SINGAPORE (May 8): As showflats and construction sites fall silent due to the Covid-19 pandemic, we look at which developers have the strongest balance sheets and the ability to survive a drastic fall in sales revenue.

The developers themselves have said that their projects are likely to be delayed. Keppel Corp’s CEO Loh Chin Hua said during a results briefing on April 29 that 19 Nassim’s show suite is closed. “We would expect that there would be some impact on the marketing process. But we are not too concerned because we think it is a very good project, well-located and the number of units is not a lot,” says Loh.

In its results review on May 4, CapitaLand said, “On the residential front, we expect sales to be muted as our sales offices for One Pearl Bank and Sengkang Grand Residences are closed during the “circuit breaker” period. Homebuyer sentiment is also expected to remain weak until there is greater clarity on the economic outlook. Our residential and commercial projects under development may also experience progress delays due to supply chain and labour disruptions.”

To be sure, the pipeline of launches was starting to slow at the start of the year. CBRE Research points out 2,093 units were launched in 1Q2020 before the “circuit breaker” measures were announced, down 6.0% q-o-q and 30.0% y-o-y.

”New units for launch will continue to slow down as some developers delay their project launches in times of uncertainty, which includes the closure of show galleries,” CBRE says. “The closure of sales galleries, stay home measures and the restriction of foreign visitors into Singapore will put more downward pressure on new home sales volume,” it adds in a recent update.

Even then, based on Edgeprop’s data, 34% of the 774 units at One Pearl Bank and 35% of the 680 units at Sengkang Grand Residence, which is a joint venture with City Developments, have been sold. As a rule of thumb, if a developer can sell 30% of the units in a project, they are almost home and dry, because that covers costs.

Balance sheet strength

Developers with a strong balance sheet will probably be in better shape as the economy contracts during the course of the year. Construction company-turned-developer Hock Lian Seng is in a net cash position. During growth phases, that could cause it to underperform as developers with leverage are likely to be able to “grow” faster. However, in a period when the economy contracts, cash is king. That may enable Hock Lian Seng to scour for interesting sites which could be transacted at lower prices psf.

Hong Lai Huat, another small developer that has diversified geographically into Cambodia, is also in a net cash position. In Singapore, it has no residential projects under development. However, its net earnings collapsed by 89% in FY2019, to $1.1 million, and it reported negative operating and free cash flow in FY2019.

For stocks that provide shelter from the storm, Bukit Sembawang Estates has limited debt, high interest cover, while retained earnings have growth. In addition, it is a very transparent company whose main business is residential development in Singapore. While this brings with risks because of the pandemic, investors who want just Singapore dollar exposure should consider this stock. Over the years, its NAV per share as at Dec 31, 2019 was $5.17 compared to its last done share price of $3.89.

Surviving a contraction

Based on The Edge Singapore simulations, Bukit Sembawang has the ability to withstand months — 51.6 months to be precise — without any sales revenue. If sales revenue dropped by 80%, Bukit Sembawang would survive for 122 months.

In comparison, the big cap blue chips — Hongkong Land, CapitaLand, and City Developments — would survive for 15.3, 15 and 14.6 months in the absence of a large portion of their revenue.

Diversification helps

CapitaLand was the second developer after unlisted Keppel Land to announce that its business in China is recovering after two months of lockdown. “By the end of the first quarter, signs of recovery had emerged and has been encouraging thus far, with improving residential sales and shopper traffic reported in March,” CapitaLand says in a statement.

CapitaLand plans to launch an additional 5,900 residential units for the rest of the year. This will bring the total units launched in 2020 in line with prior years. “This will depend on the continued economic recovery for the rest of the year. While construction and handovers for our residential projects have been impacted by the nationwide lockdown in January and February, we remain cautiously optimistic about the scheduled completions and handovers for FY 2020,” CapitaLand elaborates.

On April 29, CEO Loh of Keppel Corp indicated that its property launches in China have been encouraging, with pricing of its Wuxi Waterfront Phase 6 units similar to that of FY2019.

Still, CapitaLand cautions that its “near-term operating and financial performance [would] continue to lag that of prior years, as the pace of recovery remains uncertain”. In FY2019, CapitaLand reported net profit of $2.14 billion, up 21.2% y-o-y but warns that earnings are likely to take a hit this year because of the pandemic.

Last October, Chip Eng Seng Corp raised $96.3 million in a one-for-four rights issue. Although its net profit fell by 59.4% to $32.5 million in FY2019, its share capital was boosted by the monies from the rights issue, and its shareholders funds rose by 8.3%. Based on Edgeprop’s compilation of unsold units, Chip Eng Seng has sold 42% of Parc Komo, leaving 58% unsold. However, with its infusion of capital, and as it diversifies away from property development and construction, Chip Eng Seng’s earnings could be less lumpy. Under its previous ownership, it diversified into hospitality which has been impacted by the pandemic. And following the takeover of the company by Gordon Tang and his wife Celine in 2019, Chip Eng Seng diversified into education.

The weakest developers

According to The Edge Singapore’s simulation, the weakest developers are likely to be the ones at the bottom of Table 1. Among the companies that cannot cover their interest payments because of negative Ebitda include Koh Brothers, TEE International, and Goodland Group. Companies that cannot cover their interest payments but report positive Ebitda include Perennial Real Estate Holdings (PREH), Aspial, Tuan Sing Holdings and OUE. It should be noted that OUE has retained earnings of $3.63 billion. With the exception of OUE, the developers in this group have unsold units (see Table 3).

If these weak developers are in a desperate need to sell units, they could lower prices. “Softer economic sentiments may hold back buyers while we could see developers with weaker holding power offering more competitive pricing to move units,” CBRE says. As such, CBRE believes that residential prices could continue to correct for the rest of 2020, while developer sales numbers will drop to between 4,000 to 5,000 units (excluding executive condominiums), especially if the severity of Covid-19 is prolonged.

Alternatively, the weak developer group may raise equity through placements or a rights issue, or if they can, take on additional debt should they prefer not to lower prices to move units.

As at May 6, PREH entered into a transaction divesting ts share of AXA Tower for net proceeds of $196.4 million. Its share of the divestment gain is $45 million. PREH plans to reinvest some of the proceeds in a consortium to redevelop AXA Tower.

Stick with the big caps

The big caps are likely to be the first to recover once the Covid-19 situation is under control. Not only do they have access to more funding, and bank loans, they have strong shareholders, and funds are likely to make a beeline for these developers if they see a turn in the tide.

The companies with the largest retained earnings are Hongkong Land, CapitaLand, Keppel Corp, City Developments and UOL Group in that order. These companies are also constituents of the FTSE EPRA NAREIT Developed Index which would inevitably result in a rebound once signs of an economic recovery emerge, be it at the end of this year, or next year. — With additional reporting by Thiveyen Kathirrasan