TRIS Rating expects the residential property market to recover in the second half of 2014. The expected recovery reflects rising consumer confidence after concerns over political tension have been abated. However, a relatively high level of household debt remains a major concern. Industry-wide sales in 2014 is expected to be around 20% lower than in 2013 due to the relatively high base of sales figures in 2013 and the sharp decline in sales in the first half of 2014.
Condominium presales in the first half of 2014 dropped sharply by 47% year-on-year (y-o-y). Demand for condominiums comes from homebuyers, investors and speculators but the last two groups are the most sensitive to market conditions. The drop in demand caused developers to take a wait-and-see strategy. The number of new condominium units launched in the first half of 2014 dropped by almost 35% year-on-year (y-o-y). In contrast, demand for low-rise housing units, which are mostly real demand, increased by 5% y-o-y.
For the first half of 2014, most rated developers achieved 40%-50% of the level of revenue they achieved for full-year 2013, except for MK and SIRI whose revenues stood at only 34% and 36% of their total revenues in 2013. The backlog of most rated property developers remains high. As of June 2014, the backlog of 16 rated developers stood at Bt240,000 million. The backlogs are expected to be realized as revenues within the next two to three years. Profitability levels were about the same as last year, except for AREEYA and PRIN, whose operating profit margin declined substantially. The average leverage level of rated developers still increased since developers had to continue funding the construction of the condominium projects launched in the past two years. The average debt-to-equity ratio of 16 rated developers rose from around one time at the end of 2013 to 1.12 times at the end of June 2014.
For the first nine months of 2014, the credit ratings for most rated developers remain unchanged. Only LH and SPALI received rating upgrades due to improving revenue and profitability while leverage remained at acceptable levels. The challenges for property developers during the next few years will be an expected rise in interest rates after the US bond buyback program ceases, a labor shortage, and tighter bank lending policies. However, on the positive side, a clearer political outlook and the upcoming government investments in infrastructure will help raise demand for property.
Residential property sales dropped markedly in the first half of 2014. Several developers took a wait-and-see strategy during the period of political turmoil. Residential property sales in the first half of 2014 dropped by 30% y-o-y. The drop was in the condominium segment where demand came from homebuyers, investors and speculators. Demand from investors and speculators is quite sensitive to market conditions and, as a result, can dry up very quickly. Sales in the low-rise housing segment increased by 5% y-o-y, reflecting real demand. In contrast, sales in the condominium segment dropped sharply by 47% y-o-y, reflecting the drop in the number of new condominium projects launched in the first half of 2014. The number of condominium units launched in the first six months of 2014 was 34% fewer than in the same period of 2013.
The residential property development industry has become more consolidated. SET-listed developers and their subsidiaries have around 60-65% market share of property sales in Bangkok and the vicinity. The moves of these developers tend to lead the overall market. Due to their diversified product lines and strong financial profiles, these developers are quite flexible and can adjust quickly to changes in customer demand and market conditions. They are more cautious about the timing and type of products they launch. In addition, most of them have a relatively high backlog of condominium units on hand. As a result, these developers have not rushed to launch new condominium projects.
In addition, several developers have tried to diversify their project and product portfolios to include more low-rise housing projects. Low-rise projects are believed to have lower risk than condominium projects. Several developers launched more low-rise housing projects in the first half of this year and have postponed launches of new condominium projects until the market shows signs of improvement. However, TRIS Rating expects to see more activity in the last quarter of this year since these developers also have to refill their depleted backlogs.
Despite the drop in the number of new condominium projects launched in the first half of 2014, the absorption rate remained low. As a result, the inventory of unsold condominium rose by around 11% in June 2014, compared with the level at the end of 2013. However, if the market sentiment improves in the second half of 2014, the absorption rate should rise and inventory levels will fall. Thus, we do not expect to see any significant price decreases in this segment since land prices and construction costs are still rising.
TRIS Rating expects that property sales will improve during the second half of 2014. However, we do not expect a strong comeback like in 2010. Political tension during 2008 through the first half of 2010 kept demand low. Pent-up demand drove a strong recovery in the last quarter of 2010. Industry-wide sales in 2014 is expected to be around 20% lower than in 2013 due to the relatively high base of sales figures in 2013 and the sharp decline in sales in the first half of 2014. In addition, the relatively high level of household debt remains a major constraint. At the end of 2010, the ratio of household debt to GDP stood at around 60%. The ratio stood at around 80% at the end of 2013. In August 2014, the National Economic and Social Development Board (NESDB) cut its estimate of GDP growth in 2014 to only 1.5 – 2 percent, compared to its February 2014 projection of 3 - 4 percent.
