Progressive booking of profits from projects sold will underpin results
ALL the big listed property groups have reported substantial gains in net earnings for the period ended June 30, 2007.
And the earnings outlook for the second half is positive, as developers continue to progressively recognise profits from Singapore residential projects already sold based on percentage of completion, enjoy higher rents from their Singapore office portfolios and book fair value gains on investment properties, says DBS Vickers Securities analyst Wallace Chu.
In fact, in the latest results reason, bottom lines were substantially boosted in many instances by revaluation gains on investment properties - particularly office properties that have gone up sharply in price - arising from the implementation this year of Financial Reporting Standard 40 (FRS 40).
This standard requires that fair-value gains and losses on investment properties be recorded in the profit-and-loss account. Some companies chose to do valuations and book gains on investment properties for their financial periods ended June 30 this year, such as CapitaLand and UOL Group, while others, such as Keppel Land and Singapore Land, have said they will do so at the end of the year.
The biggest revaluation gains seen this reporting season came from CapitaLand. It booked fair value gains of $645.4 million for Q2 ended June 30, 2007 and $647.4 million in H1 2007. But that's not surprising since the group, including its listed unit CapitaCommercial Trust, has one of the biggest office portfolios in Singapore.
But even without such gains, CapitaLand's net earnings were up substantially year-on-year for Q2 and H1, due to the strength of its overall operations, especially residential development sales in Singapore and China, and higher fee-based income from commercial and retail operations.
City Developments, too, posted the best result in its history - with strong showings from residential property development, rental properties and hotel operations under listed Millennium & Copthorne Hotels and CDL Hospitality Trusts. Q2 net earnings rose 333 per cent year on year to $194.4 million, and CityDev's H1 bottom line improved 272 per cent to $320.5 million.
Management emphasised that the sterling results were achieved without booking any revaluation gains on the group's substantial investment property portfolio, including offices.
CityDev said it is continuing its conservative accounting policy of stating investment properties at cost less accumulated depreciation and impairment losses, an option allowed under FRS 40.
KepLand, which has said it will revalue its investment properties at year-end, saw its Q2 and H1 net earnings go up 42 per cent and 56 per cent respectively on the back of strong residential sales in Singapore and overseas and the robust Singapore office market.
Analysts expect the group to book gains of $221.6 million in the second half of this year from the divestment of its one-third stake in One Raffles Quay to K-Reit Asia - if the transaction is approved by shareholders of both companies.
As well, KepLand's second-half earnings are expected to be boosted by fair-value gains on revaluation of its investment properties at year-end under FRS 40, given the group is a major office landlord.
Most Singapore listed developers, which have enjoyed strong Singapore residential sales in the recent past, can look forward to continue progressively booking profits from these projects in accordance with the percentage of completion. CityDev will start booking from its Solitaire condo from Q4 2007 onwards, while profits from One Shenton will be recognised in stages starting next year.
The group sold 1,315 homes valued around $2.4 billion in H1 2007 - about three times the value in the same period last year. The group's share of pre-tax profit from residential sales yet to be booked is about $1.4 billion. This is expected to be recognised progressively over the next few years.
So far, the sub-prime woes and ensuing credit crunch in the US do not appear to have cooled developers' residential sales in Singapore or prices - as is evident from the strong take-up rate for Frasers Centrepoint's Soleil @ Sinaran launch, despite the benchmark price for the location.
But if and when they do, that could cast a pall on developers' residential profits going forward. 'Sentiment and strength of the equity market will be more important share price drivers for listed property groups,' an analyst with a foreign broking house says.
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