Published October 22, 2008

Lower profits for property developers expected

They may have to write down their assets and make provisions


HURT by slowing sales, increasing difficulty in obtaining credit and under pressure to cut home prices, most developers here are expected to announce lower earnings during the current reporting season.

Analysts do not have high hopes for the property sector.

'We can expect to see some drop-off (in earnings) as the rate of launches has fallen off compared to 12 months ago,' said Kim Eng Research analyst Wilson Liew. Keppel Land will report its earnings today.

On Friday last week, GuocoLand, which has been dogged by negative news all year, reported a net loss of $2.8 million for its first quarter ended Sept 30, compared with a net profit of $27.7 million a year earlier.

It attributed the poor result mainly to an unrealised mark-to-market foreign exchange loss.

The chief concern now is that tighter credit and declining capital values in all sectors may force companies to write down their assets and make provisions for land acquired at high prices.

This happened during the crises of 1998 and 2001.

DBS Vickers analyst Adrian Chua, who recently downgraded six property stocks including CapitaLand, City Developments and Ho Bee Investment, said asset devaluation is a concern.

Deutsche Bank analysts Gregory Lui and Elaine Khoo similarly expect continued earnings downgrades on weak sales and average selling prices (ASPs) and the risk of provisions.

'We believe CapitaLand and Allgreen face greater risk of land bank provisions this time around, followed by Wing Tai and City Developments,' the analysts said.

'Keppel Land has not bought anything in Singapore over the past two years, but offshore investments might be riskier.'

All developers except City Developments, which reflects investment properties at cost, also face the risk of revaluation losses against investment properties, analysts have said.

Another area of concern is overseas exposure, which could affect top lines. At GuocoLand, for example, group revenue fell 20 per cent to $153.1 million from a year ago due mainly to lower revenue recognised from development projects in China.

Analysts are split on the effect of weak property markets abroad.

Some say this will lead to falls in revenue, while others believe fundamentally sound developers are now being punished by investors for going overseas.

In an Oct 16 report, Goldman Sachs acknowledged that the real estate market outlook is deteriorating at home and overseas - in markets such as China and Vietnam - for Singapore developers.

'However, we think the market has been too punitive on well-capitalised players with strong overseas operational track records such as CapitaLand and Keppel Land,' said analysts Leslie Yee and Paul Lian.