TRIS Rating expects the demand for housing to strengthen by 5%-10% this year. We expect the recovery of the domestic economy, the revival of the tourism industry, and the reopening of several countries, especially China, to outweigh the negative impacts resulting from the reimposition of loan-to-value (LTV) rules and rising interest rates. However, event risks like the Russia-Ukraine war and geopolitical tensions are likely to pose challenges throughout the year.
According to data collected from 25 rated property developers, aggregate performance was slightly better than targeted last year. The value of housing units transferred in 2022 (including projects of joint ventures) increased by 12% to around THB310 billion. Despite the rising costs of construction materials and land, the average gross profit margin in the first nine months of 2022 (9M2022) increased to 35% from around 33% in 2021.
In addition, total net presales (net of bank rejections and cancellations) of rated developers increased to THB326 billion in 2022, up by 32% year-on-year (y-o-y). The growth was driven mainly by a strong recovery in condominium sales in the second half of 2022 and increasing demand for single-detached houses (SDHs). The net presales value of condominiums in 2022 improved significantly to around THB120 billion, more than doubling from 2021, while the net presales of landed properties increased by almost 10% y-o-y to around THB206 billion.
Net presales to foreign buyers in 2022 were estimated at around 10% of total condominium presales. This is equivalent to 50% of net presales to foreign buyers in 2019 and only 20% of the peak figure in 2018. Thus, if demand from foreign buyers fully recovers, it could potentially boost condominium sales by as much as 30%-40% from 2022.
In our view, the reopening of several countries amid diminishing fears of the pandemic will lead to a recovery of the domestic economy. The revival of tourism will help improve the service sector and have a multiplier effect on domestic consumption. This should partly help offset the expected slowdown in exports of goods amid fears of a global recession.
On the contrary, tightened LTV rules and rising interest rates could dampen housing demand. In our view, the LTV rules will have a greater impact on the mid- to high-end housing segments since these buyers may have more than one mortgage contract. However, we do not expect to see a sharp drop in housing sales like in 2019 as demand from foreign buyers should help offset the decline in demand from Thai homebuyers. In addition, given the easing pressure from both foreign exchange and inflation, we expect the Bank of Thailand (BOT) to raise the policy rate by just 50 bps in total in 2023.
We expect aggregate revenues of 24 rated developers (excluding Univentures PLC due to its higher contribution from the power business) to grow by 5%-10% this year. However, gross profit margin is expected to revert to the normal level of around 32%-33%, down from 35% in 9M22, since increasing construction and land costs should fully reflect in the developers? cost of goods sold. Given the improving operating performance, we expect the debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio to improve gradually, from around 6.3 times in 2022 to around 5.5-6.0 times in 2023-2024. The aggregate debt to capital ratio is expected to range from 50%-52%.
At the end of 2022, TRIS Rating issued company ratings to 25 residential property developers. The ratings ranged from ?B+? to ?A+?. In 2022, we assigned two new issuer ratings, downgraded two issuers, and upgraded one issuer. We also assigned a ?positive? outlook to one issuer and a ?negative? outlook to four issuers.
MARKET RECAP
According to data from the Agency for Real Estate Affairs (AREA), the value of housing units sold in the Bangkok Metropolitan Region (BMR) in 2022, already surpassed the level sold in 2019. The higher sold value was driven by the strong recovery in sales of condominiums and steady growth in sales of landed properties, especially SDHs. The value of condominiums sold in 2022 grew by 64% y-o-y, equivalent to around 90% of sales in 2019 and 60% of the peak in 2018. The value of landed property sales in 2022 was almost 1.5 times that of the 2019 level.
Demand for landed properties (including SDHs, semi-detached houses, and townhouses) has been quite resilient in recent years. The number of units sold in 2022 increased by around 1% y-o-y, however, the value of sales increased by 18% y-o-y. The average selling price of landed property increased by almost 20% y-o-y to around THB6 million per unit, reflecting both the rising development cost and the increasing demand for larger housing units.
