Eyes on property market amid global slowdown

Oxley, SingHaiyi and Perennial are on analysts' debt watch-lists

Mon, Mar 16, 2020

Marissa Lee


AS BEARS maul the stock market while firms grapple with a recessionary environment, the risk of a property market slowdown has risen, market watchers say.

Analysts think a price crash is unlikely unless unemployment spikes first. But sales of new private homes will naturally slow down as uncertainty takes its toll.

Some weakening in prices is also to be expected, said DBS analyst Derek Tan: "At best, primary sales this year should be flat from 2019, with downside risks.

"We also felt that the quantum sold last year of close to 10,000 units didn't paint a very bright picture of the market because we estimate that sell-through rates (percentage of units sold versus total inventory) are 30 per cent after one year of launch."

The market has seen better days, he noted: "In 2016 or 2017, within one month of launch the average project would be 40 to 50 per cent sold. Within one year, it would be 60 to 70 per cent sold.

"This year, a lot of projects that will come to market will be larger projects in the core central region (CCR) and at a high price point of S$2,500 psf and above. We're not sure how many households can afford these types of homes so we're cautious."

Analysts believe that most residential developers here will be able to weather a slowdown. But they also want to see the highest-geared players pare down their debt as liquidity is key when sentiment turns south.

Oxley

One of the firms that would be most exposed to a slump in new private home units is Oxley, which had a net debt to equity ratio of 1.94 times at the end of 2019.

After building up a strong selling momentum since 2018, Oxley's units have moved more slowly in recent months but the group is betting that its focus on the more resilient HDB upgrader market will be an advantage.

Oxley deputy chief executive Eric Low told The Business Times last week: "For me I'm quite comfortable with the Singapore mass market segment. It's not so much driven by investors or speculators any more and depends on genuine demand. If you price projects realistically and competitively they will still move.

"We have sold 73 per cent of our Singapore development portfolio. They are all in the mass market section so every week we are still moving despite this crisis."

Most of Oxley's projects are priced in the range of S$1,300 to S$1,500 psf except for Mayfair Gardens, Mayfair Modern and 1953, he said.

While some analysts note that the increased household income limits for the purchase of new Housing Board flats will move some demand from the private to the public housing market, the Singapore Interbank Offered Rate (Sibor) on which most home loans are priced has also fallen, noted Mr Low, which makes all housing more affordable.

Oxley has S$833 million of debt maturing this year, including S$150 million in retail bonds due in May 2020.

Mr Low is confident of clearing these hurdles with higher cashflows from overseas projects. "In London, Royal Wharf is mostly sold ... We have 600 units for handover that will bring in substantial cash progressively through the year.

"In Dublin, we are left with the residential units that have been delivered progressively to Greystar. We have handed over 20 per cent of the units to the fund and will complete the rest by September 2020.

"In Cambodia, The Peak, there was a delay because the contractor ran into financial difficulties but we got a new contractor in and expect the residential units to be completed by year-end."

OCBC Credit Research analyst Wong Hong Wei has a neutral rating on Oxley, citing "substantial earnings visibility" from its overseas projects. He's also expecting Oxley to receive around S$300 million in cash once it closes the second tranche sale of the retail and banking units in Chevron House later this year.

Meanwhile, the coronavirus outbreak has reduced occupancy rates at Oxley's hotels on Stevens Road to 25-30 per cent, but the hotels are only 60 per cent geared so Oxley is "not stressed" on this front, Mr Low added.

The slowdown in China has also hurt Oxley's Gaobeidian project. "But we don't have any borrowings there, so we just build slower."

Last month, Oxley issued S$75 million 6.5 per cent notes due 2023, raising questions over its commitment to deleveraging.

Mr Low explained that the bond deal was his bankers' idea but he's glad that Oxley went ahead with it: "If this is a real crisis, we might be lucky ... Last year we were being disciplined by the market so we didn't buy anything."

SingHaiyi

Another developer that may get squeezed by its big unsold land bank here is SingHaiyi, analysts said. Backed by billionaire couple Celine and Gordon Tang, SingHaiyi's net debt to equity ratio stood at 2.19 times as at Sept 30, 2019, higher than any of its peers and up from a ratio of 1.6 times as at March 31, 2019.

The rise was due to the drawdown of bank loans for the group's development projects.

SingHaiyi launched its 1,468-unit Parc Clematis mega development (formerly Park West) last August and it has been one of the top-selling projects this year.

But its two other residential projects in Bartley - The Lilium (formerly How Sun Park) and The Gazania (formerly Sun Rosier) - were priced in the S$2,000 psf range at launch last May and have not registered sales since June and July last year.

