Write Down And Start Selling

Source : The Business Times, February 9, 2009

WHEN Keppel Land announced its quarterly financial results last month, it said it had reviewed its residential landbank and concluded that no provisions or write-downs were required as their breakeven prices were lower than market prices.

Catatonic: The property market is suffering from developers' refusal to accept the pricing realities of the current economic condition

With other developers expected to report their latest quarterly results soon, it will be interesting to see who else takes the same line.

Write-downs by developers have been expected for some time. But most have adopted a head-in-the-sand approach, perhaps hoping that price falls will somehow moderate this year if they drag their feet.

However, with economic data worsening by the day, this reading could be wrong. And it could be time for developers to wake up and smell the coffee, if only to help the property market pick up and move on.

The market, which is near catatonic - with only 700 new units launched for sale in Q4 2008 - is suffering from developers' refusal to accept the pricing realities of the current economic condition.

Keppel Land still has homes to launch for sale, including those at Reflections at Keppel Bay and Marina Bay Suites in which it has a 33.3 per cent stake.

In March 2007, joint-venture partners Cheung Kong Holdings/ Hutchison Whampoa, Hongkong Land and Keppel Land paid $907.67 million for the Phase II site of Marina Bay Financial Centre (MBFC) where Marina Bay Suites is located.

The breakeven price for Marina Bay Suites is difficult to estimate because MBFC is a mixed development site. But the consortium came close to launching the luxury condo in January 2008 at about $3,000 per square foot, before changing its mind.

According to the Urban Redevelopment Authority's data, the latest transacted price (January 2009) for a unit at Marina Bay Residences next door was just $1,638 psf.

In contrast to developers, some real estate investment trusts (Reits) have begun to recognise the fall in asset values.

CapitaCommercial Trust's portfolio booked a 3 per cent or $241.8 million net decrease in fair value at Dec 1, 2008, resulting in an adjusted net asset value (NAV) per unit (excluding H2 2008 distributable income to unit-holders) of $2.92 at Dec 31, 2008, compared with $3.11 at June 30, 2008.

K-Reit, however, did report that its portfolio valuation of $2.1 billion remained unchanged from the previous year. It added that its current aggregate leverage of 27.6 per cent would only exceed 60 per cent if capital values were to drop more than 54 per cent. Capital values of commercial property tend to lag those of residential property.

A write-down will, of course, have an adverse effect on a company's NAV and share price, which partly explains the reluctance to make such a move. By not acknowledging a fall in asset values, developers are likely to continue to resist discounting home prices and rely on external funding, rather than cash flow, to finance holding costs.

But given the rising cost of finance (if you can get it), could launching developments at a discount and locking in some cash be the lesser of two evils?

One developer at least appears to be going about things differently.

Last week, Frasers Centrepoint took the bold step of launching the first phase of its 712-unit Caspian condo next to Lakeside MRT Station in Jurong. It bought the site in late 2007 for $248 psf per plot ratio. At the time, the breakeven price was estimated to be around $550 psf.

It proved a good move. The first phase of Caspian was launched at an average of $580 psf, and sales so far have been very encouraging.