Thursday, December 4, 2008

Life After DPS Won't Be Crippling For Developers

Source : The Business Times, December 4, 2008

Study shows they can weather even 20% default rate by buyers under scheme

A NEW report, which looks at the potential impact if buyers who bought homes under the deferred payment scheme (DPS) choose to walk away from their deals, concludes that developers are not likely to be too badly hit even under a 20 per cent default scenario. The report by DBS Group Research captured the impact of defaults in projects expected to get their Temporary Occupation Permit (TOP) in 2009 on developers' earnings, operating cash flow, net gearing and interest cover. For this analysis, analyst Adrian Chua covered two default scenarios: 10 per cent and 20 per cent of all DPS units defaulting. Both scenarios assume the developers do not resell the default units within the year.

'Gearing ratios for the developers do not deteriorate significantly even under a 20 per cent default scenario,' Mr Chua concluded. 'Operating cash flow and earnings would come down (which is a given) but not to the extent where it leads to a negative operating cash flow or loss-making situation. Interest cover continues to be healthy.'

But among the developers, the smaller players would be more impacted in terms of proportional decline in earnings and interest cover, the report concludes. It investigated the impact of defaults on six developers - CapitaLand, City Developments, Ho Bee Investment, Keppel Land, UOL Group and Wing Tai. Allgreen Properties, SC Global Developments and United Industrial Corp were excluded as they have no projects currently expected to obtain TOP in 2009. Wheelock Properties, which did not offer the DPS, was also left out.

The DPS has been a sticking point between analysts and developers. Many analysts have predicted that large numbers of homebuyers could walk away from their purchases once projects obtain TOP, when the bulk of the purchase price is due under the DPS.

Developers dispute this view. Developers DBS Research spoke to have maintained the likelihood of default risk is low, given that speculation in 2006-07 did not reach the property bubble levels of 1995-96, the firm said in the note.

But part of the speculative intention could be masked under the DPS, which was not part of the property landscape back in 1995-96, noted Mr Chua. 'As such, the real speculative activity in the market could become completely apparent only upon TOP of these units,' he said.

In addition, the recent property upcycle also saw active participation by foreign buyers, which adds an additional unknown to the equation: whether these buyers will follow through on their payments upon TOP. The unwinding of global financial markets and the spectre of a prolonged economic downturn and asset devaluation could force these foreign buyers to default on their property purchases here, Mr Chua said.

The research note concluded that while a 20 per cent default is not likely to hurt developers too much, the effect of DPS defaults is just one of a few challenges facing the developers in 2009. Certainly, an asset devaluation scenario in line with declining capital values could potentially bring down developers' book value and correspondingly increase their gearing, the note said.

'We remain cautious over the short term for the residential developers, in light of a lack of catalysts from the physical market and poor economic sentiment,' said Mr Chua.

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