Improving market sentiment amid intense competition among big players
TRIS Rating maintains a “stable” outlook with a positive bias for the residential property industry. We expect the market to gain some momentum from last year. Key drivers will be domestic economic recovery and government investment in infrastructure projects. Demand in the provinces should also improve from strong growth in the tourism industry and recovery in agricultural product prices. Increasing number of foreign buyers will be another catalyst for condominium sales growth. The positive impact on the property market from investments in the Eastern Economic Corridor (EEC) should become evident in the next few years. Key challenges will be the lingering high level of inventory in some areas, rising land prices, and the expected rise in interest rates.
We expect to see more low-rise housing project launches this year. Most developers are trying to balance their portfolios and realize revenue within a shorter time period, after the sharp drop in backlog during the mourning period for the late King in 2016. This may impact transfers during 2018-2019. Investment in infrastructure projects in Bangkok and vicinity is opening new zones for low-rise residential property development. Several developers also plan to build more mixed-use projects which will help increase the efficiency of land usage in downtown areas and enhance the value of residential properties. In addition, the introduction of the real estate investment trust (REIT) has encouraged developers to add more rental properties to their portfolios since they can quickly recycle their capital by selling these properties to REIT to raise funds for investment in other projects.
Credit quality of rated developers may decline slightly due to higher capital needed for the new round of investments in projects launched in 2017 and this year and more investments in land and mixed-use projects. We expect the average debt-to-capitalization ratio to increase but stay below 55%, since most developers try to find a joint development partner for larger projects. We see a decline in the profitability of some rated developers since they had to spend more on promotions and marketing expenses to close old projects. Competition among larger developers is becoming more intense since market size has not grown much and large players currently occupy almost 70% share of the total market.
At the end of April 2018, TRIS Rating publicly rated 20 residential property developers1, with ratings ranging from “BB” to “A+”. There was one downgrade in 2017 and one more in the first four months of 2018. The value of the outstanding long-term bonds of 20 rated developers at the end of 2017 was Bt206,876.70 million. Around 90% of the bonds are due within three years, with around 30% of total outstanding bonds due each year. Bond issues accounted for almost 70% of total interest bearing debt of rated developers.
MARKET RECAP
In 2017, new projects launched in Bangkok and vicinity grew by 4.4% in terms of units, to around 114,477 units. The total project value launched in 2017 increased by 16% year-on-year (y-o-y) to Bt441,661 million. The significant rise in project value launches in 2017 was due to the move toward the higher-priced housing units amid concerns over the high bank rejection rate in the low-priced housing segment (unit price below Bt2 million). Housing sales in 2017 improved from the slowdown during the mourning period in the last quarter of 2016. The number of housing units sold grew by 6% y-o-y but the value sold grew by almost 20%. Condominium sales still dominated the market, accounting for 55% of the total market in terms of volume and value. Townhouses became more popular since they have lower prices than detached houses and have more living space than condominiums.
For rated developers, the total value of project launches, presales, and backlog in 2017 increased 25% - 30% due to the postponement of new project launches during the mourning period in 2016. The strong growth in presales and backlog (Including presales and backlog of the joint ventures for AP, ANAN, SIRI, and SENA) also reflects the acquisition of Proud Residence Co., Ltd., the owner of the Park 24 project, by Origin Property Development PLC (ORI). However, the combined revenues of all rated developers in 2017 increased slightly by only 3% from prior years (or around 1% if excluding ORI). Several large developers formed joint ventures and realized share profits (losses) from their joint investments instead of recognizing revenues. Thus, the combined earnings before interest and tax of rated developers increased around 9% y-o-y (or 6% y-o-y if excluding ORI).
Market Outlook
This year we expect the market to gain some momentum from last year. The market is expected to continue growing by 5%-10% from last year, supported by an improving domestic economy and rising consumer confidence. Investment in infrastructure projects, especially in the new electric train lines, will open new zones for property developers. The rising interest rate will be a major threat to both developers and homebuyers. However, we expect the Bank of Thailand (BOT) to gradually increase its policy rate in order to accommodate the growth in the domestic economy. Thus, we do not expect the BOT to increase the rate more than 0.5% this year.
