Smaller developers exposed in uncertain market

SINGAPORE — Smaller real estate developers are more vulnerable in the current volatile market and future increases in interest rates given their high debt and weaker financial strength, according to a report published yesterday by S&P Global Ratings.

The report, Is Singapore’s Real Estate Sector A Safe Haven In The Local Currency Bond Market?, said the low interest rate environment in recent years has seen developers take on debt to fund their expansion plans. That has generally weakened their balance sheets and increased leverage levels in the industry.

“Leverage among Singaporean developers is very high, but the smaller developers are more at risk of financial distress than larger peers, given weak liquidity, limited financial flexibility, and narrow business models,” said S&P Global Ratings credit analyst Chan Kah Ling. “Access to funding will be the key default differentiator for these developers in this uncertain market,” she added.

In comparison, real estate investment trusts (Reits) are better positioned given their stable cash flows, lower leverage and high proportion of unencumbered assets. They also have stable margins and strong interest coverage, while the regulatory framework for Reits in Singapore is more supportive of prudent leverage policies, the report said.

The real estate sector accounts for nearly half of the more than S$10 billion corporate bonds maturing by the end of next year. Some of the smaller developers that may be facing a liquidity squeeze have about S$1.4 billion of bonds currently outstanding.

However, the real estate sector as a whole should stay resilient to the current volatility in the market, helped by several large players who account for a big chunk of the remaining bonds outstanding.

“The dominance of large players in Singapore’s real estate industry should provide some cushion to absorb downside risk in the domestic bond market.

“That’s because they have greater financial stability and flexibility and more funding sources to weather the near-term market weakness, unlike the volatile oil and gas sector,” said Ms Chan.