SingHaiyi has a 50 per cent stake in all three projects, which were all en bloc purchases done during the 2017-2018 land acquisition rally. One market watcher noted: "The land banks they carry are all a bit expensive."

Separately, the Tangs surprised the market in late 2018 by taking control of Chip Eng Seng, another major property developer here, so some kind of merger and acquisition strategy should not be ruled out, market watchers said.

Perennial Real Estate

Then there is Perennial Real Estate, which is less exposed to the Singapore housing market but still closely watched for its credit profile.

Last month, OCBC Credit Research's Mr Wong downgraded Perennial's issuer profile from neutral to negative, due to its "tight liquidity profile, weak credit metrics and negative operating cashflow".

The integrated real estate and healthcare group had a net debt to equity ratio of 0.74 time at the end of 2019, but is currently in a net current liability position with S$1.3 billion worth in loans repayable within one year or on demand.

That includes S$280 million retail bonds expiring in April and S$280 million medium-term notes (MTNs) expiring in July and August. A majority of its bank facilities are also due in the fourth quarter and Perennial will discuss with its banks to renew the facilities, it said.

In response to queries from the Singapore Exchange last month, Perennial said that it is confident of redeeming the retail bonds and refinancing the MTNs as well as bank facilities.

However, refinancing via the bond market is more difficult now given the higher costs, so analysts are hoping that Perennial will be able to make progress on its planned divestment of its 31.2 per cent stake in AXA Tower.

One potential inconvenience is that Perennial had previously adopted a strata sale strategy for AXA Tower, which complicates the redevelopment process for any potential en bloc buyer.

But chief executive Pua Seck Guan said during a results briefing last month that the strata title owners own just a tiny share of the office tower's total net lettable area.

AXA Tower is also one of the developments which will enjoy a 46.5 per cent uplift in gross plot ratio under the new Central Business District rejuvenation scheme announced last March, which raises its attractiveness, DBS's Mr Tan noted.

Perennial is also hoping to divest one or two blocks of its Beijing Tongzhou joint venture project in the next two years, Mr Pua said last month.

Meanwhile, Perennial has reported a negative cashflow position every year for the last three years, with net finance cost of S$109 million last year.

The group's earnings have historically been driven by revaluation gains. After stripping out one-off items and income from associates, which may not flow through to the company, Perennial's adjusted Ebitda (earnings before interest, taxes, depreciation, and amortisation) was S$18.8 million last year, up from -S$1.1 million in 2018, according to estimates by OCBC's Mr Wong.

Mr Wong said: "An outright default is not in our base case ... In the worst case, the group may reach out to its key sponsors for a bridging loan." Perennial counts Wilmar and its CEO Kuok Khoon Hong as sponsors.

More recently, Perennial has also entered the Singapore private home market.

In 2018, it made its maiden foray into pure play residential development and will jointly develop the former Goodluck Garden freehold site in Upper Bukit Timah in a 40-60 joint venture with Qingjian Realty. The 663-unit project is expected to be launched in 2020, with breakeven at S$1,724 psf, according to DBS Research.

Banker's choice

At the end of the day, it's the banks who may play the deciding role when firms face a liquidity crunch.

RHB analyst Vijay Natarajan told BT: "We know that gearing is good in an up market and bad in a down market.

"If some developers start to default on their loans, banks will look at their non-performing loans and scrutinise all other developers, reprice everyone's loans ... They will look at highly geared companies and say your credit metric looks concerning and I need to price your loan differently. That risk hasn't started out now. Central banks are still pumping money. But this will only come when defaults happen."

So far, developers are still holding home prices steady, partly because many of them are selling en bloc units which means that their margins are already squeezed.

Mr Natarajan added: "I think what developers will do is to increase marketing activities, go all out in terms of incentivising the agents. I won't be surprised if we see more discounts soon in primary markets, though it might not be obvious. But already we see sellers in the secondary market giving up at lower prices right now."

DBS's Mr Tan agrees that developers may need to offer better incentives for buyers if sales slow down, though most of them have time on their side, since they would qualify for remission of the Additional Buyer's Stamp Duty (ABSD) on their land purchase price so long as they build and sell all their units within a five-year deadline.

The "pain point" for most developers should come only in the second half of 2021 or in 2022, five years after the last en bloc cycle (circa May 2016 to August 2018), Mr Tan added.

Meanwhile, muted sentiment could also work to the advantage of those developers with stronger balance sheets, noted CGS-CIMB analyst Lock Mun Yee: "Currently, Singapore developers don't hold a lot of land bank because they adopt a quick asset turn strategy. So if land prices become more realistic, developers can look for selective buying opportunities. Most of the larger developers have a net debt to equity ratio of 0.4 to 0.7 time."