Residential Property Developers

Stocks News Monday May 8, 2017 13:00 —TRIS News Release

Slight growth in demand amid several unfavorable factors, however, developers should be able to adjust their portfolio to match the market environment.

SUMMARY

TRIS Rating maintains a “stable” outlook for the residential property industry. Despite several lingering unfavorable factors, we believe that most rated property developers will be able to adjust their strategies to cope with the current tepid economic conditions. Demand in 2017 is expected to flat or grow slightly from 2016. Banks are still maintaining stringent conditions on loans to homebuyers amid concerns over the high level of household debt nationwide and a recent rise in non-performing loans (NPL). However, we forecast that the ratio of household debt to gross domestic product (GDP) will not increase further. In addition, interest rates will not rise as fast as we had projected previously. The major concern for this year will be the ongoing rise in the number of unsold housing units available for sale, especially in the low-priced condominium segment.

At the end of 2016, according to the Agency for Real Estate Affairs (AREA), there were 184,329 housing units available for sales in Bangkok and the vicinity. The proportions were about equal: about 30% of the total were single-detached house (SDH) and detached house (DH) units, 30% were townhouse (TH) units, and 38% were condominium units. The numbers of condominium units available for sale were around 70,000 units, the highest number since the 1997 financial crisis. Around 70% of the remaining condominium units were units priced at less than Bt3 million per unit. Based on the sales rates over the past couple of years, this will take almost two years to move the remaining units. As there are more remaining units available for sale, developers may have to lower unit prices or offer more benefits to customers. These sale incentives will hurt the profit margins of the developers which target homebuyers in the low-priced segment.

Currently, several developers have been aware of the excess supply in the low-priced condominium segment. These developers have adjusted their portfolios of projects by focusing more on the high-priced housing segment. Demand in the high-priced segment is less sensitive to economic conditions. Some developers have also added more rental assets that generate recurring income into their portfolios. In addition, several developers now targets foreign homebuyers and foreign investors to offset the slowdown in local demand. These efforts will help support the growth rates of these developers.

TRIS Rating rates 20 residential property developers. The revenues of rated developers grew in 2016, rising by 4% year-on-year (y-o-y), thanks to the government tax incentive schemes launched in the last quarter of 2015. The incentives expired in April 2016. Presales of 20 rated developers were around Bt246,000 million in 2016, almost the same level as in 2015, despite a 12% y-o-y drop in the value of new projects launched. The profitability remained satisfactory while the average debt to equity ratio improved slightly. This year, the value of new projects launched is expected to increase because several projects were postponed from last year. However, the number of units launched may not increase. Developers are placing a great focus on higher priced housing units because demand remains strong.

MARKET RECAP

According to AREA, the numbers of housing units launched in 2016 were around 110,577 units, a slight increase of 2.4% from the 107,990 units launched in 2015. However, the numbers of housing units launched were still lower than the peak of 131,645 units in 2013. Around 53% of the total numbers of units launched were condominiums, followed by THs (27%), plus SDHs and DHs of about 17% - 18%. Around 61% of total units launched were priced less than Bt3 million per unit. The housing units priced at more than Bt10 million per unit accounted for only 3% in terms of the number of units launched but at more than 18% in terms of value.

The demand for housing units in Bangkok and the vicinity in 2016 dropped by 5.3% y-o-y in units and by 3% in value. Sales of TH and condominium units dropped by 10.6% and 5.3%, respectively. In contrast, DH unit sales increased by 4.6%. However, the portion of SDH and DH sales accounted for only 16%-17% of total unit sales. As a result, inventory increased by around 7.2% in units and in value.

According to the interviews with the rated developers, the rejection rate by banks rose for most developers which targeted middle- to low-income homebuyers. For housing units priced below Bt2 million per unit, rejection rates were around 30% on average and as high as 50% for some projects. The rejection rates for more expensive housing units were around 10%-15%. Despite concerns over the rejection rate for middle- to low-income homebuyers, the numbers of units launched in 2016 still increased. However, the value of units launched in 2016 dropped by 14%, from Bt444,359 million in 2015 to Bt382,107 million in 2016. The drop implies the developers still launched more low-priced housing units.

For the rated developers, the combined revenues of all rated developers increased by almost 4% y-o-y, thanks to the government tax incentives in the first four months of 2016. In the first half of 2016, most rated developers focused on the sales and transfers of completed units. New projects were planned for launch in the second half of the year. However, the market sentiment was listless in the second half of the year after our beloved King Bhumibol Adulyadej has passed away. Several developers have postponed the project launches to 2017. The combined value of the new projects launched dropped to around Bt268,000 million, a 12% decline from 2015. The presales across the 20 rated developers were nearly flat at around Bt246,000 million in 2016, the same level as in 2015. The slowdown in presales will affect the growth in recognized revenue of the large developers over the next couple of years.

