Will Developers Be The First To Blink?

Source : The Business Times, January 10, 2009

The holding power of the various parties will set the tone for the market in 2009.

THE holding power of both developers and investors will be closely watched this year as it would have significant bearing on residential property prices.

While the extent of speculation by investors is not known yet, the recent uncharacteristic appeal by the Real Estate Developers Association of Singapore (Redas) president Simon Cheong for government support of a tripartite plan to deal with the current credit squeeze, does leave one wondering if holding power could be on the wane.

In his speech at the 49th Redas Anniversary dinner on Nov 26, Mr Cheong said that 'a tripartite plan of action is needed between developers, financiers, and the government through moderating new supply, shoring demand, and introducing fiscal measures to help ease funding for the industry'.

Developers' holding power has made upcoming supply a bit of a moving target. Cushman and Wakefield managing director Donald Han says that between the third and fourth quarters of 2008, 7,234 residential units out of a total 66,422 units were deferred and would only be completed after 2011. 'We expect more deferment of residential projects in 2009,' he adds.

DTZ Research also believes that supply has been 'overestimated'.

Of the 60,048 units that the Urban Redevelopment Authority (URA) expects to be completed between 2009-2012, only 24,905 are under construction currently. 'Actual supply in 2009 and 2010 will more likely be in the range of 18,000-19,000 units, less than two-thirds of the 30,296 units projected by the URA,' DTZ adds.

Not surprisingly, 2009 forecasts for residential prices have been mixed, with one consultancy even saying it was not issuing forecasts at all.

Consultants do believe high-end property prices are expected to fall the most - anywhere between 15 and 30 per cent. The mid-tier segment is forecast to fall between 10 and 20 per cent, while the mass market is estimated to fall by a more moderate 5-10 per cent.

But if developers do not have holding power, they could be forced to launch developments at lower prices.

Jones Lang LaSalle head of research (South East Asia & Singapore) Chua Yang Liang says that developers are unlikely to defer projects that have been launched.

'So, in those instances, they have to weigh the benefit of potential large sales volume against the negative publicity and possible issues associated with price cutting, especially if the difference between what earlier buyers paid and what new buyers will be paying is significant.'

According to OCBC Investment Research (OIR), the top nine developers in Singapore had a total current debt of about $5 billion and non-current debt of almost $20 billion in the third quarter of last year. Still, OIR investment analyst Foo Sze Ming notes that the amount of short-term debt owed is relatively lower now compared to the previous property downturn in 2001.

Using CapitaLand as an example, OIR noted that it used to owe $4.8 billion of short-term debt and $4 billion of long-term debt with a net gearing ratio of 0.88 times. 'Now, its financial position is stronger with short-term debts of $2.2 billion, long-term debt of $8.2 billion and net gearing ratio of 0.5 times,' Mr Foo says.

But he cautions: 'In light of the tightening credit market, we do see heightened risk involving short-term debts that require refinancing. We are more concerned with the debt exposure of smaller and less-established developers who entered late during the property up-cycle as they may have over-geared and bought their landbanks at higher valuations.'

Prices in 2009 could also face downward pressure from defaulting speculators. OIR believes that default risk will be skewed towards the Core Central Region (CCR).

It expects that 3,069 and 2,888 units under construction in CCR are due for completion in 2009 and 2010, respectively. For illustration, it assumes that 50 per cent of the units were bought under the deferred payment scheme (DPS) and 40 per cent of the buyers (from speculators, foreign buyers and funds) are likely to default on their purchases.

'Based on this, we estimate that 614 and 578 CCR property units could be returned in 2009 and 2010, respectively, and these will directly flow back into the market and push up the unsold supply,' it says.

The impact of DPS will likely start to play out in 2009. But DTZ research senior director Chua Chor Hoon says that buyers 'cannot simply walk away from their purchases as developers can sue them for specific performance over the sale and purchase agreement'.

'In the past, developers have been known to work out some scheme to allow more time to make the final payment if a buyer has difficulty paying up upon TOP.'

With Budget 2009 in January expected to be pro-business, Colliers International director for research and advisory Tay Huey Ying reckons that to contain development costs, the government could look at reducing property tax and development charge payable by reverting back to the earlier formula of creaming off only 50 per cent of land enhancement value instead of the revised 70 per cent.

But Ms Tay notes that the main reason for the sluggish property market is the financial crisis. Coupled with 'astronomical' prices in the high-end and luxury segments, she says, 'a correction such as the one we are witnessing now cannot be avoided'.