow-out in the credit margins will be sustained', he added. 'I don't see it compressing to where it was last year.'

At CapitaLand, 'we're seeing, on average, rates go up by between 60 to 100 basis points, depending on whether it's corporate risk or project risk'.

'But we are sensing a flight to quality, so for us we've been able to raise about S$4 billion overall of credit debt from multiple sources in the first quarter alone. We still have access, but we do have to adjust to a higher margin. Thankfully, the cost of money is much lower, so the overall cost is about the same as it was last year.'

Last month, the firm raised another S$2 billion of bank funding for its new condominium development at Farrer Court. 'Banks are still lending,' he said.

In Asia, outside its main markets of Singapore, China and Australia, CapitaLand has been 'probing many other markets' including Thailand, Malaysia and the Middle East, 'but it's becoming much clearer to us that two countries are at the top of the list - Vietnam and India', he said. 'We're starting to accelerate our investments in both of those countries.'

Meanwhile, despite suggestions that property prices in Singapore have risen too far too fast, 'I think the market is a lot healthier than people indicate', Mr Lim said.