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Thailand: Property outlook negative
Tris Rating holds a negative view on the residential property industry in Thailand. Although the Covid-19 pandemic may not directly affect 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. The more prolonged the outbreak, the greater the impact on the property industry. Assuming 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 for developers has shrunk since last year, lower additional sales could translate into lower revenue recognition this year and in subsequent years.
Presales last year were affected by more stringent loan-to-value (LTV) rules, the global trade war and the appreciation of the baht.
According to data collected from our 22 rated developers, presales value in 2019 dropped by 33% year-on-year (39% for condominiums and 27% for landed property). The condo backlog was worth 287 billion baht, down 10% from a year earlier.
Condominium sales to foreign buyers have plummeted since 2019 due to the economic slowdown in China and the appreciation of the baht. Data from the 22 developers showed condo sales to foreign buyers in 2019 amounted to only 25 billion baht, down almost 60% year-on-year.
This year, revenues and cash flow from unit transfers could be negatively affected by the unprecedented risk arising from the Covid-19 outbreak. Consequently, developers need to focus heavily on liquidity.
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 quality companies. The risk avoidance poses a refinancing risk for all rated issuers.
Based on their financial statements, the 22 rated developers had outstanding bonds worth 243 billion baht at the end of 2019. This figure accounts for around 60% of their total interest-bearing debt.
According to data as of March 30 from the Thai Bond Market Association, bonds due during the remainder of 2020 of these rated developers amount to 89.3 billion baht, comprising 23.4 billion in short-term debentures and 65.9 billion as the portion of long-term bonds due within the year. Around 50% of both short- 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 having to turn to bank lenders. If we exclude cash flow from operations as a source of funds and assume that firms can roll over their bank loans, all rated developers have enough cash on hand and available credit lines (which can be drawn from banks without prior conditions) to redeem bonds over the next three months. Around half of rated developers have sufficient cash and undrawn bank facilities to redeem their bonds due within 2020.
The corporate bond stabilisation fund to be set up by the Bank of Thailand to invest in good quality, newly issued bonds (rated BBB- and above) that cannot fully roll over maturing bonds will help lower the refinancing risk of good quality companies. However, as the situation is still evolving, Tris Rating will monitor and update the liquidity of each developer.
As of the end of March 2020, Tris Rating had rated 22 developers: seven issuers rated A, 11 rated BBB, and four rated BB. We assigned negative outlooks to six companies: AREEYA, LPN, NOBLE, MK, ANAN and PF.
The residential property market in 2019 declined more than projected. Condo sales dropped sharply from the slowdown in demand from both domestic and foreign buyers, as noted earlier.
Most developers took a wait-and-see approach. Several postponed project launches and focused on sales of existing projects. According to Agency for Real Estate Affairs, the value of new projects launched in Bangkok and vicinity dropped by 21% year-on-year, reflecting 1% growth in landed property and a 27% drop in condominiums. The value of new projects sold dropped by 21%: landed properties were down 11% and condominiums by 39%.
According to the data collected from the 22 rated developers, the total value of new launches dropped by 20% year-on-year, mostly because of the drop in condo launches of around 40%. Net presales (net of cancellations and bank rejections) also fell by 33% year-on-year: 27% for landed property and 39% for condominiums.
The overall value of housing units transferred in 2019 dropped by 10%: 7% for landed property and 17% for condominiums. 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% to around 320 billion baht.
Despite the plunge in the value of new condo launches, the sharp drop in net presales and lower transfers caused the remaining value of condominium units available for sale (both built and unbuilt) to keep rising — by 8% year-on-year to 816 billion baht.
MARKET OUTLOOK
Tris Rating expects another slowdown this year as there are no positive factors to outweigh negative ones, including the impact of Covid-19 and the drought.
Developers with a high proportion of foreign sales may have to postpone transfers of units for foreign buyers, especially Chinese buyers, due to travel restrictions. The sharp fall in demand for corporate bonds has further exacerbated the situation.
The government has taken several steps to support the economy, ranging from interest rate cuts to relaxation of LTV rules and the establishment of a fund to stabilise the bond market. Despite all these measures, concerns over Covid-19 are still paramount and could ultimately cause severe damage to the overall economy.
As well, rising non-performing loans (NPLs) may cause banks to maintain stringent lending policies. The NPLs of commercial banks have risen from 2.19% of credit outstanding in 2014 to 3.49% in September 2019. A further slowdown in the domestic economy could drive NPLs higher still.
The backlog of foreign homebuyers at the end of 2019 was valued at 83 billion baht, or 26% of the total backlog (for both landed properties and condos). It is estimated one-third of the foreign backlog will be transferred this year.
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.
Source: https://www.bangkokpost.com/business/1896320/property-outlook-negative