SUMMARY
TRIS Rating holds a “negative” view on the residential property industry. Although the outbreak of coronavirus (COVID-19) may not directly impact the industry, it is causing severe damage to the overall economy. As the domestic economy is already fragile and heavily reliant on tourism and exports, the virus pandemic could cause a contraction in the domestic economy. The more prolonged the outbreak, the greater the impact will be on the industry. Assuming that the COVID-19 outbreak is contained in the first half of this year, residential property sales could still decline by as much as 20%-30% from last year.
This year, our concerns lie with both presales and transfers. As the total backlog of developers has dropped since last year, the lower additional sales could translate into lower revenue recognition this year and in subsequent years. Last year’s presales were affected by the implementation of more stringent loan-to-value (LTV) rules, the global trade war, and the appreciation of the Thai baht. According to data collected from our 22 rated developers, the presales value of the developers in 2019 dropped by 33% year-on-year (y-o-y), resulting from a 39% drop in condominium presales and a 27% drop in landed property presales. The condominium backlog at the end of 2019 fell by almost 10% y-o-y to Bt287 billion.
Negative impacts from the COVID-19 outbreak on the property developers have escalated since late February 2020 as fears of the virus spreading outside China increased. The number of Thai homebuyers visiting show units declined sharply due to fear of the contagion and the imposition of restrictions on travel and gatherings by the government. Condominium sales to foreign buyers have plummeted since 2019 due to the economic slowdown in China and the appreciation of the Thai baht. Data from the 22 rated developers showed that condominium sales to foreign buyers in 2019 amounted to only Bt25 billion, down by almost 60% y-o-y.
This year, revenues and cash flow from unit transfers could be negatively affected by the unprecedented risk arising from the COVID-19 outbreak. The rated developers need to focus heavily on liquidity. The fear of impacts from the virus outbreak on economy has also soured investor confidence. Due to the prolonged nature of the outbreak, bond investors are holding on to their cash and are reluctant to invest even in bonds issued by good-quality companies. The risk-off sentiment in the corporate bond market poses a refinancing risk for all rated issuers.
From the 2019 financial statements, the 22 rated developers had outstanding bonds worth around Bt243 billion at the end of 2019. This figure accounts for around 60% of total interest-bearing debts aggregated across these rated developers. According to data as of 30 March 2020 from the Thai Bond Market Association (Thai BMA), the amount of bond due during the remainder of 2020 of these rated developers will be around Bt89.30 billion, comprising Bt23.36 billion of short-term debentures and Bt65.94 billion of the portion of long-term bond due within 2020. Around 50% of both short-term and long-term debentures due will come due in the second quarter of 2020.
As demand for corporate bonds dries up, several rated issuers are now having to turn to bank lenders. If we exclude cash flow from operations as a source of fund and assuming that all companies are able to roll over their bank loans, we find that all rated developers have enough cash on hand and available credit facilities (which can be drawn from banks without prior conditions) to redeem bonds over the next three months and around 50% of rated developers have sufficient cash and undrawn bank facilities to redeem their bonds due within 2020. The “Corporate Bond Stabilization Fund” to be set up by the Bank of Thailand (BOT) to invest in good-quality, newly issued bonds by corporates (rated “BBB-” and above) that cannot fully roll over maturing bonds will be another source of fund which will help lower the refinancing risk of good- quality companies. However, as situation is still evolving, TRIS Rating will closely monitor and update the liquidity of each developer regularly.
At the end of March 2020, TRIS Rating had rated 22 developers, comprising seven issuers in the “A” category, 11 issuers in the “BBB” category, and four issuers in the “BB” category. We assigned “negative” outlooks to six companies: AREEYA, LPN, NOBLE, MK, ANAN, and PF.
MARKET RECAP
The residential property market in 2019 declined more than projected. Condominium sales dropped sharply from the slowdown in demand from both domestic and foreign buyers. Thai buyers were affected by implementation of the new LTV rules in April 2019 and the slowdown in the domestic economy. Foreign buyers, especially Chinese investors, were impacted by trade tensions and the appreciation of the Thai baht. Most developers took a wait-and-see approach. Several developers postponed their project launches and focused on sales of existing projects. According to data from the Agency for Real Estate Affairs (AREA), the value of new projects launched in Bangkok and the vicinity in 2019 dropped by 21% y-o-y, reflecting a 1% growth in landed property launches and a 27% drop in condominiums. The value of new projects sold dropped by 21% y-o-y, reflecting a drop in sales of landed properties by 11% y-o-y and of condominiums by 39% y-o-y.
According to the data collected from the 22 rated developers, the total value of new launches dropped by 20% y-o-y, mostly due to the drop in condominium project launches of around 40%. Despite the slowdown in new condominium projects, the value of condominium units sold was much lower, thus, the remaining inventory of condominiums still increased. The net presales (net of cancellation and bank rejections) also dropped by 33% y-o-y, comprising a 27% drop in landed property presales and a 39% drop in condominium presales. The overall value of housing units transferred in 2019 dropped by 10% y-o-y, comprising a 7% drop in landed property transfers and a 17% drop in condominium transfers However, the sharp drop in presales and higher cancellation and bank rejection rates caused the ending backlog of the 22 rated developers to fall by 10% y-o-y to around Bt320 billion at the end of 2019.
