http://www.businesstimes.com.sg/comp...sales-softness

ANALYSIS

Developers' FY14 results belie home sales softness

Performances were helped by "locked in" sales and one-time gains

By Lee Meixian

[email protected]@LeeMeixianBT

4 Mar


THE mixed crop of results produced by Singapore property developers in FY2014 belies the underlying softness of domestic home sales.

Although performances have largely met market expectations, analysts attributed this to two factors.

One was that developers were reaping the benefit of "locked in" sales and income for projects sold one to two years ago, progressively recognising them on a percentage-of-completion basis.

Some developers were also helped by one-off gains, mainly through divestments of assets. For instance, CapitaLand benefited from the S$579 million sale of Westgate Tower, while City Developments (CDL) posted its best-ever quarter supported by the completion of the sale of cashflows of its profit participation security platform for its Quayside Collection project in Sentosa Cove.

Excluding one-offs, analysts are expecting property developers' earnings to diminish over the next one to two years, citing factors such as weaker sales, as seen at recent residential launches, and the time-lag factor for sales and profit recognition. This is especially so if the broader property market doesn't improve.

"Most of the past projects were substantially sold, but sales at new projects have been a bit slow, so the total sales that they recognise going forward will be less," DBS Group Research analyst Derek Tan said.

UOB Kay Hian analyst Vikrant Pandey expects a slight positive growth in core earnings for this year, fed by "locked in" sales from the past years.

The poor buying sentiment in the property market was further reflected in some developers booking impairment losses and provisions for foreseeable losses on their development projects - although the numbers are "very marginal" as a percentage of their total portfolios.

CapitaLand, for instance, made an impairment of S$77.4 million for its Singapore residential segment in 2014 after stress-testing all its projects with double-digit percentage cuts on their current selling prices, OSK-DMG analyst Ong Kian Lin noted.

This was a prudent exercise done to de-risk its domestic residential exposure, which is at less than 9 per cent of its total assets.

OCBC investment analyst Eli Lee further noted that two of its completed residential projects, Urban Resort (about 69 per cent sold) and The Interlace (about 84 per cent sold), are subject to qualifying certificate (QC) penalties this year, but the total extension charges of S$8.6 million will likely not impact it too much.

QC conditions require foreign developers to finish selling all units in the project within two years of the completion date. All listed developers are deemed foreign companies - defined as one that has even a single non-Singaporean shareholder and/or director.

CDL also wrote down three residential projects: the not-yet-launched Nouvel 18 (about S$8 million), as well as a combined S$24.2 million for UP@Robertson Quay (79 per cent sold) and The Venue Residences (30 per cent sold), noted JPMorgan analyst Brandon Lee.

"We believe this should result in lower selling prices - to drive sales - and more projects could follow suit should the weak residential outlook persist," he added.

An expected continued residential slowdown means developers will likely have to look overseas for opportunities. They may also recycle some capital by injecting assets into real estate investment trusts (Reits) or funds, said Mr Tan from DBS.

"That will be the earnings surprise that we expect from developers. This is supported further by Reits' current trading levels - at or above book - where they can actively acquire and raise equity if they need."

Developers recently also had to contend with tell-tale signs of imminent higher mortgage rates, with the three-month Sibor (Singapore interbank offered rate) now more than double last year's rate. This will further spoil buying sentiment and demand from potential home buyers.

All these said, UOB's Mr Pandey pointed out that developers' share prices are more driven by their RNAV (revalued net asset valuations). "I reckon the bigger thing to watch for is policy easing, which could be a catalyst for developers," he said.

Developers are trading at very deep discounts to RNAV of 30-40 per cent now, some even higher. Mr Pandey said this means they are factoring in a 40-plus per cent fall in property prices, but once there is confirmation that the price fall won't be as steep, developer stocks should pick up.

Outside the residential sector, offices are headed for another bullish year of higher rentals, suburban retail malls remain healthy, and hotels' performances may rebound from a weak 2014, albeit not very strongly.

Analysts' unequivocal favourite seems to be CapitaLand, for reasons ranging from its potential for asset recycling, its effective restructuring to boost returns on equity, easing of housing measures in China, and diversified regional presence with a portfolio holding significant investment assets. They also like UOL and Wing Tai on a valuation basis.