Hopes Of Property Market Rebound Fading

Source : The Business Times, May 22, 2008

Uncertain economy, housing glut fears seen taking toll on developers

HOPES that a slowdown in Singapore's property market is temporary are fading as an uncertain economic outlook and a looming housing glut threaten to plunge the sector into a prolonged downturn.

Homebuilders such as CapitaLand, Keppel Land and GuocoLand have delayed launching new projects in the moribund market, taking a hit to first-quarter earnings as they hoped for a rebound later this year.

Housing hurdle: With home prices expected to fall 30 to 40 per cent over the next three years, Singapore's developers could be badly hit

Prospects could be dented further in coming months if smaller developers face financing troubles and have to unload properties at massive discounts. Some have gorged themselves on expensive land acquisitions over the past two years.

With home prices expected to fall 30 to 40 per cent over the next three years, Singapore's developers could be badly hit and analysts may slash their earnings estimates further.

'This is the start of a multi-year price correction. Private residential property prices could easily fall by up to 30 per cent by 2010,' said Barclays Capital economist Leong Wai Ho.

Credit Suisse in a report this month saw rents and property prices falling even more steeply by as much as 40 per cent, and downgraded its investment recommendation for the sector to 'underweight'.

Warning signs have been flashing as first quarter 2008 sales volumes slumped to the lowest in five years and price growth slowed for two straight quarters, with concerns about a global economic slowdown and the US sub-prime mortgage crisis scaring off potential homebuyers.

Mr Leong said an impending oversupply will worsen the problem, with 66,000 new homes expected to be completed over the next four years, against forecast demand for 50,000 in the same period.

The three-month Singapore Interbank Offered Rate - a benchmark for mortgage loans - has fallen to near record lows below 1.3 per cent, but that may not be enough to revive buyers' flagging confidence, economists say.

'Negative real interest rates will be at best a cushion, rather than a boost to housing demand in the near term, although they could lift property demand if and when sentiment turns,' said Citi analyst Kit Wei Zheng.

'The worst is yet to come and price cuts are imminent,' said ABN Amro analyst Fera Wirawan.

BNP Paribas has flagged high financial risks for small developers including Bukit Sembawang, Low Keng Huat and Lian Beng, which have almost all their debts due within a year. Even major builders such as Allgreen, Keppel Land and GuocoLand could face difficulties after steep drops in profit in the last quarter as they launch fewer projects, analysts say.

Slower sales and rising costs could raise developers' gearing or debt-to-equity ratio to dangerous levels above 70 per cent, up from the industry average of about 62 per cent.

'We identify three developers, namely Allgreen, GuocoLand and Keppel Land, that could face some pressures on cash flow,' JPMorgan analyst Christopher Gee said in a report, noting that gearing levels could be pushed up to between 80 and 130 per cent.

The risk of price falls has been heightened by property speculators buying in recent years with little upfront cash, relying on a deferred payment scheme. The government scrapped the scheme last October in a bid to cool down the sector.

Analysts expect speculators will dispose of about 700 units on the cheap this year, and another 2,000 next year, as the properties near completion and instalments are due.

Some developers are still counting on home prices in the city state to rise for at least another year, as they see the market in the middle of an upswing even as the US housing market grapples with its worst downturn since the Great Depression.

'This is a temporary hiccup. We just had a boom starting in 2006 and it's usually a seven-year cycle,' property tycoon Kwek Leng Beng, who heads Singapore's No 2 developer City Developments, told Reuters. The property market will be supported by greater foreign investments as Singapore sees the completion of two casino projects and the influx of major events such as Formula One races and the Youth Olympics over the next few years, Mr Kwek argued.

But Barclays' Mr Leong said his bearish scenario, which calls for a near one-third drop in property value, already takes into account any boost resulting from these economic developments. 'It's not the worst-case scenario. This is the most likely scenario based on the numbers,' he said. -- Reuters