SUMMARY
TRIS Rating expects the demand for housing to drop by 10% this year. The negative factors are likely to outweigh the positive factors. The major negative factors include the new loan-to-value (LTV) measures implemented by the Bank of Thailand (BOT), expected fewer Chinese buyers, and political uncertainty. In addition, the number of non-performing mortgage loans are rising as is the inventory of condominium units. Both of these facts are key concerns for the regulators and commercial banks. The key growth drivers remain low interest rates plus the expansion of the mass transit system in Bangkok and the vicinity.
The demand for condominiums will be directly affected by the new BOT measures and slowing of the Chinese economy. For housing priced at less than 10 million per unit, the BOT reduced the LTV limit to 80% from 90%-95% for the second mortgage contract, if the first mortgage period is less than three years. The LTV will be reduced to 70% for the third and subsequent mortgage contracts for all housing price ranges. In TRIS Rating’s view, this change will affect demand for condominiums more than demand for landed properties. This is because most people purchase a condominium unit as their second home. However, the LTV limit will not affect the first-time homebuyers. So, in our view, the new LTV rules should affect around 10%-15% of homebuyers.
As the economy in China slows, we expect demand for condominiums would be affected. According to the data from our 22 rated developers, foreign buyers accounted for 27% of their total condominiums presales in 2017 and rose to 33% in 2018. It is estimated that the Chinese buyers accounted for around 50% of all foreign buyers, in terms of value. Foreign buyers usually have to make a down payment equal to 20%-30% of the unit price. The high down payment often means that foreign buyers are more likely to complete the transfer of the finished unit rather than walk away and lose the deposit. Thus, we believe a slowing of the economy in China or other nations is more likely to affect demand for new units rather than transfers of units already under contract.
TRIS Rating expects the leverage levels of the rated developers will rise. Since we forecast demand is likely to decline and the number of unsold housing units will rise, should developers continue to launch new projects. In addition, some developers are investing more in the commercial properties such as shopping centers, office buildings, and serviced apartments. The weighted average debt-to-capitalization ratio of the 22 rated developers is expected to rise to around 55% in 2019 from around 51% a few years ago. The ratio of funds from operations (FFO) to total debt could drop to around 12%-13% from levels around 14%-15% few years ago.
In 2018, TRIS Rating rated 22 residential property developers. The ratings ranged from “BB” to “A+”. Two rated developers were downgraded last year and two were assigned a “positive” outlook. Taken together, the 22 rated developers had outstanding long-term bonds worth Bt232,302 million at the end of 2018. This figure accounted for around 64% of reported interest-bearing debts aggregated across the 22 rated developers.
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MARKET RECAP
According to the data by Agency for Real Estate Affairs (AREA), the value of new projects launched and sold in Bangkok and the vicinity (or the Bangkok Metropolitan Region (BMR)), peaked in 2018. The number of units launched grew by 9% year-on-year (y-o-y) to 125,118 units and the value of units launched grew by 28% y-o-y to Bt565,674 million. Housing sales also peaked in 2018, climbing at Bt511,000 million, a 23% y-o-y growth. The number of housing units sold grew by 16% y-o-y.
Condominium sales still dominated the market, accounting for 58% of the total market in terms of volume and value. The sales of condominiums increased by 22% y-o-y in terms of units and 29% y-o-y in terms of value. Condominium inventory also accumulated, rising by 6.5% y-o-y to a peak at 81,818 units. However, the value of the remaining unsold units increased more rapidly by 15% y-o-y to Bt329,410 million, or around 1.4 times of the average annual presales during 2016-2018.
Sales of landed property also grew in 2018. Sales rose by 9% y-o-y in terms of units and 16% y-o-y in terms of value. The ending inventory of landed property, equal to the remaining value of the landed property if completely built, was around 2.3 times the average annual sales value during 2016-2018. Landed properties are built phase by phase, in contrast with condominiums which are built as one complete project. As a result, TRIS Rating does not see the rise in the remaining value of landed properties being as much of an issue as the rise in the value of unsold condominium units.
Large developers still dominate the market. The 22-rated developers and their subsidiaries account for 70%-80% of total sales of residential property in the BMR. However, the presales reported by the 22 rated developers include presales of units sold in other provinces, not just the BMR. According to data from AREA, presales of SET-listed developers and their subsidiaries account for 72%-74% of total presales in the BMR.
The average price of housing units has been rising. The average price rose to Bt4.5 million/unit in 2018 from Bt3.9 million/unit in 2017. The rise reflects the cost upswing of land and changes in the product portfolios. Developers are building more higher-priced products. One reason for the shift toward higher-priced units is a climb in the number of non-performing mortgage loans. Banks have become much stricter when lending to homebuyers in the low-income segment.
The deterioration in the quality of mortgage loans has raised a concern for the regulator like the BOT. Last year, the BOT proposed new “macroprudential” measures which target the homebuyers that have more than one mortgage loan contract. The new requirement comes after the central bank found that the financial system was showing signs of growing vulnerability in the property sector. The number of mortgage loans extended to borrowers for the second or the third home was rising and credit quality appeared to be deteriorating.