KEY ISSUES IN THE NEXT 12 MONTHS

• Inventory remains high. We forecast the number of housing units available for sale to hang at a high level since demand will not grow strongly. At the end of 2016, around 50% of the new housing units available for sale are priced below Bt2 million per unit. The units in this price range are targeted at the low-income homebuyers. The inventory overhang is a notable drag on the market. However, the excess supply is concentrated in certain areas like the areas along the route of the Purple Line electric train, and in the Bangna and Rangsit areas. Based on the selling rate over the past two years, it will take around two years to move the units currently in inventory. The high inventory level will pressure the prices of any new projects launched in those areas. Developers may have to offer more discounts or incentives to homebuyers in order to sell the units and reduce inventory levels. Last year, we started to see a slight decline in the housing price index. According to the data compiled by the Bank of Thailand (BOT), the housing and land prices have been rising more slowly starting in the second half of 2016.

• Policy rates are not expected to rise. Due to the sluggish growth in the domestic economy, we do not expect the BOT to increase its policy rate in the near term. The US Federal Reserve (Fed) has started to increase the Fed funds rate, but we expect that the rates will increase slowly and gradually. In addition, the Fed’s decision to increase the Fed funds rate is still dependent on the economic data of the United States (US). If the US economy shows no clear signs of recovery, the rates may not increase as expected. Currently, we note the policy rates in several countries, including Thailand, depart from the pattern seen in the US. This implies that each central bank tries to accommodate the growth in the domestic economy rather than to follow the US. In addition, the Fed funds rate is still low when compared with the prior levels.

• Household debt to GDP should be under control. The household debt to GDP dropped slightly from 81.2% at the end of 2015 to 79.9% at the end of 2016. First-time car buyers, who recently purchased vehicles as part of the government tax saving scheme, are now reaching the end of the mandatory holding period. As car buyers pay off of the auto loans, the debt to GDP level will fall. In addition, the prices of agricultural products have recovered somewhat, boosting incomes in provincial areas. The slowdown in the growth of consumer loans, coupled with a gradual recovery of the domestic economy, should keep the household debt to GDP ratio under control. The lower ratio should lessen the concerns of banks over the repayment ability of homebuyers. The loan rejection rates may fall accordingly.

• Diversification is the key. Due to the healthy demand for luxury and high-priced housing units, several developers have changed their focus toward this segment while waiting for a recovery in the lower-priced segment. However, not every developer can compete in the high-end segment since a good brand name is required. Thus, innovation will be another way for some developers to attract customers. For example, some developers offer townhouses with more bedrooms and usable space in a limited area of land, some focus on mixed-use property projects, and some provide guaranteed rental yields for investors. A flat population growth rate and a slowdown in the urbanization rate have also forced developers to diversify not only their product lines but also their customer bases.

• Overall financial performances of rated developers are still better than the industry average. We forecast the profit margins of the rated developers will be better than the industry average. A gradual market recovery, despite absence of any clear positive sign, will cause the profit margins to remain steady. This level of profitability is still acceptable in our view. The revenues of most rated developers should grow, but only slightly. Due to the declining in the value of new projects launched last year, the weighted average debt-to-capitalization ratio (adjusted for the proportions of debt held by joint ventures (JV) at some companies) dropped slightly from 53% in 2015 to around 51% in 2016. However, this ratio should increase in 2017 since companies plan to launch more new projects this year. The backlog of 20 rated developers at the end of 2016 dropped slightly by almost 6% y-o-y, implying that the presales are needed to be built-up this year.

Changes in Rating/Outlook
In 2016, TRIS Rating assigned a new rating to ORI at “BBB-/Stable”, upgraded three issuers – ANAN, UV, and GOLD -- and assigned a “negative” outlook to AREEYA. Most rated developers have a “stable” outlook, except AREEYA, NOBLE and LALIN, which carry “negative” outlooks. Due to defaults of several non-rated issuers, we expect the number of new rated issuers to increase this year. However, the credit quality of new issuers is expected to be lower than the existing ones. Looking forward, large developers still perform better than the market on average. This is due to an access to low-cost funding, strong connections with suppliers and contractors, and strong brand names. Small developers, which rely on short-term funding sources like bills of exchange, are needed to be monitored closely.

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