Published December 4, 2008

Developers head into crisis with more cash

Gearing improves as developers pare borrowings, increase cash held from divestments


(SINGAPORE) Developers have entered the latest slump in much better shape than they were in during the last property downturn in 2001, a comparison of their cash positions and debt-to-equity ratios then and now shows.

In fact, between the second and third quarters this year, some developers worked to better their gearing ratios. 'Among the larger-cap developers we track, most reported stronger balance sheets at end-Q3 2008,' said OCBC Investment Research analyst Foo Sze Ming.

'On average, the net debt-equity ratio had come down from 0.52 times in Q2 to 0.49 times in Q3. And the improvement was generally attributable to a stronger equity base, paring of borrowings and an increase in cash held from divestments.'

CapitaLand, City Developments and GuocoLand all cut their debt-to-equity ratios in Q3, OCBC's data shows.

The same trend holds true when comparing developers' financial positions at end-2001 and Q3 2008. Data gathered by DMG & Partners on selected developers shows most companies now have smaller debt-to- equity ratios. They also have more cash on hand. 'They are definitely stronger this time around,' said DMG & Partners analyst Brandon Lee.

Singapore's big three listed developers - CapitaLand, City Developments and Keppel Land - exemplify this trend. At end-2001, CapitaLand had $1.9 billion of cash and a gearing of 0.87 times. Now, it has a whopping $4.2 billion in cash and a gearing ratio of 0.51 times. Similarly, City- Dev has increased its cash holding from $701.8 million to $813.3 million and cut its gearing from 0.8 times to 0.46 times. KepLand has also increased its cash holding, from $120.9 million to $663.4 million, and cut its gearing from 1.33 times to 0.54 times.

Property companies are expected to continue to try to improve their cash balances and reduce gearing over the next few quarters. SC Global Developments, for example, recently drew $100 million from reserve facilities to boost cash on hand. But the pace of divestment is expected to slow as buyers get cold feet in the poor economic climate.

Analysts reckon things do not look as bad as feared for developers for another reason - in the Q3 earnings reporting season, much- feared provisions for landbanks acquired at high prices, which analysts had predicted, did not materialise.

Analysts have changed their tune and now expect developers to make provisions only in the second half of 2009, or even later. Some also reckon the provisions could be less than what the market has already priced in.

In 2001 and 2002, several developers, including CapitaLand, CityDev and Keppel Land, made massive write-downs on their Singapore residential landbanks, which hit their results badly. But this time around, the write-offs may be smaller, some analysts say.

Keppel Land was one of the first developers to make provisions in 2001, announcing $455 million of write-downs in the value of its residential landbank in November that year.

But the risk of a landbank write-down in the current downturn is lower for KepLand because the company did not buy any land in Singapore last year and its current landbank is carried in its books at relatively low cost, said OCBC's Mr Foo.

CIMB analyst Donald Chua said: 'We are not seeing provisions yet because prices have not fallen that much yet. Developers are probably waiting to see how the market pans out next year.' In light of this, provisions are unlikely for Q4 unless things take a turn for the worse, Mr Chua said.

In the 2000-2003 property downturn, the residential price index for private homes recorded a quarter-on-quarter drop in Q3 2000. However, the provisions and write-offs only came towards the end of 2001. This time around, the quarter-on-quarter dip in the price index appeared only in Q3 2008, so provisions are only expected around end-2009.

Downward revaluations of investment properties are still expected in Q4 2008 when developers do their yearly valuations. And for many developers, landbank write-downs will definitely take place at some point in time if 'things keep going this way', an analyst said.