Oct 3, 2008

Global credit freeze

Developers may be first to feel the chill

Interest costs are rising and they may be stuck with project backlogs

By Goh Eng Yeow, Markets Correspondent

PROPERTY developers here are likely to be among the first to feel the chill winds sweeping into Singapore from the big freeze-up in global credit markets.

For years, being among the largest borrowers in town, they have lapped up cheap credit to finance major projects. But now, they are set to feel the squeeze from the markedly higher interest costs arising from the global credit crunch.

They may also face a large backlog of vacant units, if buyers who signed up to buy properties through deferred payment schemes fail to secure financing to complete purchases. These schemes were stopped last October.

The global credit crisis erupted about a year ago in the United States, but until now, it has not touched Singapore in a truly significant way.

Local banks did not scale back on loans to firms and individuals. The interbank market - comprising loans between banks - was flush with cash. In early August, the one-month Singapore Interbank Offered Rate (Sibor) charged for loans between banks was just 0.75 per cent.

But this cosy scenario altered dramatically after the collapse of US investment bank Lehman Brothers two weeks ago. US insurer American International Group almost went belly up soon after.

In the 10 days after that, as global credit markets froze up completely and banks refused to lend to each other, the one-month Sibor shot up, hitting 2.275 per cent last Friday before easing to 1.8125 per cent yesterday.

Singapore home buyers have started to notice that 'distressed sales' are now more common, as banks turn more cagey about extending loans to buyers, in case they are over-stretched financially.

Remisier Alan Goh said: 'I recently saw a flat that the owner had to sell cheap. Otherwise, the bank would not give him a loan for his new flat, which had just received its temporary occupation permit (TOP).'

Going by gloomy reports put out by analysts, the situation may not improve, as an estimated 15,000 new flats are set to hit the market by the end of next year.

'Our economist is now projecting the service sector will create just 20,000 jobs next year, against the 100,000-plus jobs a year created since 2006,' said Citigroup analyst Wendy Koh.

She expects the residential market to swing from 'a standoff between buyers and sellers to a buyer's market'.

A softening job market and rougher economic conditions are hardly likely to encourage any bank to expand its mortgage portfolio.

For property developers, this will be a double whammy, hitting them just as the income stream from completed projects is due to help fund their start-ups.

Credit Suisse noted that in the second quarter, smaller developers were already saddled with gearing ratios of 242 per cent. In other words, for each dollar put up by their shareholders, they had borrowed another $2.42.

Some analysts are worried that with credit drying up, these heavily indebted developers could face difficulties in refinancing as interest rates rise.

Large developers have been more prudent, maintaining their gearing at 52 per cent in the second quarter, but that may be scant consolation given the size of their commitments.

Credit Suisse estimated that CapitaLand's gearing could rise to 1.1 times if all $8 billion of its major commitments comes in at once.

Keppel Land is also likely to be financially stretched by its projects in the Marina Bay Financial Centre, and in Vietnam and China, Credit Suisse added.

Even Allgreen Properties could see its gearing shoot up to 1.5 times, given its $2billion worth of impending investments in China.

Weighted down by such large financial commitments, whenever new problems emerge in global credit markets, developers will face a fresh round of worries.

Take last Tuesday, after the US Congress rejected the original US$700 billion (S$1 trillion) plan to buy the troubled assets of US financial institutions.

The big loser on the local market that day was City Developments, which plunged $1.27, or 14.8 per cent, to $7.33 at the opening bell.

In contrast, traders were relatively sanguine about local banks, despite the bruising received by financial institutions elsewhere. DBS Group Holdings lost only 90 cents, or 5.3 per cent, falling to $16 at the opening bell that day.

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