TRIS Rating Sees Property Market Back to Normal; Oversupply Risk Remains

TRIS Rating expects the residential property sector to continue to grow and the market to return to normal. However, the agency warns an aggressive rise in new supply will likely lead to an excessive inventory accumulation, raising the risk of price deflation in the future.

TRIS Rating Co., Ltd., the Thai rating agency, says today that the growth in the residential property sector in 2011 should be partly supported by developers’ sizable backlogs. The number of newly launched units and units sold in 2011 is expected to decline moderately from 2010 as market returns to normal and the tax incentives have expired. Sales and launches of low-rise projects should lead the market growth. The number of new high-rise units in 2011 is expected to decline as most developers are taking a more cautious stance. An increase in low-rise segment should raise the portion of real buyers -- as opposed to speculative buyers -- and translate into healthier market growth.

Speculative demand is expected to subside in 2011 after the Bank of Thailand (BOT) issued a precautionary loan-to-value (LTV) measure. Rising market interest rates will also reduce the attractiveness of yields on property rents and cut speculation. The stepped-up financing costs on the back of strong economy are not expected to dampen real estate demand.

However, TRIS Rating warns that the risk of oversupply cannot be completely ruled out. The number of condominium units purchased by speculators and renters over the past few years is estimated at 25%-40% of the total number of units launched or around 40,000 units. This supply could return to the market should economic conditions reverse. A continuing expansion of the new supply exceeding 70,000 units per annum will likely lead to an excessive inventory accumulation, raising the risk of price deflation in the future. Political instability also poses another risk. However, history shows that the real estate market is quite resilient. Demand generally drops during periods of political unrest and then rebounds quickly when the situation returns to normal.

Most developers rated by TRIS Rating continued to report healthy profit margins in 2010. The average operating profit margin was around 15%. The end of government tax incentives and higher costs for land, materials, labor, and marketing should weigh down developers’ profit margins by 3%-5% in 2011. Inventory levels of the rated developers have risen noticeably since the end of 2010. To liquidate the existing inventories, developers would need around 2.8 years at current take-up rates. The aggregate amount of total debt outstanding across all rated developers escalated substantially in 2010. The rise in debt came as firms financed future projects.

TRIS Rating sees the mass transit development projects should gradually relieve the upward pressure on land and property prices in Greater Bangkok in the near to medium term. Large developers with a broad product portfolio and a range of price levels can gain a competitive advantage over smaller developers. However, the dominant positions of the large property developers can destabilize the market stability. When large property firms increasingly adopt similar strategies and pursue the same product, price or geographic segments with the highest growth potential, there is a great chance that new supply will quickly overwhelm existing demand. A subsequent rapid evaporation in demand could raise the risk of firms getting stuck with inventory mismanagement nightmares. Developers also continually face the challenge of identifying the next booming segment in order to sustain revenue growth plans, said TRIS Rating. -- End

Developer Company Rating/Outlook Asian Property Development PLC BBB+/Positive Lalin Property PLC BBB/Stable Land & Houses PLC A/Stable M.K. Real Estate Development PLC BBB+/Stable Noble Development PLC BBB+/Stable Pruksa Real Estate PLC A/Stable Property Perfect PLC BBB-/Stable Quality Houses PLC A-/Stable Sansiri PLC BBB+/Stable Supalai PLC A-/Stable Univentures PLC BBB/Stable ? Copyright 2011, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.