Slowing markets, still-high financing costs cloud outlook for Singapore property companies

Jan 30, 2024

PROFIT warnings have come thick and fast since December from Singapore-listed property companies ahead of the start of reporting season last week.

However, cost pressures and current market weakness are not expected to hurt too much, said investment analysts, though numbers may be less than stellar.

In December last year, CapitaLand Investment (CLI) said it expects a “significant decrease in its net profit for FY23 compared to the previous year”, flagging fair value losses on its investment properties as the main reason for the decline.

Within the same month, City Developments Ltd (CDL) said profit for FY23 could see a substantial drop due to a lack of significant divestment gains.

This January, both Ho Bee Land and Chinese property developer Yanlord Land Group also said that they expect to record net losses for the full year ended Dec 31.

Ho Bee pointed to fair value losses of its investment properties in London, while Yanlord Land attributed the lower numbers to impairment losses on its development properties in China and fair value losses on investment properties in the mainland.

One exception so far has been Far East Orchard. The company said last Friday (Jan 26) that it expects to report a higher profit after tax for its FY23 results, attributed to fair value gains on its investment properties.

Analysts whom The Business Times spoke to said elevated borrowing costs, high interest rates and rising inflationary cost pressure continue to exert an impact on property development and investment activities.

But even with these grim figures, analysts told BT that they did not view the profit warnings as potential red flags that things are going downhill for real estate players.

“The general financial health of property companies are still strong, with the likes of CLI and CDL having a strong cash balance of about S$2 billion. We do not see significant stress on the financial health, as most (of their) projects have sold well and there is little inventory,” said Darren Chan, Phillip Securities’ senior research analyst.

Vijay Natarajan, vice-president of equity research at RHB Singapore, agreed: “Overall, the property companies appear to remain profitable operationally, although this has decreased year on year due to higher interest costs and inflationary cost pressures.”

However, the net profits of property companies have taken a hit, and some are expected to swing into losses due to the devaluation of assets, mainly across overseas markets.

“The key reasons for this valuation decline include the expansion of capitalisation rates (cap rates) and the negative forex impact as the Singapore dollar has broadly appreciated against major currencies,” said Natarajan.

“These are, however, one-off in nature and should not raise major concerns”.

Phillip Securities’ Chan cited further valuation declines as well as the weak property market in China as potential downside risks for those that have exposure to them.

“The key risks for Singapore residential markets include higher new supply and completions, as well as signs of buyers’ fatigue amid pricing expectations’ mismatch,” said Natarajan.

An unexpected sharp slowdown in the economy will also have a negative impact on the property market and developers, he said.

The peaking of interest rates and the anticipated cuts this year could alleviate interest cost pressures, and possibly mark the end of cap rate expansions, which should lead to firmer asset values.

“That could drive demand (for properties) as mortgage rates fall,” said Chan.

DBS’ vice-president for group equity research, Derek Tan, said that most of the negatives for companies’ second-half results have already been flagged.

In terms of balance sheet position for property companies, general debt/equity levels have remained fairly constant at 0.6 times on average, he said, and this could move higher due to the impact of fair value adjustments in their overall equity.

“As their loans on the books are usually pegged to investment properties or development properties, the underlying cash flows have remained resilient while unsold inventories on the books are generally low, meaning that visibility of cash flows from the development projects is strong,” added Tan.

OCBC’s head of investment research, Carmen Lee, said that for CDL, its latest profit warning in December was not a cause for concern. During the earlier H1 2023 reporting, CDL had posted lower net profit of S$66.5 million versus a restated H1 2022 profit of S$1.1 billion, due to the absence of substantial divestment gains which was recognised in H1 2022.

Ring alarm bells

Although the latest profit guidance may ring alarm bells, Lee said CDL’s management had guided that “earnings have not been significantly impacted compared to the previous financial year”.

Citing a consensus estimate from Bloomberg, Lee said the market is expecting CDL’s FY23 earnings to amount to S$335 million (with no divestment gains) versus S$1.3 billion in FY22 (including divestment gains).

OCBC Investment Research said CDL is trading at a price-to-book ratio of about 0.7 time, and had put the fair value estimate for the stock at S$8.87. CDL shares closed S$0.02 or 0.3 per cent lower at S$6.15 on Tuesday.

OCBC’s Lee also tracks UOL, which she said is expected to post FY23 profits of S$321 million, down 34.8 per cent from S$492 million in FY22.

For H1 2023, UOL posted a 64 per cent drop in profit to S$135 million. This is due to lower fair value gains of S$3.5 million, versus S$190 million in H1 2022.

“Our fair value estimate for the stock is S$8.15, with UOL trading at a price-to-book ratio of 0.5 time,” she added. UOL ended trading S$0.08 or 1.3 per cent higher at S$6.20 on Tuesday.

The other property stock watched by institutions is CLI. “CLI remains in good financial health in our view, with core operating earnings and cash flow being stable,” said Adrian Loh, UOB Kay Hian’s head of research.

He said: “CLI’s fee income-related business for Q3 2023 had a 9 per cent year-on-year growth; lodging management saw a 31 per cent increase in revenue; and net debt to equity was 0.55 time, which is not egregious in our view.”

CLI’s FY23 results may not look great after its profit warning last December. But Loh noted: “The losses are non-cash in nature and (more) importantly, the markets will look for guidance for this year as to whether earnings can improve, especially if policy support from China can bolster its market.”

“The profit warning should not be a surprise given that during its Q3 2023 business update, the company had (already) commented that impairments were likely,” he said.

Higher Additional Buyer’s Stamp Duty rates announced last April on foreign buying will continue to curtail demand from foreign homebuyers across the board, with the biggest impact on the high-end market, said Chan from Phillip Securities.

OCBC’s Lee said that interest rate cuts this year could potentially benefit property players due to lower financing costs on their debt and acquisitions. Homebuyers are also likely to enjoy lower mortgage rates, and this could help to sustain property demand, she added.

“For property stocks, 2023 was a challenging year as higher interest rates deterred investors from buying into property stocks. Stripping off the one-off items, FY2024 earnings are likely to improve by an estimated 14 per cent for CDL and 9 per cent for UOL,” Lee estimated.

RHB’s Natarajan was more sanguine in his outlook. He believes that with the expected interest rate cuts, there could be more mergers and acquisitions (M&A) opportunities by H2 2024.

RHB Singapore maintains a neutral stance on property companies. “While the property counters trade at a significant discount to net asset value and revised net asset values, we see the lack of strong catalysts to narrow the discounts,” said Natarajan.

“However, a potential unlocking of value by developers via M&A, divestments or spin off into private funds or real estate investment trusts could potentially help in narrowing this discount,” he said.

Chan from Phillip Securities said that most developers still have a strong balance sheet and adequate interest coverage ratios.

“With interest rates peaking, we expect transaction volumes to pick up, and more divestments and asset recycling in 2024 as compared to 2023,” he said.

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