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Thread: Are developer debt fears overblown?

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    Default Are developer debt fears overblown?

    [b]Are developer debt fears overblown?

    Analysts advise investors to keep tabs on debt and project sales. Some developers also leaning on recurring income streams; Aspial and Oxley are already deleveraging[/b]

    Thu, Apr 11, 2019


    AS PUNDITS squint at their recession-watch indicators and Hyflux becomes the latest cautionary tale, attention has fallen to Singapore's most leveraged companies and the question is where the next risks lie.

    A quick scan shows that property developers are the most highly-leveraged among large- and mid-cap firms, with their average interest cover having trended downwards since the property market peaked in 2013.

    Indeed, it is no surprise that developers tend to take on more debt, given the capital-intensive nature of their business. They can also leverage higher because their assets are tangible and can be secured, which may not be the case for companies in other sectors.

    But it would be prudent for developers to mind their debt more closely now, OCBC Credit Research analyst Wong Hong Wei told The Business Times. "Refinancing costs for high-yield companies have mostly increased. For example, Chip Eng Seng's latest bond is issued at 6 per cent (interest cost), compared to 4.75 to 4.9 per cent previously."

    He added: "The property market in Singapore is no longer buoyant. There may be less room for error."

    To be sure, default fears are not top of mind for most analysts.

    Singapore's most highly-geared developers like Aspial and Oxley are already in deleveraging mode, Mr Wong said. "Aspial is already trying to deleverage, so it is less about intent and more about the ability to deleverage faster than the current pace."

    Aspial's historically-high gearing stems partly from accounting rules, RHB analyst Vijay Natarajan noted.

    For Singapore residential developments, revenue is recognised based on a "percentage-of-completion" method. But for Australia 108, Aspial's residential skyscraper project in Melbourne, the "completed-contract method" is applied and cash flow cannot be progressively recognised until units are handed over to buyers.

    At the end of last year, Aspial recognised about A$177 million (S$171 million) in revenue from Australia 108, as buyers started moving into the building's lower levels.

    The company still has S$610 million of unbilled contracts for the upper floors. Like it has done since last year, Aspial said it will use these progressive proceeds to pay off some of its debts before maturity.

    It has S$68 million medium-term notes maturing in June. It has S$200 million retail bonds maturing in April 2020 and S$150 million retail bonds maturing in August 2020.

    Mr Natarajan said: "One risk is construction risk, which I believe the developer should be able to manage."

    Although construction has progressed to level 70 out of the development's 101 levels - only one floor was added in the December-quarter last year - Australia 108 is, in fact, ahead of schedule, Aspial said.

    A spokesman told BT: "Physical progress in terms of levels has been slower as levels 67 to 71 comprise rooms housing mechanical and electrical equipment and two facilities.

    "Physical progress appears slower due to the complexity of the works for these levels. After this, physical progress will be faster for the residential levels from level 72. In addition, there was a long Christmas/year-end holiday season in December/January."

    Mr Natarajan added: "As long as they can sell projects at a margin within the timeline, there is no issue. The issue comes only when they are stuck with unsold units and are unable to pay their debt."

    Another developer which is working down its debt burden is Oxley, which said it aims to gradually reduce its net gearing to one time from 2.55 times net debt-to-equity now.

    It has S$300 million in retail bonds maturing in November 2019 and S$150 million in retail bonds maturing in May 2020.

    To pay down these debts, Oxley is focused on divestments and a quick turnover for completed projects, such as Dublin Landings in Ireland and The Peak, Oxley's largest mixed development in Cambodia, which includes the country's first Shangri-la hotel.

    As at early February, Oxley had S$3.3 billion of unbilled contracts from developments here and overseas, up from S$2.8 billion in early November last year.

    In Singapore, Oxley has received an expression of interest to acquire Chevron House for S$1.025 billion, which represents a 30 per cent premium to book value.

    It has hired exclusive agents to sell its Novotel and Mercure hotels on Stevens Road. The hotels have a carrying value of S$905 million.

    From its land-buying spree in Singapore over the last two years, Oxley has also accumulated a launch pipeline of more than 3,800 units.

    From last April to date, 2,069 units have been sold, Oxley told BT. Its 171-unit condo Mayfair Modern sold 15 units over the weekend.

    Of the remaining unsold units, 1,000 belong to Riverfront Residences and Affinity at Serangoon, which are joint-venture projects so risk is shared. Oxley's stake in Riverfront is 35 per cent; its stake in Affinity is 40 per cent.

    SooChow CSSD Capital Markets analyst YiYuan Zhao noted that take-up rates for Oxley's homes in the six months to December 2018 were below her estimates, but momentum is stabilising. She expects Oxley's gross margin for the Singapore projects to hold above 15 per cent, since it was a first-mover in the en bloc spree, buying land at costs around 25 to 30 per cent lower than comparable sites.

    She added: "Oxley's more crucial projects were launched last year. What's left are the smaller projects - Parkwood Residences and iNSPACE."

    Since no one can tell when the next property market crash will happen, analysts want to see developers moving their units and giving their bankers less reasons to worry.

    DBS analyst Derek Tan said that loans in the property space are largely project loans tied to ongoing projects: "Most names like Roxy-Pacific and Chip Eng Seng have project level debt which is tied to their recent land banking of residential land in Singapore. Therefore the strength of pre-sales during launch will be a key data point to gather if the property companies can continue to pay off their debt obligations."

    Roxy-Pacific purchased six residential development sites in Singapore last year.

