THE resilience of property developers will be put to the test in 2015 as the market softens further because of the banks’ tighter lending policy, as well as the bleak economic outlook.
In a downturn, developers with a strong balance sheet and steady cash flow will be in a better position to weather the storm. Having a highly geared balance sheet would exert pressure on cash flow to meet debt obligations.
Whether a developer sinks or swims in a weak market will also depend on its market segmentation and product offerings.
Total borrowings versus cash flow
Analysts contacted agree that a strong balance sheet will be the key to survival next year. “Companies with strong balance sheets — and especially low gearing levels — will be able to stomach the potential industry downturn. When the industry is back on the up-
cycle, they can go back to purchasing land,” says one.
A check of 20 property developers’ most recent balance sheets shows that many of the mid-cap players had net gearing levels that were far below the ideal ceiling of 0.5 times for the sector (see table). Some, such as Matrix Concepts Holdings Bhd and Titijaya Land Bhd, were even in net cash positions.
The big-cap players, meanwhile, have higher ratios, with Eco World Development Group Bhd and Tropicana Corp Bhd’s net gearing breaching the optimal 0.5 times level. In a recent note, TA Securities estimates that Mah Sing Group Bhd’s net gearing could touch 0.5 times after its recent land acquisitions.
It is worth noting that both Eco World and Mah Sing will be making cash calls. Eco World will raise about RM2.2 billion via an issuance of new shares and a rights issue with warrants, plus a share placement of up to 20% of its enlarged share base.
Maybank IB Research estimates that Eco World’s net debt-to-equity level would drop to 0.33 times by the end of its financial year ending Oct 31, 2015 (FY2015), which seems to be rather comfortable.
Also, the property group will have more than 4,000 acres of landbank that could last the group another six years, CIMB Research reckons.
As for Mah Sing, the group is raising RM630 million from its upcoming rights issue with free detachable warrants. Of this, RM530 million or 84% of the gross proceeds is expected to be used for land purchases, mostly to partly pay for land in Seremban (with a potential gross development value of RM7.5 billion) and Puchong (GDV: RM9.3 billion).
Over at Tropicana, its balance sheet for 3QFY2014 showed that it had RM301.67 million worth of assets available for sale. Should that happen, its net gearing level could be reduced to 0.61 times. Kenanga Investment Bank, however, said in a note that Tropicana’s management was looking to dispose of RM700 million to RM800 million of non-core assets in the coming year.
Another analyst says one should look beyond the net debt-to-equity ratio because it does not take into account a property developer’s ability to service its debts from its cash flow. He suggests looking at the ratio of earnings before interest, taxation, depreciation and amortisation (Ebitda) to total borrowings.
“Developers’ cash flow will be strangled when sales slow down ... cash available to pay interest expenses plus other costs will be less than before. In this scenario, the company is likely to run into financial troubles,” he explains.
The average ratio of the trailing 12-month Ebitda to total borrowings for the 20 property developers was 1.38 times. If one takes UOA Development Bhd out of the list — given that it has a far superior ratio of 12.01 times — the average stood at 0.82 times.
While the ratio showed that the property players’ cash before the changes in working capital that came in the last 12 months was on average higher than their total borrowings — which gave much breathing space before paying off debt and interests — half of those companies have an Ebitda-to-total borrowings ratio of less than 0.5 times. Only five had ratios of above the 0.82 times average, excluding UOA Development.
Brem Holding Bhd, which has landbank mainly in the Segambut area, a stone’s throw from Mont’Kiara, has an Ebitda-to-borrowings ratio of 0.62 times. Titijaya Land Bhd, which builds medium- to medium-high-end properties, has a ratio of 0.9 times. Tambun Indah Land Bhd, meanwhile, has a ratio of 0.95 times.
Johor-based KSL Holdings Bhd has an impressive ratio of 1.78 times, meaning its one-year Ebitda is more than enough to clear its debt nearly twice over. The developer’s financial statement for the nine months ended Sept 30, 2014 (9MFY14) also showed that it derived over 24% of its pre-tax profit from rental of properties and car park management services, which gives it steady recurring income.
Again, most of the property developers with a ratio of below 0.5 times are big-cap players, with Eco World and UEM Sunrise having the smallest ratios of just 0.05 and 0.08 times respectively. For property players that are raising cash and using the proceeds to trim their borrowings, the ratio would improve further.
Market segmentation and product offerings
In the high-end sector, many are expected to be hit harder. An industry executive heaves a sigh when asked whether demand for that class of properties could be sustained next year.
“Mortgages are expected to be lower next year, which will then affect sales. In terms of affordability, industrial properties are still doing fine, followed by commercial and residential properties,” he says.
Bank Negara Malaysia’s latest data showed that while the total value of approved loans for residential properties between January and October inched up 2.43% to RM101.08 billion, the value of applications, however, fell 7.15% year-on-year to RM187.67 billion from RM202.13 billion.
Meanwhile, loan applications as well as approvals for non-residential properties showed a drop. Loan applications were down 14.75% to RM86.49 billion, while approvals dipped 2.51% to RM42.34 billion.
Winson Ng, a banking analyst with CIMB Research, tells The Edge that while there was pent-up demand pending the Goods and Services Tax (GST), the loan application value was lower possibly due to a lower number of applications and smaller amounts asked for.
“It [drop in loan application value] could have been worse had it not been for the GST,” he says.
As for the uptick in loan approvals, Ng points out that the increase is only in single digits, and there have been declines for individual months. This reinforces some industry players’ grouses that mortgages have been harder to come by following Bank Negara’s cooling measures last year.
Last year, Bank Negara shortened the mortgage tenure to 35 years from 40 previously in a move to curb speculation and cut household debt. The developer interest bearing scheme was scrapped while Real Property Gains Tax was raised.
Another analyst points out that the anticipated downturn in the property market will be different from that during the global financial crisis in 2008, considering there might not be much inflow of foreign liquidity this time around.
“The crisis previously wasn’t so bad because foreign funds were buying in. However, the end of quantitative easing (QE) and the expectation of a rise in US interest rates could impact property sales,” he says.
RHB Research Institute, in a recent note on property stocks, estimates overall property sales could fall by 5% to 10% in the first half of next year, and 3% to 5% for the whole of 2015.
“While loan rejection rate should remain high (currently at 40% to 50% as quoted by some media reports) as banks continue to tighten mortgage lending, the impact of GST will be felt from April 1, 2015. The fall should be more severe in 2Q2015, immediately after the implementation of GST,” RHB analysts Loong Kok Wen and Alia Arwina writes in the note.
They add that it could be more favourable for the Penang property market as the weakening ringgit should benefit exports and tourism. “Both the manufacturing and services sectors account for more than 90% of Penang’s economy. Hence, affordable housing players such as Tambun Indah should still fare better.”
Another analyst agrees that the Penang-based developer could withstand a potential downturn next year as it builds affordable property. Also, there is still demand in the Penang market.
This article first appeared in The Edge Malaysia Weekly, on December 29, 2014 - January 04, 2015.
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