Property Ventures: Popular Has To Watch Its Books

Source : The Business Times, November 6, 2008

THE financial mayhem has affected almost every part of the economy but the pain has certainly been felt most strongly in the equity and property markets. Share values have plunged, real estate prices have dipped and most investors are keeping their feet dry from both fields.

It was therefore surprising to see Popular Holdings launch a rights issue last week. Not only is it trying to raise up to $22.2 million in a bearish stock market, most or even all of the net proceeds would go into property development.

While Popular is a household name when it comes to bookstores and education materials, it is a relatively new real estate player, having joined the scene in 2006 when the market was just beginning to pick up.

Popular's fundraising attempt at this juncture is likely to fuel speculation about its ability to support its property investments. The company has put up more than $71 million in four land purchases so far.

The tightening credit situation is certainly not working in Popular's favour. Banks have reportedly become more selective in extending loans, especially when the cooling property sector is involved. For small developers with no track record, loans are likely to come with more or tougher conditions.

Project financing

In fact, Popular's move reinforces concerns that emerged as early as a year ago - that non-core developers which jumped onto the property bandwagon might have trouble financing their projects should the market head south.

It does not help that Popular has two construction projects eating into its resources - One Robin and 18 Shelford. One Robin is already open for sale and could bring in cash as development progresses. This in turn would help fund the construction.

Unfortunately, 18 Shelford will not afford Popular such a breather. Construction is underway but the development has not been launched for sale and will not be receiving any proceeds. This is where funding could get a little tight and some extra cash may come in handy.

Few details

Popular's statement last week revealed few details on how proceeds from the rights issue would be used, save that they would 'strengthen the capital base', keep its property development business 'properly funded', and allow it to be 'selective in timing its property marketing and sales activities'.

For now, Popular's financials look sound. With cash and fixed deposits amounting to $45.3 million as at July 31, the group is more than able to settle the $13.7 million debt due within a year or on demand. Its net gearing ratio also rests at a comfortable 0.14 times.

Besides, Popular's investments in One Robin and 18 Shelford are far from dire. At the very least, both are situated in Districts 10 and 11, locations which tend to be fairly sought after by both locals and foreigners.

On the whole, Popular is nowhere near a solvency crisis. But the rights issue does still send out a warning signal on the short-term liquidity of its property business.

While the foray may bring huge returns, it is also exposing the latecomer to large risks, forcing it to shore up its cash position. Popular will need to watch its books closely to make sure that such risks do not spill over and affect its core retail and publishing business.