Published September 20, 2008

Sector In Focus
Property risks back in spotlight

Developers with overseas exposure stay upbeat amid downturn. By Uma Shankari

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THE property business has come full circle for listed developers here. A few years ago, with land prices on the upswing and intensifying competition in Singapore, many property companies ventured overseas into untapped markets in search of better returns. Their overseas units flourished. And for the past few years, these units have been fattening the bottom lines of many property firms here.

While the going was good, there was a tendency, when it came to evaluating such companies, to overlook the commonly-acknowledged risks inherent in developing markets - such as changing regulatory environments and the tendency of foreign investors to flee when the going gets even a bit rough. But now, with the property markets in China (and to a lesser extent Vietnam) taking a beating - in part due to government actions - those risks are being thrown into the spotlight once again.

Last week, China Vanke, China's largest listed property developer, reported a 35 per cent drop in its August real estate sales. The developer also reportedly cut prices in Nanjing, Guangzhou, Shanghai and Beijing by as much as 20 per cent. Soon after, news emerged of other developers following suit with substantial price cuts.

There are no signs of the Chinese government stepping out to halt the slump in the property market. In an announcement by the People's Bank of China in late August, the central bank continued to call on commercial banks to tighten their lending to property developers and restated its curbs on bank loans directly for land purchases by developers.

'We think recent price cuts could further depress pricing of residential properties and lead to prolonged weakness in an already ailing China property market as other developers may undercut prices for their properties and buyers are likely to avoid the market on concerns of further price cuts,' said OCBC Investment Research analyst Foo Sze Ming.

In Vietnam, prices could also head south. Like in China, the government in Vietnam is fighting inflation with various regulatory measures to cool the economy. A liquidity crunch also means that smaller and non-reputable developers could be forced out of the market.

Many Singapore-listed property companies have targeted China, Vietnam, and also India, another emerging market, for expansion over the past few years. Now, with the property market in Singapore taking a pause, developers with large stakes in these emerging markets, such as CapitaLand, Keppel Land and GuocoLand, have to assure investors that they have not over-stretched themselves.

Partly in response to the negative newsflow about China's property market over the past few weeks, property stocks with exposure in that country have been punished by the market over the past week. Adding to the problem was the current global stock market turmoil.

But looking ahead, analysts are throwing their weight behind those developers who have stayed put in Singapore. Kim Eng Research, for example, said yesterday that its picks for the sector are Singapore-centric property developers City Developments and Wing Tai as beta plays for a recovery in the Singapore property market in the future.

On their part, developers with assets in emerging markets have been pointing to the strong fundamentals in these countries. Growing middle classes, increasing disposable incomes and housing affordabilities as well as rapid urbanisation are all key drivers for real estate demand, they say. Some also point out that their overseas exposure is not as large as their presence in the relatively more stable Singapore.

'CapitaLand's exposure in China is a balanced one with exposure to the residential, commercial, retail, serviced residence and financial services sectors across multiple regions,' said Lim Ming Yan, chief executive of CapitaLand China. As at June 30, 2008, CapitaLand's assets in China came to some $7.4 billion and accounted for 27 per cent of CapitaLand's total assets.

CapitaLand's presence in Vietnam, on the other hand, is much smaller, the developer said. 'CapitaLand is relatively early in expansion in Vietnam and our current exposure is just under one per cent of the group's total balance sheet,' said Chen Lian Pang, chief executive for South-east Asia for CapitaLand Commercial.

Similarly, both Keppel Land and GuocoLand have stressed that their portfolios are balanced.

Some developers, sitting on a pile of cash, are also taking this opportunity to hunt for distressed assets they could pick up at bargain prices. 'I am still looking to buy in those markets (China and Vietnam) but only if the price is right,' a developer told BT. If smaller developers are forced to sell because of refinancing or other issues, bigger companies could buy assets and wait for the market to turn around, he said.

CapitaLand shared the view. With its strong balance sheet, the developer is in a very good position to take advantage of the current market to continue to expand selectively in China and Vietnam, it said.