Condominium sales remain the major component of the market. Increasing demand from foreign buyers is a plus for condominium sales. However, we expect to see more low-rise housing projects launched this year as several developers try to capture real demand and also try to diversify their portfolio in order to improve their revenue stability. Competition in the market will be more intense since almost 70% of sales are in the hands of big players.
Key positive factors:
• Improving domestic economy
Generally, the residential property industry moves in tandem with the domestic economy but with a higher degree of volatility. This year TRIS Rating expects the gross domestic product (GDP) to grow by 4% y-o-y, driven mainly by growth in tourism, exports, and public investments in infrastructure projects. Consumer confidence is also expected to improve. Private consumption is expected to increase as agriculture and commodity prices start to recover.
• Investment in infrastructure projects
The extensions of the electric train lines have opened several new zones for property developers. We expect to see more new project launches along the green line extensions and the blue line. In addition, the government’s announcement of its plan to invest in the EEC has drawn attention from several developers. However, developers are still focusing on developing projects in Bangkok and vicinity due to stronger demand and faster speed of absorption. Developers are quite cautious when entering provincial markets due to the lower absorption speed. Thus, we expect to see the launch of more low-rise or landed property projects than high-rise projects in provincial areas since demand and absorption rates in the provincial areas are not as strong as in Bangkok and vicinity.
• Increasing demand from foreign buyers
Demand from foreign buyers has been increasing but the proportion is still small compared with domestic buyers. It is estimated that foreign buyers accounted for less than 10% of total sales in 2017. Foreign buyers are mainly from China, Hong Kong, and Singapore. Demand from foreign buyers is still concentrated in certain locations in Bangkok (e.g., Ratchadapisek road and Sukhumvit road) and tourist destinations like Chonburi and Chiang Mai provinces. The ability to capture demand from foreign buyers will be a plus for property developers.
Key challenges:
• High level of accumulated inventory
The number of units in inventory (including built and un-built) has grown continuously over the last five years from 128,934 units in 2012 to 195,227 units at the end of 2017. The number of units launched always outpaced the number of units sold by 5%-10% each year. Condominium units accounted for the highest portion, increasing from 32% of total remaining units in 2012 to 39% in 2017. However, the proportion of low priced condominium units (prices below Bt2 million per unit) decreased from almost of 60% of total remaining units in 2012 to around 44% at the end of 2017. Due to the higher bank rejection rate in the last few years, developers have moved their target toward the higher-priced segment for which affordability of homebuyers and investors remains strong.
• Rising land cost
Land prices keep rising, especially in the downtown area where supply is limited. Several developers have started to accumulate land plots amid concerns over rising land prices. We expect to see growth in the balance sheets of several developers from the higher portion of land cost. For higher priced projects, land cost becomes a significant portion of the project cost since construction cost is relatively stable. Thus, developers acquiring land plots at cheaper prices will be at an advantage. However, construction costs and speed are still important to developers focusing on the low- priced housing segment.
• Rising interest rate
Property developers, especially large developers, have enjoyed the low interest rate environment for a very long period. The low interest rate environment benefits both developers and homebuyers, especially investors. Since interest rate is the major factor directly impacting the purchasing power of homebuyers and returns for investors, the rise in interest rates will negatively impact housing demand, especially demand from investors. However, we expect the BOT to slowly increase the policy rate in order to accommodate economic growth. We do not expect the BOT to increase the policy rate more than 0.50% this year despite the significant growth in the Fed funds rate.
• Intense competition among big players
In 2017, housing sales of listed property developers and their subsidiaries accounted for almost 70% of total sales in Bangkok and vicinity. Due to the slowdown in the property market in the last few years, we witnessed a decline in revenue and presales from several big players in the market. In addition, the entrance of large players with strong capital bases like TCC Group, CP Group, and Singha Group will be a major threat to existing players.
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