China, Vietnam Landbanks May Hit Developers

Source : The Business Times, September 15, 2008

AMID the doom and gloom in the local property market, concerns are also beginning to mount about Singapore developers' exposure to the China and Vietnam markets.

Recent news out of China's property market has been grim. Many Chinese developers are reportedly cutting selling prices as the sector feels the heat from previously-introduced government measures to cool the market, coupled with a slowing economy.

CIMB's Hong Kong/China property analyst Alice Chong, for one, believes that while price cuts are not widespread yet, anecdotal evidence suggests that transaction prices have fallen by about 10 per cent so far this year. Going into 2009, she expects another 5-10 per cent decline in prices as the sector enters a correction phase. Regions that she is particularly negative on are Shenzhen, Guangzhou, Beijing and Shanghai.

Vietnam, previously South-east Asia's property darling, could go the same route. Like in China, the government in Vietnam is fighting inflation with various regulatory measures to cool the economy. In line with this, there is a danger of prices heading south.

Singapore developers, who have sharply raised their exposures in the two countries over the past three years, could be hit. Investors here, who have been tracking falling property prices in Singapore closely, should also keep a wary eye on the property markets in China and Vietnam.

CapitaLand, for example, had some 30 per cent of total assets, worth $7.4 billion in all, in China, Macau and Hong Kong in the first half of 2008. The developer has more than 35,000 homes in the pipeline and stakes in over 20 million square feet of net lettable area in office and retail assets in China.

Analysts think that this exposure could prove to be a bugbear for the company in the near term.

Recent reports suggest that the fundamentals in the Chinese property sector are weakening. Construction costs have risen by around 10 per cent year-to-date. As inventory levels continue to rise, developers who deferred sales in the first half of 2008 are coming under pressure to move their units and cut prices.

Kim Eng Research, for one, recently marked down its average selling price (ASP) assumptions for China by 10-15 per cent, and downgraded CapitaLand's stock to a 'hold'. In the same vein, CIMB noted that a 10 per cent fall in residential selling prices will result in a 2 per cent fall in its revalued net asset value (RNAV) estimate for CapitaLand.

A weakening economy is also putting pressure on capital value estimates for CapitaLand's commercial and retail properties. 'Assuming the market values for all asset classes are scaled back by 10 per cent, we estimate that CapitaLand's RNAV will fall by around 3.5 per cent,' CIMB noted in a report.

In the same vein, Keppel Land is also similarly facing rising short-term operating risks in China and Vietnam.

About 17 per cent of KepLand's total assets were invested in China as at end-June 2008. The developer also revealed in July - in a bid to reassure investors about the situation in Vietnam - that some $360 million, or 6.5 per cent, of group's total assets as at the Q1 2008 - were in Vietnam, including office buildings and serviced apartments.

Another developer that is big in both China and Vietnam is Guocoland, which has more than 50 per cent of its assets overseas.

Vietnam is suffering from high inflation and a widening trade deficit, and there are fears of a dong devaluation. A liquidity crunch also means that smaller and non-reputable developers will be forced out of the market.

While Singaporean developers in China and Vietnam are neither small nor disreputable, they will be forced to cut prices if other developers do so.

Right now, none can pinpoint with any certainty where the markets in both countries are heading. But investors should bear in mind that, for several Singapore developers, the dangers could come from outside - even if the property market in Singapore stages some sort of recovery.