On the contrary, the average selling price of condominium units dropped by 7% y-o-y since demand for units priced below THB3 million outweighed demand in the higher price segment. Based on new condominium projects launched in 2022, the number of units sold was 24,861 units or around 80% of the 2019 figure. Demand for condominium units priced lower than THB3 million was almost 95% of the level in 2019 while demand for condominium units priced from THB3-THB5 million per unit and from THB5-THB10 million per unit were around 70% and 30%, respectively. Demand for condominium units priced above THB10 million was still far below the pre-COVID-19 level.
According to the data collected from the 25 rated property developers, the aggregate performance of the developers was slightly better than targeted in 2022. The value of housing units transferred in 2022 (including projects of joint ventures) increased by 12% to around THB310 billion. Around 60% of the transfers were from the landed property segment. Despite rising costs of construction materials and land in 2022, the gross profit margin in 9M2022 of rated developers still improved, rising to 35% from around 33% in 2021. However, we expect gross profit margins to revert to their normal level of around 33% in 2023-2024 since the rising land, construction, and interest costs should be fully reflected in developers? cost of goods sold. In addition, we do not expect developers to be able to fully pass through the rising costs to homebuyers.
Total net presales in 2022 (net of bank rejections and cancellations) increased to THB326 billion, up by 32% y-o-y. The growth was driven mainly by a strong recovery in condominium sales in the second half of 2022 and strong demand for SDHs. The net presales value of condominiums in 2022 improved significantly to around THB120 billion, more than doubling from 2021, while net presales of landed properties increased by almost 10% y-o-y to around THB206 billion.
Total backlog of the 25 rated developers at the end of 2022 stood at around THB220 billion, comprising 70% condominiums and 30% landed properties. The total condominiums backlog of rated developers declined substantially from its peak of THB320 billion in 2018 to around THB160 billion at the end of 2022. Thus, the expected growth in transfers of condominiums in 2023 and 2024 will depend largely on the growth in sales of existing projects. At the end of 2022, the remaining value of condominium units available for sale (including built and un-built) stood at around THB340-THB350 billion.
Market Outlook
TRIS Rating forecasts demand for housing to grow by 5%-10% this year. Key supporting factors are the recovery of the domestic economy and the expected growth in demand from foreign buyers after the reopening of several countries, especially China, as pandemic fears subside. Key challenges will include the reimposition of LTV measures and rising interest rates. Uncertainties over the Russia-Ukraine war and geopolitical tensions will remain key risks for rated property developers.
Key growth drivers:
? Higher demand for condominiums from foreign buyers. We expect the reopening of China and several other countries after the pandemic to act as a major growth driver for the condominium market in Thailand. According to data from the 25 rated developers, net presales of condominiums in 2022 were around THB120 billion, surpassing the 2019 level of THB116 billion but reaching only 60% of the peak of THB200 billion in 2018. Net presales to foreign buyers accounted for around 10% of total condominium presales in 2022, equivalent to only 50% of the condominium value sold to foreigners in 2019 and only 20% of the peak of THB58 billion in 2018. Thus, if demand from foreign buyers recovers to the 2018 level, it could potentially increase the sales value of condominiums by almost 30%-40% from 2022. It is estimated that demand from Chinese buyers would account for more than 50% of total demand from foreign buyers, in terms of value.
? Revival of the domestic economy. TRIS Rating estimates gross domestic product (GDP) growth in 2023 will be around 3.5%, almost 1% higher than the 2.6% growth in 2022. The growth is expected to be driven by the recovery of tourism, stronger private consumption, and increased public and private investment. The number of tourists is expected to rise to around 27 million this year, or almost 70% of the peak in 2018. The recovery of tourism will help improve the service sector and have a multiplier effect on domestic consumption, which should partly help offset the expected slowdown in exports of goods amid fears of a global recession.
Key challenges:
? Reimposition of LTV measures. With the recovery of the domestic economy, the BOT decided to end the relaxation of LTV measures from 2023 onwards. According to the BOT, it is estimated that 71% of mortgage loans were first mortgage contracts for housing priced below THB10 million per unit, which are not affected by the LTV measures.
