Real Estate Sector Turns to Bank Loans Amid Difficult Bond Market
Mr. Somanat Pongsomboonchok, a senior analyst at Nomura Securities, revealed that in the second quarter, six real estate companies, namely Ananda Development (ANAN), Land and Houses (LH), Pruksa Holding (PSH), Quality Houses (QH), Sansiri (SIRI), and Supalai (SPALI), had a total of 23 billion baht in long-term bonds maturing. Of this amount, only 8.6 billion baht was raised through new bond issues to replace the old ones, while the remainder was financed through bank loans for repayment, reflecting a challenging situation in the bond market.
“Generally, using bank credit incurs higher costs, but with the trend of declining interest rates, the overall cost is not expected to rise significantly, at most by 0.25 to 0.50%. However, some companies may need to sell off investments to boost liquidity, which could lead to changes in costs,” he added.
Additionally, three other companies—AP (Thailand) (AP), L.P.N. Development (LPN), and SC Asset Corporation (SC)—have bonds maturing this year totaling 66.7 billion baht. The financial status of this group as of Q1 2020 showed a net interest-bearing debt to equity (Net IBD/E) ratio of approximately 0.97 times.
Considering only the long-term bonds maturing, which account for 77% or about 51.2 billion baht, most of these will need to be repaid in the second half of the year, with a significant portion of 22.5 billion baht due, necessitating careful financial assessment of each company during this period.
“The fourth quarter is particularly concerning as bank support will diminish after many companies have already utilized their credit. However, government assistance in purchasing investment-grade private bonds could provide some relief, as all nine major real estate companies mentioned have this credit rating,” he noted.
In terms of business outlook, although sales and transfer figures in Q2 exceeded expectations, this was largely due to pricing strategies, resulting in some companies' gross profit margins dropping to only 15-20% from the usual 30%. This is likely to be a short-term demand boost.
“The use of such pricing strategies is partly because companies want to enhance liquidity as much as possible, which is also reflected in their willingness to issue perpetual bonds with higher costs. Overall, this suggests that companies may survive, but growth will be increasingly challenging,” he stated.
Overall, stocks in the real estate sector are expected to start recovering, possibly waiting until Q1 2021. The industry's current hope lies in government policies, including support for purchasing private bonds, allowing foreign investors back in, or opportunities to relax LTV policies. However, the situation is not expected to be as dire as the 1997 crisis, as current interest costs are relatively low, and many companies have joint ventures with foreign firms, which helps diversify risk. However, medium and small-sized companies are the most concerning, as they lack these advantages, which could exacerbate the situation if it affects other suppliers in the industry.
For major players, ANAN and SIRI are the most concerning due to their high Net IBD/E ratio of 1.1 times and an increasing trend, while their primary revenue comes from condominiums with a high proportion of foreign customers, leading to significant uncertainty.
