TRIS Rating expects the housing sales in Thailand will grow by 5% to 10% in 2022, assuming no resurgence of deadly Coronavirus Disease 2019 (COVID-19) variants. Landed properties should continue to witness strong growth momentum, while condominium sales may not show signs of significant improvement until the second half of 2022. Key challenges for this year will be the high level of household debt, rising inflation rates which could impact the development and financing costs of developers, and the prolonged COVID-19 pandemic. However, Thailand?s relatively high vaccination rate as well as the extension of government supporting measures like the easing of the loan-to-value (LTV) ratio and the reduction of mortgage and transfer fees should help support the property sector in 2022. In addition, the lower supply of new housing units in the past couple of years should help ease pricing pressure for developers.
The aggregate performance of 23 rated developers in 2021 fell below our target by around 5%-10%. The resurgence of the COVID-19 pandemic in 2021 disrupted both new launches and transfers of several projects. Net presales of condominiums (net of bank rejections and cancellations) dropped for the third consecutive year, reaching only 25% of the peak in 2018, causing the combined backlog of the 23 rated developers to deplete by a further 20% year-on-year
(y-o-y) to THB160 billion. Any further slowdown in condominium sales could impact revenue recognition in the next 1-2 years.
On the contrary, the landed property segment continued to show strong growth momentum, which we expect to carry on this year. Despite a drop in new launches in 2021, net presales of landed properties remained strong, up by almost 10% y-o-y. However, revenue recognition in 2021 could be affected by the resurgence of the pandemic, which prompted the lockdown of construction sites in July 2021. Thus, the aggregate revenues of the 23 rated developers in 2021 could stay on par or fall slightly below the level seen in 2020.
Looking forward, we expect the operating performance of rated developers to improve moderately from last year. Revenues should grow by 5%-10% y-o-y while earnings before interest, taxes, depreciation and amortization (EBITDA) should grow by 10%-15% due to better profit margins. However, a recovery of earnings to the 2019 level could be delayed until next year. We expect the average debt to capitalization ratios of rated developers to range between 50% and 53% over the next two years, slightly improved from 2020-2021, due to the lower need for capital for the development of landed properties than condominiums. However, if demand for condominiums recovers sharply, we could see a jump in the leverage level of rated developers.
As of December 2021, TRIS Rating rated 23 residential property developers. The ratings ranged from ?BB-? to ?A+?. Three rated developers were downgraded in 2021, while two issuers were upgraded. The downgrades were mainly due to weakening operating performance and rising debt levels. One of the upgrades was due to a change in our ?Group Rating Methodology? and the other was due to a change in the company?s business risk profile after the acquisition of a power business. We also revised the outlook of four developers, two downwards and two upwards. Outstanding bonds of the 23 rated developers at the end of December 2021 stood at around THB237 billion, or around 60% of total reported interest-bearing debt. Bonds due in 2022 will amount to around THB90 billion, or around 38%-40% of total outstanding bonds at the end of 2021.
MARKET RECAP
According to data from the Agency for Real Estate Affairs (AREA), residential property sales in 2021 improved by 34% y-o-y to THB350 billion, after a drop of 35% in 2020. The sales were driven by a strong growth in demand for landed properties following a slowdown during 2019-2020. However, demand for condominiums remained stagnant, growing by only 17%
y-o-y after a sharp drop of 54% y-o-y in 2020 and 29% y-o-y in 2019. Successive waves of COVID-19 significantly pressured demand for condominiums in 2021 and may continue this year. Sales of condominium units in 2021 reached THB112 billion, much lower than the peak of THB295 billion in 2018. The slowdown in condominium sales has been partly compensated by strong growth in demand for landed properties. Despite the value of landed property projects launched in 2021 declining by 15% y-o-y, the value of housing units sold increased by 43% y-o-y. The sold value of landed properties in 2021 stood at THB234 billion, surpassing the peak of THB209 billion in 2018. Landed properties accounted for almost 70% of the total housing sales value in Bangkok and vicinity.
For the 23 rated developers, net presales of condominiums (net of bank rejections and cancellations) dropped by almost 20% y-o-y to THB58 billion amid high cancellation and bank rejection rates. Transfers of condominiums were around THB104 billion, dropping by 30% y-o-y, since the developers did not aggressively cut prices to promote sales as in 2020. Lower net presales than transfers caused the aggregate backlog of the 23 rated developers to decline by more than 20% to around THB160 billion, falling well below the peak of around THB320 billion in 2018. Thus, a slow recovery in the condominium market could impact the future revenues and earnings of the rated developers. On the contrary, net presales of landed properties in 2021 grew by 10% y-o-y, hitting a peak of around THB190 billion. The strong presales of landed properties compensated for the decline in condominium sales, causing the total net presales of rated developers (both condominiums and landed properties) to grow by 2% y-o-y. However, the total net presales of rated developers in 2021 still only reached 65% of their peak of THB378 billion in 2018.
MARKET OUTLOOK
We expect demand for housing to grow by 5%-10% this year, driven by the continuing growth in demand for landed properties and a gradual pick-up in demand for condominiums. In our view, a recovery in demand for condominiums to the pre-COVID-19 level may not be seen before 2023. Pricing pressure should be less intense with fewer new launches in the past couple of years.
