Standard & Poor's is going to walk on the other side of the road to avoid property developers in Singapore.
"Singapore's Smaller Developers Are Vulnerable to Liquidity Risk" hit the wire right around the same time as "Recent Revival in China's Property Sector Is Likely to Lose Steam."
There's much more at stake for Singapore.
The performance of Singapore real estate recently has been dire. Property prices have dropped 9.3% since their peak in 2013, and after 11 straight quarters of declines, there's hardly a line of buyers with checks in their hands beating a path to new developments. So there's now a major overhang of supply.
S&P pegs the total amount of bonds held by all listed entities in the Lion City at S$60 billion ($45 billion). Property developers and real estate investment trusts (REITs) account for fully 52% of that tally.
Liquidity is weak in the smaller developers, after they took advantage of free-flowing cash and low interest rates to stock up on debt and expand, ramping up their leverage dramatically. Gross debt to earnings in the sector has crossed 11x for the first time in three years as a result.
That contrasts with the 6.8x debt-to-earnings ratio with Chinese developers, while Indonesian ones are running at only 3.7x, although they're all pretty small.
"We believe the leverage for Singapore real-estate issuers is unlikely to improve anytime soon," Kah Ling Chan, as primary credit analyst, declares in the S&P report. "Their debt is very high, and reduction will require either a substantial increase in operating cash flows, a dramatic cut in capital spending, or an equity infusion, which is not prevalent at present."
Although REITs operate on debt as a rule, they've been much less aggressive, so they're on surer ground. The central Monetary Authority of Singapore also caps the debt-to-asset ratio of REITs at 45%; so they can withstand any market correction in a way the developers probably can't. Debt-to-earnings ratios for REITs is running at 7.5x. Plus REITs, as landlords more than developers, have much more stable income.
They didn't name any names for the smaller developers ... so I called Kah Ling to see why that was. "You're not the first person to ask me that today," she told me, adding that of course she had a list. But her legal department had warned her not to publish the names. They're largely unrated developers, and might understandably get a bit miffed, if not to say litigious, about any finger-pointing.
So I ran the numbers myself, looking at the developers' debt-to-capital ratios as listed by the Financial Times' market data section. Taking $1 billion in market capitalization as a cutoff point, we find a few saints in the smaller players: Bukit Sembawang Estates SGX:B61 uses little or no debt. Likewise Sing Holdings SGX:5IC, with a debt-to-capital ratio of 2.4%. Wilton Resources SGX:5F7 has substantial cash on its books and virtually no debt.
And then the sinners, all with debt-to-capital ratios of more than 50%: Roxy-Pacific Holdings SGX:E8Z (65.5% and up from 60.1% last year), TA Corp SGX:PA3 (64.7%, down from last year's eye-popping 122.7%), Centurion SGX:OU8 (64.4%, down from an even more impressive 137.7% last year), Tuan Sing Holdings SGX:T24 (55.0%, but down from a worrying 84.5%), and Heeton Holdings SGX:5DP (52.0%, down from 79.2% last year).
CapitaLand is hardly a saint: its debt to capital ratio is 40.0%, down from a hefty 74.5% last year. But as S&P indicated, the company can borrow at lower interest rates. Oh, and it's also part of Singapore Inc., essentially a state-backed company with nothing to worry about.
City Development's figures are similar, a ratio of 37.0%, down from 54.8% last year.
Are those smaller players digging their holes in the sand? If interest rates start to rise, or they simply can't offload their stock, that debt pile is going to come crashing down.