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New cracks appear in the foundations of some Asian property developers

Speculative money flows remain a risk to open economies, explain Standard & Poor’s Christopher Lee and Bei Fu.

While some property developers in Asia are benefiting from relatively favourable market conditions, policy risks and uncertain economic conditions will strain the outlook for others.

For Asia’s real estate developers, the good news is that relatively favourable monetary and external refinancing conditions should help property sales and liquidity this year. The bad news is that speculative money flows remain a risk to open economies, such as Hong Kong and Singapore. A key concern is that property prices in these markets could correct sharply if money flows reverse course. In particular, Hong Kong developers could have a challenging year ahead, in view of recent government measures to curb speculation. The outlook is brighter, however, for those operating in Indonesia, mainland China and Japan.

Southeast Asia: Indonesia on positive outlook, Singapore and Vietnam on shakier ground
In Southeast Asia, we have a slight negative bias on Singapore. Weak GDP growth, large supply and policy risks are likely to constrain the Singapore residential property market this year. On the other hand, domestic liquidity is abundant and mortgage rates are unlikely to increase sharply, in our view.

Demand for residential property is slowing, and foreign purchases in particular have weakened due to extra stamp duties for property transactions. Demand is mostly focused in the mass-market catering to local upgraders. The government is increasing land supply to ensure a healthy supply pipeline, which should help deflate price expectations. Overall, we expect the government’s policy stance to remain negative as property prices and investment demand remain buoyant despite recent measures to cool the market.

We also maintain a negative outlook for the Vietnamese market. The main constraining factors we see are high levels of inflation, still-high interest rates and a limited availability of mortgages as banks struggle to repair their balance sheet. Year-to-date property sales are sluggish, with limited signs of a recovery, and we expect property prices will remain under pressure in 2013. Government restrictions on lending to real estate developers have slightly relaxed since March 2012, amid signs that hyperinflation is easing gradually and currency volatility is moderating.

Nevertheless, the property sector may take time to recover, as banks are cautious about lending to risky sectors as they look to improve their financial strength following large losses in the recent economic downturn. Poor property sales, access to financing and tight liquidity remain a focus for the credit quality of Vietnam-based property developers.

Our only positive outlook is on the Indonesia property sector, which we believe will benefit from continuing economic growth, low mortgage rates, increasing household incomes and growing urbanisation. Infrastructure improvements are likely to spur property development, while condominium sales have proved resilient and property sales are strong. We expect property prices to increase, albeit at a slower pace than previously. Property developers are likely to have another good year. Developers may find it challenging to strike a balance between growth and financial discipline while they are attempting to sustain healthy land reserves and development pipelines amid rising land costs. Profitability may also start to moderate as housing price growth decelerates and land costs rise.

China has stable outlook as liquidity and sales improve
Residential developers in China are starting to rebuild their strength. Sales now have positive momentum, after picking up since the third quarter of 2012. In addition, more developers have improved their liquidity at favourable costs because funding channels have reopened, such as offshore capital markets. Further, refinancing risks have receded, partly because of more proactive financial management. But smaller developers could still struggle to raise funds or overcome stiff competition.

We don’t expect the central government to drastically tighten or loosen its controls over the real estate industry this year, but it may slightly adjust some measures — particularly to suppress investment demand. Our view is predicated on property prices increasing modestly and tracking economic improvement. Standard & Poor’s projects GDP will rise 8% in 2013, a modest recovery from 2012.

Developers appear to have a more reasonable appetite for land acquisitions, compared with the recovery phase of past cycles. This partly reflects developers’ anticipation that the government will tighten its policy towards the housing sector if land prices increase significantly. Many rated players used all or part of their equity and bond proceeds to refinance or pay down debt. Developers’ communications with stakeholders have also improved, and operational and financial targets also appear more realistic. Most developers met or exceeded targets in 2012, and we expect them to retain such discipline this year.

We expect the liquidity of large developers to be good in 2013, relative to last year, given their likely healthy sales, better access to financing (in onshore and offshore markets) and more disciplined financial management. Several smaller players that are struggling to secure financing have resorted to asset sales to improve liquidity. More developers are likely to tap the offshore markets in search of lower funding costs and longer-term financing.

Risks are rising for Hong Kong residential developers
We see growing risks for the residential property sector in Hong Kong. We believe steep residential property prices are unsustainable in the long run. Housing sales are vulnerable to external shocks, such as rate hikes, and increasing regulatory risks, as local buyers are priced out of the market. Nevertheless, stable leasing income and low gearing should support the credit profiles of Hong Kong developers.

Regulatory uncertainty remains the top risk for the Hong Kong residential property sector this year, in our view. The government’s recent measures — such as higher stamp duties, lower mortgage financing and additional duties on foreign purchasers — have had a limited effect on property prices so far although sales volume has dropped. We believe the government will introduce more measures if prices increase further due to populist pressure and also concern about the stability of the banking system if prices drop sharply.

The risk to the government’s repeated and frequent intervention in the property market is that these measures could exacerbate and deepen a correction when the property market turns down. This risk is pronounced for Hong Kong as foreign buyers are a significant source of demand, local buyers’ affordability is comparatively low and external shocks have been the main cause for market downturns in past cycles. Delayed policy reactions and counter measures could cause bigger swings than would have been the case in the past.

Some signs of market recovery in Japan
We maintain our stable outlook for the Japanese property sector, given signs of recovery, including increased property transactions and equity-financing activities by Japanese real estate investment trusts. Nevertheless, we expect knock-on effects in the industry from sluggish GDP growth in Japan this year, and a mixed outlook for the global economy, which would undermine Japanese export growth to a degree.


The authors of this article are Christopher Lee, managing director and analytical manager for Asia-Pacific corporate ratings, and Bei Fu, director for corporate ratings at Standard & Poor’s.

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