Bangkok--8 Aug--TRIS Rating
TRIS Rating Co., Ltd. says in the latest report on the property sector that the industry is expected to continue its growth trajectory for the rest of 2011. However, the rating agency voices concerns on sustained high leverages of rated developers for coming years and expects to see top priority on balance sheets strengthening.
For the rest of 2011, TRIS Rating expects the residential development industry to grow favorably, driven by a strong economy, rising consumer confidence, and greater political stability. The SDH segment should drive the market growth. The townhouse segment should grow at a rate lower than the overall industry growth rate, given the current level of units available for sale. Performance in the condominium segment in 2011 should be on par with 2010. The growth in sales of condominium units will come from two key segments: units priced below Bt2 million in populated communities, and units over Bt5 million located along mass transit routes. The industry should become healthier from a greater number of real buyers in the low-rise segment and fewer speculative buyers in the condominium segment.
In the coming months, there are two policies expected from the new government that are directly related to the property development sector. In TRIS Rating’s view, the zero-rate mortgage financing plan should stimulate demand only in the short run. As for the minimum wage hike policy, the implementation will inevitably exert upward pressure on construction costs, raising costs by 2%-5%. However, in the medium term, developers will likely be able to adjust their products and pricing to align with the higher wage level. Developers have been able to keep their margins relatively stable amid rising prices for land and raw materials.
TRIS Rating believes that higher financing costs, on the back of a strong economy, are not expected to dampen real estate demand. However, if headline inflation accelerates above 6% and monetary tightening follows, TRIS Rating believes a real estate market correction, particularly in the low-income segment, is highly likely. Several developers have expanded their overhead expenditures over the past few years and they would face immense difficulties in a market downturn.
TRIS Rating cautions on a rise in leverage levels of rated developers, driven by aggressive land purchases and inventory accumulations since 2010. The leverage levels are expected to stay
elevated at least until 2012. At the current sales pace, it should take around 2.7 years to liquidate the inventory sitting on the books of the major developers. In the coming quarters, TRIS Rating expects developers to give a high priority to strengthening their balance sheets in order to bolster for their credit profiles.