The lower GDP growth rate was due to weaker exports because of sluggish global economy, slow recovery of the tourism industry, limited public and private investments, and lower domestic car sales as a result of the 2012 first-time car buyer tax refund scheme. Going forward, property developers are facing more challenges, such as slower growth in demand, tighter financing conditions, and a labor shortage. However, on the positive side, the resolution of some political issues and the upcoming government investments in infrastructure will help raise demand for property.
Due to the fragile economic recovery, the Bank of Thailand still maintains its one-day policy interest rate at 2%. However, sooner or later, interest rates are expected to rise after the US ends its bond buyback program. Rising interest rates could hurt developers in terms of higher funding costs and lower consumer purchasing power. The current market slowdown, coupled with the expected rise in interest rates, could also drive away both investors and speculators who purchase condominium units for rent or resale. This group of buyers is estimated to comprise 20%-30% of total condominium demand. Higher condominium unit prices and rising interest rates make investments in condominium units less attractive for these investors.
Key Trends for the next 12 months
- Borrowers’ credit profiles deteriorated, leading to higher rejection rates by banks and lower sales of housing units, especially in the low- and mid-priced housing segments. Thus, we expect developers to offer more products in the higher price range due to concerns over the credit quality of home buyers.
- Investments in provincial areas will be mainly in the low-rise housing segment. Most developers will keep their focus on Bangkok and the vicinity. The recent political instability and the imposition of martial law caused a slowdown in demand for housing in tourist destination provinces. In addition, after hefty investments in the provincial areas during the past two years, several developers have found that demand in some provincial areas was much lower than previously expected.
- Land prices keep rising, especially in the downtown area where supply is limited. Land purchases are expected to increase in the second half of 2014. However, most developers do not buy and hold land for longer than two years before starting project development. Large holdings of vacant land could weaken a developer’s credit profile if its sales drops substantially. Currently, only few rated property developers bought more land than they would need for projects in the next one to two years. As of June 2014, the value of land awaiting development at 16 rated developers stood at Bt17,833 million, accounting around 10% of their revenues in 2012 and 2013. Since they have survived several crises, most rated developers are more cautious in land accumulation and are more flexible with their investment strategies. Some developers even cancel condominium projects if presales are below their targets.
- Large and diversified developers remain resilient. The backlog at rated property developers remains high. As of June 2014, the backlog of 16 rated developers stood at Bt240,000 million. The backlogs are expected to be realized as revenues within the next two to three years. During an economic slowdown, most rated developers tend to focus more on profit than sales volume. In addition, most rated developers have become more diversified in terms of their products and price points. Thus, they can adjust their product portfolio and their project launches to match changing economic conditions.
- Smaller and less diversified developers are more vulnerable. Due to their weaker credit profiles, these developers may not be able to withstand prolonged market slowdown. If the cash inflows from selling housing units drop, liquidity will tighten up and lenders will impose more stringent credit conditions. Leverage would rise sharply during an economic downturn.
- More developers entered the bond market in the last few years. Highly rated developers also have an advantage over their lower-rated or non-rated peers since they are able to access low-cost funding sources either from banks or bonds. Bond issuances by rated developers have totaled Bt38,900 million so far in 2014, almost the same amount as the same period last year when Bt38,085 million was issued. Around 50% of bond issuances were for refinancings and 50% to fund business expansions. As of 26 September 2014, rated companies had Bt128,087 million in bonds outstanding, up by 24% from Bt103,436 million at the end of 2013. The outstanding bonds account for around 54% of the value of all interest-bearing debt combined across all rated developers.
Changes in Rating/Outlook
Despite the weakening operating conditions, the credit trend for most rated developers remain unchanged so far in 2014. Some developers received rating upgrades this year as they diversified their sources of income and boosted profitability while leverage remained at acceptable levels. For the first half of 2014, most rated developers achieved 40%-50% of the revenues they achieved in 2013.
Profitability levels were about the same as last year, except for PRIN and AREEYA. However, leverage is on the rise since most rated developers have a number of condominium projects under construction. Developers with more aggressive debt-funded growth and low-quality backlog (down payments less than 5% of the unit selling price, for example) may face downgrades since leverage is rising and the transfers of finished units remain uncertain. Smaller developers face greater risk from their sales and financing prospects. In addition, during market slowdown, selling expenses may rise in an effort to boost sales. Profit margins may continue to decline. However, the profit margins of most top rated developers will remain stable since they have started to realize revenues from condominium units sold in the past few years. The costs are known, while the remaining unsold units are expected to sell at current market prices, which are usually higher than the initial offering prices. Thus, profit margins of these developers remain acceptable.
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