Published May 19, 2008


Pre-sold projects lend support as developers undergo correction

Greater blow from weaker sales will be felt only over next few years: analysts


PROPERTY developers were mostly hit by slower residential sales in their first quarter results, and for some, they also suffered a lack of fair value gains in investment properties. But even as the residential segment undergoes a correction this year, analysts do not foresee significant earnings weakness as revenue from pre-sold projects is still lending support.

For developers with a large amount of pre-sold projects and are able to hold back new units to await better prices, the greater blow from the weaker home sales will only kick in over the next few years if market sentiment does not pick up, analysts say.

'The earnings for this year have been locked in by the sales done in the past two to three years,' said UOB KayHian analyst Vikrant Pandey. 'Sales have slowed down this year, but the impact will only be felt two, three years down the line when the actual construction takes place.'

Investors have been greeted with a mixed bag of earnings results from property developers for the first quarter. The impact of the US housing problems and global economic slowdown was felt in terms of lower transaction volumes as developers held back new launches in a quiet market.

There was also the timing issue in recognising earnings from development projects on a percentage of completion basis, which added to the earnings volatility, analysts say.

'Q1 is typically a slower quarter for developers simply because of the holiday season and development is slower,' said CIMB-GK analyst Donald Chua. The recognition of earnings from developments that are at the initial stages of construction is hence slower.

Keppel Land reported a 3.5 per cent dip in net profit to $60.3 million due mainly to lower contribution from property trading with the completion of several projects in Singapore and overseas and a writeback on provision in its property investment segment.

In the absence of fair value gains, CapitaLand's first-quarter net profit fell 59.3 per cent year on year to $247.47 million; Overseas Union Enterprise's (OUE) net profit slipped 69.2 per cent to $23.67 million and United Engineers' (UE) net profit slumped 90 per cent to $1.2 million. Excluding fair value adjustments, CapitaLand's net profit would have jumped 36.5 per cent year on year, while OUE and UE would have marked smaller net profit declines.

City Developments, however, which adopts the policy of stating net profit at cost less accumulated depreciation and impairment losses, posted a net profit growth of 30.8 per cent to $164.97 million in its fiscal first quarter despite its revenue falling 1.3 per cent from a year ago to $758.75 million.

Analysts noted that the practice of booking in revaluation differences in investment properties under the Financial Reporting Standard 40 is adding to the earnings volatility. This accounting method is seen inflating developers' bottomlines last year and cutting into their bottomlines in a poorer market condition like now.

But analysts added that they do not treat revaluation gains as part of core earnings and strip off revaluation gains from headline numbers before analysis. While there has been suggestions that FRS40 may not be an accurate reflection of earnings, it does provide a clearer picture of the actual values of properties owned by developers.

For the rest of this year, analysts do not expect developers to report fair value losses as there is room for rental upside, particularly in the office segment where new supply is not coming through yet. 'Rentals are coming from a very low base. There's still a lot of catching up to do,' Mr Pandey said, pointing to the heady asking prices for some prime grade office that have shot up to $17 per square foot.

But developers that lack strong cashflow from pre-sold projects will likely find the going tougher in an environment of low or zero revaluation surplus and slower home sales, analysts caution. Without holding power to defer launches, they will have to slash prices for new projects and accept lower margins.

For this year, Mr Pandey is factoring in a 20 per cent correction in the high-end segment, 13 per cent for the mid-end segment and 5 per cent for the mass market segment.