CDL warns of fire sales in high-end market

Singapore

CITY Developments Ltd (CDL) executive chairman Kwek Leng Beng has warned that the current subdued state of the Singapore housing market particularly in the high-end segment, if it continues, could ignite fire sales.

Mr Kwek made this point in CDL's third quarter results statement. CDL posted net earnings of S$127.21 million for the third quarter ended Sept 30, 2014, up 4.7 per cent from the same year-ago period. Revenue rose 58.3 per cent to S$1.32 billion.

"The domestic residential real estate market will need to battle headwinds as sentiments remain subdued with little signs of property curbs being tweaked or removed in the near-term. Transaction volumes and prices continue to face downward pressures as homebuyers maintain a wait-and-see approach," he lamented.

The high end market, in particular, remains subdued with prices still below their 2008 peak. "Average residential rents across all market segments, particularly the high-end . . . are on the decline, coupled with a weak secondary market.

"From the group's experience, having gone through many property cycles, if this trend continues, with prices dipping more, some mortgage borrowers affected by lower rentals may have difficulty servicing their loans, possibly leading to forced fire sales," Mr Kwek said.

On a more positive note, Mr Kwek noted that savvy investors who believe in Singapore's prospects will continue to read positively into the property market with a medium to long-term perspective. "New launches that are priced carefully will continue to sell, as buyers only need to make progressive payments based on stages of construction, and they are confident that the market will recover over time," he added.

The group can also count on two "shining stars" - the office and hotel markets. "Office and hotel properties have become most desirable assets. Demand for Grade A office space in Singapore is improving; and capital value for hotels has increased significantly, even though earnings have not caught up yet. With over 120 hotels globally, the group is able to counterbalance by geographical spread," Mr Kwek said.

In the first nine months of this year, CDL's net earnings shrank 17.1 per cent to S$384.74 million despite revenue surging 20.3 per cent to S$2.92 billion.

CDL said that the earnings drop was due to absence of significant divestment gains from non-core investment properties as compared to the corresponding period, which had accounted for gains largely from the sale of 100G Pasir Panjang and strata units in Citimac Industrial Complex, Elite Industrial Building I, Elite Industrial Building II and GB Building. "Excluding such divestment gains from YTD Sept 2013, on a like-for-like comparison, the group's core earnings would have increased by 25.5 per cent for YTD Sept 2014," CDL said in its results statement.

The group's net gearing ratio as at Sept 30, 2014, was 36 per cent, up from 25 per cent as at Dec 31, 2013. Interest cover was 11 times for YTD Sept 2014, down from 13 times in the same period last year.

This does not factor in any revaluation gains in investment properties but takes into account the consolidation of CDL Hospitality Trusts and acquisition of new hotels by the group.

Third quarter earnings per share rose 4.5 per cent to 14 Singapore cents. Net asset value per share rose to S$8.79 as at Sept 30, 2014, from S$8.50 as at Dec 31, 2013.

On the stock market, the counter closed two cents lower at S$9.36 on Wednesday. CDL released its results after trading.

In Q3 FY2014, profit before income tax (including share of after-tax profits of associates and jointly-controlled entities) from property development rose to S$99.82 million from S$88.90 million previously. Profit from hotel operations too improved to S$87.59 million from S$67.13 million. Profit from rental properties rose to S$34.40 million from S$28.32 million.

Giving an update of the South Beach project (a joint venture with Malaysian group IOI), CDL said that the consortium is confident of hitting about 90 per cent occupancy at South Beach Tower (the office component) by end-2014. The 654-room hotel in the development is expected to soft open by Q2 2015.

CDL's London-listed property arm Millennium & Copthorne Hotels has a stake in Tanglin Shopping Centre, where efforts to launch a collective sale failed to garner the requisite 80 per cent consent level from owners - resulting in the collective sale agreement (CSA) lapsing on Aug 27, 2014. "As M&C holds approximately a 34 per cent interest, it does not anticipate that a new CSA will be negotiated. It is unlikely to participate in further attempts in the foreseeable future, given that this committee has already tried twice and the asking prices have not been realistically determined," CDL said.

Giving an update on its UK projects, CDL said that planning approval has been secured on the projects in Belgravia, Knightsbridge (at 32 Hans Road), Reading and Croydon. "The group expects to secure the consents for 90-100 Sydney Street in Chelsea and the Knightsbridge carpark (at 28 Pavilion Road) in Q1 2015," it added.

Mr Kwek also said that the "group's DNA is evolving" as it enters cautiously into new frontiers to expand its overseas property development business.