Gearing under scrutiny; but future proceeds, old ties could tip balance
As the financial turmoil wrings precious liquidity out of markets, talk of tighter credit affecting property developers here has been making the rounds.
Analysts have scrambled to redo their math, and as the earnings reporting season kicks in, property developers will be closely scrutinised for their debt levels and overall financial standing. Not only are the property sector's fortunes at stake, market watchers will also be on the lookout for any implications for banks, which have a significant exposure to real estate.
'(We) could see banks continue to reduce their exposure to the property sector,' said a recent OCBC Investment Research note. According to the outfit, the proportion of bank loans to the sector has already been reduced to 17.9 per cent in August, down from 18.1 per cent in June.
But just how leveraged are property developers and do numbers alone tell the whole story? While gearing ratios will shed some light, market watchers highlight other factors to watch in evaluating firms' resilience to scarcer credit.
According to financial data on over 30 developers from DMG & Partners Securities, net gearing levels range from a negative 0.1x to 3.2x. Expressing net debt as a proportion of shareholders' equity, the higher the net gearing ratio, the more debt a firm has comparatively.
Topping the list is Sim Lian Group, with a net gearing of 3.2x. SC Global Developments, Hiap Hoe, Sing Holdings and Soilbuild Group Holdings complete the top-five band.
'Gearing will determine how much future funding property developers can get,' an analyst told BT. 'Highly-geared companies may face more covenants from banks, or get charged higher interest rates.'
But the market should not judge developers based on net gearing alone, analysts say. Another critical indicator to watch is the size of short-term debt and the amount of cash available to cover it.
Some property developers have more breathing space when it comes to short-term loans. In fact, Sing Holdings has no such debt to service. While SC Global has $19.5 million repayable till June next year, it has cash and cash equivalents of $70.8 million to meet this need.
A third factor to look at is the amount of proceeds going to developers in the near future. As the OCBC report also noted, with strong property sales in 2007 and progressive recognition of profits from sold projects, 'developers are financially stronger to weather thestorm'.
Sim Lian, for instance, will receive temporary occupation permits for The Premiere @ Tampines and Carabelle over the next 12 months. It expects to collect about $255 million from sales, which exceeds short- term debt of $136.2 million as at June 30.
For Hiap Hoe, Cuscaden Royale and Oxford Suites are due for completion in December next year. Their outstanding sales proceeds amount to over $100 million - far more than the $12.2 million held as short- term debt as at end-June.
DMG & Partners' list also highlights a trend: smaller property developers are more likely to have higher net gearing ratios. This ratio is just around 0.5 for bigger players such as Keppel Land and City Developments. For CapitaLand, net gearing is 0.43x if capital from recent property divestments is included in the end-June results.
Some industry watchers attribute the trend to portfolio differences. Besides having development properties, larger firms tend to own other sites for rentals or capital gains. Such investment properties can be revalued to reflect higher fair values (though not all developers practise this). This boosts the equity base and shaves net gearing.
Smaller companies holding more development properties would hence benefit less from rising markets, because these sites can be reported only at the lower figure of cost or net realisable value.
But regardless of size, property developers across the board will find new loans costlier or harder to come by. 'Banks are definitely more cautious these days,' a banker told BT.
The softening property market provides little comfort. 'Developers with ongoing projects that have limited flexibility in deferment . . . may find themselves stretched for cash, as sales and rental income slow down,' warned a Credit Suisse report last month.
This is where developers' past performance and relationships with banks count. 'We take into account a host of factors which include the project's viability, the parties involved (their financial strength, background, track record and our experience with them), the project's cashflow and the market demand for the project,' said Samuel Tsien, global head of OCBC's global corporate bank.
'If these factors are deemed to be present, we are open to considering financing under the appropriate terms and conditions.'
An industry insider also said that some banks are prepared to extend loans to existing clients but could shy away from new ones.
'Soilbuild is well supported by financial institutions which have developed long-term relationships with us,' said the firm's executive director Low Soon Sim. To further strengthen its capital base, the developer is also raising funds through a rights-cum-warrants issue, supported by commitments from the founders and directors.
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