Published October 2, 2008

Write-downs could see property stocks slip further

Larger developers saw 31-50% stock price falls in 2001, says Credit Suisse


THE outlook for developers here could get worse, with write-downs on asset values possible, says Credit Suisse.

Projects: CapitaLand could write down on Farrer Court (above), while Tianjin eco-city (next) is reminiscent of Singapore Suzhou Industrial Park

In a report, its research analyst Tricia Song says CapitaLand, for one, could write down as much as $200 million on its Farrer Court and Char Yong Gardens projects alone.

This is based on an estimated breakeven figure of $1,429 psf and an estimated average selling price of $1,280 psf for Farrer Court project. For Char Yong Gardens, the estimated breakeven figure is $2,564 psf and the estimated average selling price $1,960 psf.

In its analysis, Credit Suisse says Keppel Land and Allgreen could at worst face respective gearing of 1.7 and 1.5, assuming a prolonged downturn with major outgoings and no cash inflows. In June, Keppel Land's gearing was 0.54 and Allgreen's was 0.45.

A possible write-down factor for Keppel Land is its exposure to the troubled Vietnam market, where it has nine residential projects and one major township.

Credit Suisse says Tianjin eco-city, in which Keppel Land may take a stake, is reminiscent of Singapore Suzhou Industrial Park, which resulted in huge write-offs in the 1990s.

Noting that CapitaLand and Keppel Land are now trading around 1.2 times price-to-book value (P/B) and City Developments (CDL) is trading at 1.7-times P/B, Credit Suisse reckons CDL should not trade below book. It bases this assessment on CDL's conservative accounting policy of using historic costs for investment assets and limited write-downs on its residential landbank. But it still expects CDL's premium to narrow.

Unlike other developers, CDL does not account for asset revaluations directly in its profit & loss statement.

Write-downs signal developers' acceptance of price falls. Credit Suisse says that in 1998 and 2001, the larger developers suffered respective stock price falls of 66-79 per cent and 31-50 per cent.

CapitaLand and Keppel Land wrote down between $900 million and $2.1 billion in 1998, and between $700 million and $900 million in 2001. Credit Suisse says they could 'do so again due to aggressive expansions and acquisitions, and substantial revaluation gains in recent years'.

Perhaps more significantly, it reckons small-cap developers could put an added drag on the property market. It notes that as gearing rose to 52 per cent for big-cap developers by Q2 2008, gearing for smaller developers rose to 242 per cent.

'This reinforces our belief that small developers will drive the price cuts in the near future in the primary markets, especially in the prime and mid-high end, as some of them have acquired prime sites at peak prices,' it says.

In its analysis, small-cap developers include Aspial, Koh Brothers, Heeton, Hiap Hoe, Ho Bee, Roxy, SC Global, Sim Lian, Sing Holdings, Soilbuild and Tee International.