    In January, it launched RV Altitude (140 units) and Fyve Derbyshire (71 units). A total of 27 units were sold as of March, Urban Redevelopment Authority data shows, as buying softened after fresh cooling measures were announced last July. Roxy has four more Singapore projects with a combined 393 units in the pipeline. These are expected to be launched over the next six months.

    Meanwhile, Chip Eng Seng (CES) owns 60 per cent of the 805-unit Park Colonial project, which was launched last July, the same day the cooling measures were announced. The project is 71 per cent sold but construction was only 10 per cent completed as at end-2018, implying a healthy amount of unbilled sales. CES is also expected to launch the 276-unit Changi Garden this quarter. More recently in January, it bought a land parcel at Kampong Java that it plans to redevelop into about 380 apartment units.

    Another important trend that might improve the sector's resilience is that developers are now more focused on growing their recurring income from investment properties, instead of relying on development income alone, RHB's Mr Natarajan said.

    DBS' Mr Tan agreed: "Both Roxy-Pacific and Chip Eng Seng have fairly strong recurring income from their hotel investments (Grand Mercure Roxy and Roxy Square for Roxy; Park Hotel Alexandra and other investment properties for CES) to provide some form of buffer in the event the residential market slows.

    "Some of the other names like Ho Bee have a large proportion of their revenues from rental income, which are more than sufficient to pay off their interest costs."

    Looking beyond the property developers, analysts are generally not fretting over corporate debt. OCBC's Mr Wong said: "The pace of increase in leverage for Singapore-listed companies has stabilised in the past two years, with interest rates still low for longer and bank debt and capital markets conducive for corporates."

    DBS analyst Andy Sim pointed out that not all companies with high leverage are cause for alarm. They must be looked at on a case-by-case basis and in detail.

    He said: "Gearing should be looked at in relation to the industry (asset- and capex-heavy sectors such as property and utilities tend to have higher gearing), stage of business cycle, business model (for example, a trading business with high working capital loans), as well as other factors such as upcoming or recent acquisitions."

    Mr Sim added: "For instance, in ThaiBev's case, its gearing spiked after its acquisition of a majority stake in Saigon Beer and Alcohol Corp (Sabeco) in December 2017. In this case, we studied the factors surrounding it and believe the company will be able to service its loan obligations and has the ability to deleverage over time, given its stable operating cashflow... And, if we looked at its historical track record - after its acquisition of F&N back in 2012 - gearing jumped but has subsequently climbed down over time."

    In the past 12 months, a number of large-cap firms have also made more use of leverage to grow.

    This is a function of where the companies are in their life cycle, noted Mr Wong: "Companies need to evolve... Large Singapore corporates appear to be at an inflection point where they are in the midst of business transformation, like Keppel and Singtel."

    Mr Wong expects the credit risks for such firms to increase in the short to medium term as they take on more leverage to grow in new and unproven directions and with potentially higher operating risks.

  2. #2
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    Default Re: Are developer debt fears overblown?

    Of the remaining unsold units, 1,000 belong to Riverfront Residences and Affinity at Serangoon, which are joint-venture projects so risk is shared. Oxley's stake in Riverfront is 35 per cent; its stake in Affinity is 40 per cent.

    What do you see?

  3. #3
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    Default Re: Are developer debt fears overblown?

    Chip Eng Seng (CES) owns 60 per cent of the 805-unit Park Colonial project, which was launched last July, the same day the cooling measures were announced. The project is 71 per cent sold but construction was only 10 per cent completed as at end-2018, implying a healthy amount of unbilled sales.

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    CES is also expected to launch the 276-unit Changi Garden this quarter.

    More recently in January, it bought a land parcel at Kampong Java that it plans to redevelop into about 380 apartment units.

  5. #5
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    Default Re: Are developer debt fears overblown?

    Quote Originally Posted by Arcachon View Post
    CES is also expected to launch the 276-unit Changi Garden this quarter.

    More recently in January, it bought a land parcel at Kampong Java that it plans to redevelop into about 380 apartment units.
    Parc Komo launch seems near and the units are bigger than the recent mickeys.

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    Default Re: Are developer debt fears overblown?

    Quote Originally Posted by Arcachon View Post
    Chip Eng Seng (CES) owns 60 per cent of the 805-unit Park Colonial project, which was launched last July, the same day the cooling measures were announced. The project is 71 per cent sold but construction was only 10 per cent completed as at end-2018, implying a healthy amount of unbilled sales.
    they collecting money for high park residences now and few years time collect money for Park Colonial. the same JV partners in the same proportion for both projects, Heeton and KSH will also benefit.

  7. #7
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    Default Re: Are developer debt fears overblown?

    Quote Originally Posted by bargain hunter View Post
    they collecting money for high park residences now and few years time collect money for Park Colonial. the same JV partners in the same proportion for both projects, Heeton and KSH will also benefit.
    [url]https://scontent-sin6-2.xx.fbcdn.net/v/t1.0-0/p526x296/56958782_10215542516528949_1418362436393631744_o.jpg?_nc_cat=107&_nc_eui2=AeEybuFC-MGpl-vknn8M5pFpOjgxfgv_LIM276dwhZRaR4owYD27pXDgdPeAaanf5AyaNY_lCRIDwWoFh0NpWhJJXSmgd2yr-gTwdqD7jFPxlA&_nc_ht=scontent-sin6-2.xx&oh=dff3dad1ac0fdddb955fc887a5632525&oe=5D3EEBB0[/url]

  8. #8
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    Default Re: Are developer debt fears overblown?

    You don't know what you miss if you never see, you will feel better when you don't know.

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