In our view, the tightened LTV rules will have a greater impact on the mid to high-end housing segments since these buyers may have more than one mortgage contract. The value of transfers in 2022 may consequently be inflated somewhat as buyers might speed up their purchases to avoid the tightening LTV rules. However, we do not expect to see a sharp drop in housing sales like in 2019 following the imposition of LTV rules and in 2020-2022 with the COVID-19 pandemic. Rather, we expect a recovery of demand in 2023 from foreign buyers who are not affected by the LTV rules.
? Rising interest rates. We view that the widening gap between the US Fed funds rate and the BOT?s policy rate may force the BOT to increase its policy rate further this year. Last year, the US Federal Reserve Bank (The Fed) raised the Fed funds rate seven times to a range of 4.25%-4.50% from 0%-0.125% while the BOT raised the one-day policy rate only three times to 1.25% from 0.5%. The Fed is expected to raise the Fed funds rate a few more times this year to ensure that US inflation is on a sustained downward path. Thus, we expect the BOT to increase the policy rate further this year.
In our view, the interest rate hikes will affect not only the funding costs of developers but also the debt servicing capacity of homebuyers, especially those in the lower-income segment. Rising interest rates could also dampen demand from investors as their expected returns are eroded by higher funding costs. However, we do not expect a higher portion of demand from investors and/or speculative demand. In addition, with easing pressure from both foreign exchange and inflation, we expect the BOT to raise the policy rate by only 50 bps in 2023. The BOT has already raised the policy rate by 25 bps in January 2023.
At the end of 2022, total interest-bearing debt (IBD), including proportionate shares of debts from joint ventures, of 24 rated developers (excluding Univentures PLC due to its higher contribution from the power business), was around THB420 billion. Total IBD comprised bonds and bank loans of around 60% and 40%, respectively. The aggregate debt to capitalization ratio of rated developers is expected to range from 50%-55%.
? Russia-Ukraine war and geopolitical tensions. The ongoing Russia-Ukraine war and intense geopolitical tensions may present challenges for all developers. The Russia-Ukraine war, beginning in early 2022, caused supply chain disruptions and sharp rises in the prices of several commodities, including fuel, coal, and steel. Though construction costs have eased over the past few months, the conflict could be escalated at any time. Thus, developers remain exposed to raw material price risk, and they may not be able to fully pass-through the elevated construction costs via price increases.
Changes in Rating/Outlook
In 2022, TRIS Rating rated 25 residential property developers. We downgraded the issuer ratings of two companies (MJD and AREEYA) and revised downward the outlooks of four companies (MK, PS, QH, and SENA) to ?negative? from ?stable?. The downgrades were mainly due to weak performances and/or rising leverage levels. We upgraded the issuer rating of one company (ORI) and revised upward the outlook of one company (AP) to ?positive? from ?stable?. The positive rating actions were mainly due to better-than-expected operating performance and declining financial leverage.
The lingering COVID-19 pandemic and the slowdown in demand from foreign buyers has caused the credit quality of several rated developers to deteriorate over the past few years. However, most of them have been able to maintain their credit metrics within their current rating thresholds. Some developers were able to gain market shares from their peers. These developers have relatively strong positions in both the condominium and landed property segments and are able to quickly adjust their product portfolios to capture rising demand in landed properties. Developers that focus only on the condominium and lower-priced housing segments seemed to perform worse than their peers.
Looking forward, despite the likelihood of headwinds, we expect most rated developers to perform better in 2023. The reopening of major countries like China and the strong recovery of the tourism industry should help boost demand for housing in Thailand. We forecast the revenues of 24 rated developers (excluding UV) to grow by 5%-10%. We expect rising inflation to cause construction and land costs to remain high while developers may not be able to fully pass-through the rising costs to buyers. This is likely to bring down the gross profit margin of rated developers to the normal level of around 32%-33%, from 35% in 9M22. The average debt to capitalization ratio is expected to remain around 50%-52%. Given the improving sales performance of rated developers, we expect the debt to EBITDA ratio to improve gradually, from around 6.3 times in 2022 to around 5.5-6.0 times in 2023-2024.