Are developer debt fears overblown?
Very good article from Business Times. The URL is
Summary:
- 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
- Property 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
- 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.
- One risk is construction risk, which the developer should be able to manage.
- 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.
- 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.
- 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
- 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.
- 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.
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