Despite the value of new condominium launches in 2019 dropping by almost 40% from the prior year, the sharp drop in net presales and lower transfers also caused the remaining value of condominium units available for sale (both built and un-built) to keep rising. At the end of 2019, the remaining value of units available for sale increased by 8% y-o-y, to Bt815.7 billion from Bt755.4 billion.
Market Outlook
TRIS Rating expects another year of slowdown as negative outweigh positive factors. Negative factors range from the outbreak of the COVID-19 to concerns over severe drought. There are no prominent positive factors which could help support growth. The outbreak of the COVID-19 at the beginning of this year proved to be an unprecedented setback for property developers. The rapid spread of the virus in several countries outside China worsened the situation in several industries, including residential property development. Developers with a high proportion of foreign sales may have to postpone transfers of units for foreign buyers, especially Chinese buyers, due to the travel restrictions. The sharp fall in demand for corporate bonds has further exacerbated the situation. The Thai government has implemented several measures to support the economy, ranging from interest rate cuts, relaxation of LTV rules, and the establishment of a fund to stabilize the bond markets. Despite all these measures, concerns over the COVID-19 are still prominent and could ultimately cause severe damage to the overall economy.
Key support factors:
• Interest rates hit lowest point in the last decade. The BOT lowered the 1-day policy rate twice in the second half of 2019 amid concerns over the global trade war and the slowdown in the domestic economy. This year, the BOT started the year with another 50 basis points (bps) reduction in its 1-day policy rate to 0.75% from 1.25%, amid concerns over the negative impacts of the COVID-19 outbreak. The Federal Reserve Bank of the United States (US) also lowered the Fed funds rate by 50 bps in February 2020 as concerns over the impact of COVID-19 mounted. We expect central banks around the world to keep interest rates low to support their economies.
• Government’s supporting measures. On 20 January 2020, the BOT issued minor revisions to the LTV rules implemented last April. The relaxation of the maximum lending amount to 110%, including the 10% top-up loans for home decoration, for the first mortgage contract have made it easier for low-income homebuyers to access their mortgage loans. This measure requires the cooperation of the major commercial banks. However, the more prolonged the COVID-19 pandemic, the lower the effectiveness of this measure will be since buyers will have more concerns about their future income while banks will have more concerns about bad debts.
Key challenges:
• Rising non-performing loans (NPLs) may cause banks to maintain their stringent bank lending policies. The NPLs of commercial banks kept rising from 2.19% in 2014 to 3.49% in September 2019. Due to the rising number of NPLs and concerns over the speculative demand in the past several years, banks have become more stringent with their loans to homebuyers. The further slowdown in the domestic economy could drive the number of NPLs higher.
• Unprecedented risk from the COVID-19 pandemic. Rapid spread of the COVID-19 outside China caused the government to escalate measures to prevent the spread of the disease in Thailand. Restrictions were placed on people traveling to and from high-risk countries like China, Japan, and South Korea. As a result, some developers have extended the transfer period for foreign buyers. Based on data from the 22 rated developers, the backlog of foreign homebuyers at the end of 2019 was around Bt83 billion, around 26% of total backlog (both landed properties and condominiums). It is estimated that around one third of foreign backlog will be transferred this year. Thus, we do not expect the delay in transfers to have a significant impact on rated developers. Our concerns lie more with new sales to both foreign and domestic homebuyers should efforts to contain the virus within the first half of 2020 fail.
• Liquidity crunch in the bond markets. Due to the disruption in the global and domestic economies, bond investors are holding on to their cash and are reluctant to invest even in bonds issued by good-quality companies. The risk-off sentiment in the corporate bond market poses a refinancing risk for all issuers. Fortunately, Thai banks are much stronger than in the past and have the capacity to support their corporate clients. Most developers should be able to borrow from banks to repay their maturing bonds. In addition, the Thai Bankers’ Association, the Government Savings Bank, and the Government Pension Fund have collectively set up a Bt70-Bt100 billion Corporate Bond Stabilization Fund to invest in short-term papers issued by high-quality corporate issuers that have problems refinancing their maturing bonds. The stabilization fund is intended to bridge the gap in market liquidity and mitigate the refinancing risk of corporate issuers. However, the fund will invest only in investment grade bonds (rated “BBB-” and above) and the investment amount is limit at 50% of the maturing bonds. From the 22 rated developers, only four issuers have ratings lower than BBB-“.
According to data from the Thai BMA at the end of March 2020, bonds due during April-December 2020 of the 22 rated developers amount to Bt89.30 billion, comprising Bt23.36 billion of short-term debentures and Bt65.94 billion of the portion of long-term debentures due within 2020. If we exclude cash flow from operations as a source of fund and assuming that all companies are able to roll over their bank loans, we find that all rated developers have enough cash on hand and available credit facilities (which can be drawn from banks without prior conditions) to redeem bonds over the next three months and around 50% of rated developers have sufficient cash and undrawn bank facilities to redeem their bonds due within 2020. Therefore, the “Corporate Bond Stabilization Fund” can help bridging the liquidity gap for some rated developers if the situation cannot be resolved in the first half of this year. However, most rated developers have other unencumbered assets like land banks or debt-free residential units, which can be pledged as collateral for new loans.