The BOT reduced the LTV limit to 80% from 90%-95% for the second mortgage contract, if the first mortgage period is less than three years, for housing priced at less than Bt10 million per unit. The LTV will be reduced to 70% for the third and subsequent mortgage contracts for all housing price ranges. However, the LTV ratio remains unchanged at 90%-95% for borrowers who apply for the first mortgage to buy a home priced below Bt10 million. The new macroprudential measures were implemented from the first of April this year. The BOT expects that these measures will help curb speculative demand and improve the quality of housing loans.
Market Outlook
TRIS Rating forecasts demand for housing to slow by 10% this year. Several key growth drivers and several challenges are listed below.
Key growth drivers:
• Investment in infrastructure projects. The extensions of the mass transit network in the BMR will open new zones for property developers. Eight projects are currently under construction, three have been approved by the Cabinet, and one project is out for bidding. The investments in the Eastern Economic Corridor (EEC) should become materialize in the next couple of years. As a consequence, most developers are still focusing on the BMR and tourist destinations.
• Interest rates remain low. Last year, the BOT raised the one-day policy rate by just 25 basis points in the last quarter of 2018. This rise was less than our expectation. There are rising concerns over slower growth prospects for many countries. In addition, the US Federal Reserve Bank is not expected to increase the Fed funds rate this year. As a result, the BOT is under no pressure to increase the policy rate. We therefore do not expect an interest rate hike this year. In addition, several rated developers have enjoyed lower bond coupon rates rather than the rates that the banks would charge for loans. The average coupon rate of a three-year bond issued in 2018 was just 2.5% for an “A” rated issuer and 3.93% for a “BBB” rated issuer. Several developers have chosen to fund their projects by issuing bonds rather than obtaining bank loans. In 2018, bond issues constituted around 64% of the reported interest-bearing debt (IBD) financing of the 22 rated developers.
Key challenges:
• Stricter LTV rules. In TRIS Rating’s view, the new LTV rules will affect two groups of people. The first group is homebuyers that expect to buy a housing unit using 100% debt financing. If these homebuyers cannot borrow 100% of the price of the housing unit, they may have to delay their purchase. The second group is investors that purchase several condominium units at the same time. These investors expect to sell the units before the completed unit is ready to transfer, or, if they must take the delivery of the finished unit, they expect to borrow 90%-100% of the value from the banks. If these investors must make larger down payments, they will not purchase as many condominium units as before.
We believe these new LTV measures should affect demand for condominiums over the next one to two years. However, these measures will benefit the industry in the long run. The stricter LTV rules should help improve the financial discipline of homebuyers, improve the quality of the backlog of developers, and boost the quality of mortgage loans at banks. These measures should help curb some of the speculative demand. Speculators would not want to make higher down payments since this would lower their returns on the investments.
Based on the portfolio of the 22 property developers rated by TRIS Rating, housing units priced below Bt10million per unit comprised 90%-95% of the number of units available for sale or 75%-80% in terms of value. Data from the BOT shows the number of new mortgage loans used to purchase a second home or additional housing units accounts for around 20% of new mortgage loans provided by commercial banks. Thus, if 70% of homebuyers borrow money to make the purchase, then, around 12%-13% of homebuyers would be buyers purchasing a second housing unit priced at less than Bt10 million. The effect in terms of value would be slightly lower: around 10%-11% of total sales.
• Slow growth in demand from foreign buyers. Demand from foreign buyers, especially Chinese investors, was the key growth driver sustaining the growth in demand for condominiums over the last couple years. According to the data from the 22 rated developers, foreign buyers bought around 27% of condominiums in 2017 and 33% in 2018. In 2018, the sales value of condominiums sold to foreign buyers increased by 31% y-o-y to around Bt56,500 million. We do not expect demand from foreign buyers will grow at such a high rate this year. The trade war between China and the US, coupled with a slowing of the Chinese economy, should affect demand from the Chinese investors. It is estimated that the Chinese buyers of property accounted for around 50% of all foreign buyers, in terms of value.
• High inventory. There were 81,818 unsold condominium units at the end of 2018, up by 7% y-o-y. The value of the unsold units was Bt329,410 million, up by 15% y-o-y. Condominium prices have kept rising because the cost of land has carried on rising. Land along the mass transit routes has become more expensive. The condominium price index grew by around almost 8% y-o-y in the last quarter of 2018. According to the data of the 22 rated developers, the value of real estate investments at the end of 2018 was 3.18 times the three-year average cost of real estate sales, up from 2.95 times at the end of 2017.
Changes in Rating/Outlook
The credit quality of the rated developers may decline slightly due to the expected slowdown in demand from both domestic and foreign buyers. We expect presales to drop by 10% this year. Some buyers may have to postpone their purchase now that the new LTV rules took effect this April. Demand from both domestic investors and foreign investors may not be as strong as last year. As the size of the market is not expected to grow much, competition among large developers will be more intense. We foresee declines in profitability at some rated developers. Developers must spend more on promotions and marketing to close out old projects.
We also anticipate that some developers will adjust their project portfolio. These developers may try to add more rental properties. Investments in assets that produce recurring income may push up the leverage at some developers. Cash flow protection may weaken as a result. The weighted average debt-to-capitalization ratio of the 22 rated developers is expected to rise to around 55% compared with 51%-52% previously.
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