BTO: New risks emerge for property companies

Business Times - 31 Mar 2009

New risks emerge for property companies

Credit crunch, price uncertainty affecting firms, says E&Y

By ARTHUR SIM

 

(SINGAPORE) Real estate companies face new and growing risks amid the downturn in the world economy, says Ernst & Young (E&Y).

 

'The credit crunch, fluctuations in global economies and resultant pricing uncertainty are affecting real estate companies globally, including those in Singapore,' says E&Y Singapore's assurance partner and market leader for real estate Liew Choon Wai.

 

Many local developers have overseas portfolios, including in emerging markets, and a major concern is the economic vulnerability of these markets and possible changes to local regulations as a result, he says.

 

Another source of potential concern is the real estate investment trust (Reit) sector. 'Should the economic downturn be prolonged or worsen, we expect some form of consolidation in this sector, especially with its refinancing needs and the continuing pressure on rents.'

 

As for residential property, E&Y continues to see a 'rebalancing of selling prices and judicious timing of property launches', Mr Liew says.

 

E&Y's 2009 real estate business risk report itemises the top 10 risks faced by the industry as ranked by leading analysts.

 

The greatest concern is continued uncertainty and the impact of the credit crunch. As E&Y points out, the real estate sector has felt tighter credit conditions perhaps more than any other industry.

 

Restrictions on availability of credit and the short-term inability to deploy capital at acceptable levels of return have 'paralysed' the industry's transactions sector, says E&Y's global infrastructure and construction leader Michael Lucki.

 

'The only lending today is on deals with 50 per cent loan to value and at rates 200 to 400 basis points higher than six months ago, whereas towards the end of 2007 most loans were at 80-90 per cent loan to value,' he says.

 

But some lenders may be on the lookout to move real estate related assets off their books fast, paving the way for forward-thinking companies to develop strategies to take advantage of distressed assets and debt situations.

 

Besides volatility and a lack of credit, other risks for the real estate sector seen by E&Y are: the impact of ageing or inadequate infrastructure; the worldwide war for talent; changing demographics; the inability to find and exploit global and non-traditional opportunities; pricing uncertainty; the green revolution, sustainability and climate change; and volatile energy costs.

 

Still, E&Y's global and Americas real estate leader Howard Roth still believes there is a lot of capital on the sidelines waiting to take advantage of distressed real estate opportunities when the time is right.

 

'A structured, comprehensive due diligence programme will be more important than ever as buyers and sellers evaluate their opportunities,' he says.