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Beware These Local Property Developers Which Are Standing On Shaky Ground

It appears that local property developers can’t seem to catch a break these days.

Not only are they faced with potentially pricier debt, they’re also contending with softer demand in the real estate market. For investors in locally-listed real estate developers, now’s probably as good a time as any to find out which are the ones standing on shaky ground.

The creditors, they’re a-coming

Last week, Piyush Gupta, chief executive of DBS Group Holdings Ltd  (SGX: D05), warned that the credit cycle in Asia is turning. In other words, companies may find that borrowings will become more expensive in the future.

Given that real estate development is a very capital intensive business, developers often have to borrow heavily to raise funds to go about their daily operations. If interest rates do rise, it would make life even tougher for the developers.

The homebuyers, they’re all a-missing

As if potentially higher interest expenses is not posing enough of a headache, developers in Singapore are also seeing weaker demand from homebuyers. Earlier today, the daily national broadside The Straits Times had published an article, pointing out how 2014 had “ended with a whimper amid the worst sales in six years.”

Here’re some telling statistics from the article, titled “Anything But A Merry Christmas For Developers”:

  • Only 7,378 units were sold in 2014, the worst since the financial crisis era when 4,264 units were sold in 2008.
  • Only 230 new condominium units were sold in December 2014; it was the “worst month of sales since January 2009, when 108 apartments were sold.”

Fraught with danger and a Foolish take

Being faced with a highly-geared balance sheet, weak consumer demand, and the possibility of expensive refinancing in the future is definitely not the best position to be in for any company. Unfortunately, this is where companies like Oxley Holdings Ltd (SGX: 5UX), Roxy-Pacific Holdings Ltd (SGX: E8Z), Heeton Holdings Limited (SGX: 5DP), Fragrance Group Limited (SGX: F31), and Hiap Hoe Ltd (SGX: 5JK), find themselves in at the moment.

The quintet are locally-listed property developers that depend on Singapore’s real estate market for at least two-thirds of their revenue. And as you can see in the table below, they are also heavily-leveraged, with a net-debt to equity ratio (where net-debt is equal to total borrowings minus total cash) of at least 97% based on their latest financials.

Company Net-debt to equity ratio
Oxley 394%
Roxy-Pacific 214%
Heeton 121%
Fragrance Group 99%
Hiap Hoe 97%

Source: S&P Capital IQ

And to exacerbate the issue, they have also had trouble generating positive operating cash flow even when Singapore’s real estate market was in much better shape between 2010 and 2013.

Cash flow for property companies

Source: S&P Capital IQ

The situation may well improve for these companies as we move further into 2015. Singapore’s property market might rebound if the government decides to reduce the cooling measures that are currently enforced. Or, Gupta’s warning about the turning of the Asian credit cycle may turn out to be false, allowing these companies to continue operating in a more comfortable low interest rate environment for some time more.

So, none of all the above is meant to say that the quintet of Oxley, Roxy-Pacific, Heeton, Fragrance Group, and Hiap Hoe are definitely in trouble. But based on what I’m seeing so far, I think investors ought to pay close attention to how the businesses of these developers are faring as they are standing on some shaky ground.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.