The COVID-19 pandemic has disrupted consumer behavior in several ways. Developers have had to adjust not only their products but also their marketing strategies to attract customers during lockdown periods. The work-from-home trend has brought about a rise in demand for large and flexible space, which in turn drove a growth in demand for landed properties. As the vaccination rate increases and the severity of the pandemic wanes, we expect demand for condominiums to gradually recover. However, the zero-COVID-19 policy adopted by the Chinese government could slow down the return of Chinese buyers to the market.
Positive factors:
? High vaccination rate. At the end of January 2022, around 70% of the Thai population had been fully vaccinated and around 22% had received booster shots, and more than 50% of the global population had also been fully vaccinated. The high vaccination rate helps lower the severity and death rate of the disease which helps enhance consumer confidence so that the country will fully reopen soon. According to the University of the Thai Chamber of Commerce, the consumer confidence index (CCI) rose to 46.2 in December 2021, from a low point of 39.6 in August 2021, and then dropped to 44.8 in January 2022, amid concerns over rising cases of the Omicron variant. However, the widening gap between the number of COVID-19 cases and deaths should help ease concerns over the Omicron variant. The Public Health Ministry plans to move COVID-19 from pandemic to endemic status within this year.
? Easing of the LTV ratio. The Bank of Thailand (BOT) has relaxed the LTV limit to boost the property sector, starting from 21 October 2021 until the end of 2022. The LTV limit has been lifted to 100% from 70%-90% for all housing units. The BOT expects the LTV relaxation to help stimulate the property sector and related industries. According to the BOT, the policy should help increase new mortgage loans by around THB50 billion, equivalent to around 8%-10% of new mortgage lending in 2021, this year. In addition, the government has extended the reduction in the transfer fee and the mortgage registration fee to 0.01% (for housing units priced less than THB3 million) from the end of 2021 to the end of 2022. These measures are expected to help support the growth of the residential property sector in 2022.
? Less price competition. The significant drop in new condominium projects launched in the last couple of years created a better balance in the demand and supply of condominiums. This should help lower the pricing pressure for most developers. In addition, since we expect demand to recover this year, we anticipate revenues and profit margins of rated developers to improve from 2022 onwards. Thus, we expect the total revenues of rated developers to grow by 5%-10%. We also expect the EBITDA margins of rated developers to improve by 1%-2% to around 23%-24%, which is still lower than the levels seen in 2018-2019 of around 25%-26%. Based on the expected growth in revenues and profit margins, EBITDA of rated developers should grow by 10%-15% during 2022-2023. The total EBITDA of the rated developers should reach the 2019 level by 2023.
Key challenges:
? High household debt amid slow income recovery. As of September 2021, household debt peaked at THB14.35 trillion while the household debt to gross domestic product (GDP) ratio stood at 89.34%, down slightly from 89.41% at the end of 2020. The relatively slow pace of economic recovery has caused this ratio to hang at a high level. The Thai GDP dropped by 6.2% y-o-y in 2020 and grew 1.6% y-o-y in 2021. This year, we expect the GDP to grow by 3%-4% y-o-y. Thus, assuming household debt stays the same, the household debt to GDP ratio will decline slightly to around 87%. The relatively high household debt level will impact the recovery of the lower-priced housing segment the most since the bank rejection rate in this segment is high.
? Slow recovery in demand for condominiums. Demand for condominiums has slowed since the implementation of LTV rules in 2019 and the onset of the COVID-19 pandemic in 2020, which has continued until this year. Changes in consumer behavior coupled with travel restrictions during the pandemic doubled down demand for condominium units. We expect a recovery in domestic demand for properties situated along the mass transit lines outside the Central Business District (CBD). However, demand from foreign buyers is not expected to improve until the second half of 2022. China?s zero-COVID-19 policy means that the opening of borders for both Chinese and foreigners to travel freely may not happen soon.
? Rising inflation rate. The rise in inflation rates since the last quarter of 2021, if it persists this year, could pose a threat to both developers and homebuyers. High inflation rates will push up the development and funding costs of developers while lowering the purchasing power of homebuyers. The high inflation rates will impact the prices of construction materials and labor costs. Developers? profit margins could decline if they are unable to pass-through the rising costs to homebuyers. Although the BOT has held the policy rate at 0.5%, bond yields have increased since the last quarter of 2021 following rising bond yields in the United States. Since rated developers use bonds to finance almost 60% of their total debts, the rise in yields will inevitably impact their refinancing costs. At the end of 2021, the outstanding bonds of 23 rated developers stood at around THB237 billion. Bonds due in 2022 will amount to around THB90 billion, equivalent to 38%-40% of total outstanding bonds at the end of 2021.
CHANGES IN RATING/OUTLOOK IN 2021
In 2021, TRIS Rating rated 23 residential property developers. We downgraded the issuer ratings of three companies (ANAN, CI, and LPN) and upgraded the issuer ratings of two companies (GOLD and UV). The three downgrades were mainly due to weak performances and rising leverage levels. The upgrade of GOLD was the result of a change in our ?Group Rating Methodology? while the upgrade of UV was due to a change in its business risk profile after its acquisition of power plants from a listed company. We also revised the outlook of four companies, two downward and two upward. We assigned a new issuer rating to ASW at ?BBB-? with a ?stable? outlook and withdrew the issuer rating of RML.
TRIS Rating Co., Ltd.
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