Developers of luxury condo hardest hit

The impact of the current economic downturn on property companies depends on the sub-segments that they are exposed to, with developers of luxury condominiums likely to take a much bigger hit, say analysts.

Developers also need to boost sales via new launches instead of sustaining on unbilled sales, they said.

OSK Research property analyst Mervin Chow said sales of luxury condominiums had been extremely slow.

“Certain speculators and short-term investors, especially those with poor holding power who have been trying to unwind their investments, will place massive downward pressure on luxury condo prices,” he said. “The glory days of luxury condos are over.”

Chow said the luxury condo segment “will experience a steep correction that should last for two years before a slight recovery, likely to be seen in 2011 when developers start to launch some projects which were scaled back in the previous two years.”

ECM Libra property analyst Bernard Ching agrees that companies which are exposed to high-end properties, especially condos within the KLCC and Mont Kiara areas, have been seeing declining sales.

However, Ching said many developers were now more prepared to face the downturn, having survived the 1997/98 Asian financial crisis.

“Most developers are now focused on preserving cashflow. This has been done by differring ‘greenfield’ projects which require substaintial upfront costs and focusing on existing projects or unsold stocks.

“Many developers are also introducing aggressive financing packages to entice buyers,” he added.

He noted that many developers were absorbing some of the upfront costs such as legal fees, stamp duties and even interest payments during the construction period and beyond.

For instance, early this year, SP Setia Bhd and Mah Sing Group Bhd required buyers to pay only 5% upon signing the sales and purchase agreement, with no further payments until completion of the projects concerned.

Analysts also noted that the sales performance of landed properties, especially in the mid to high-end segment, had been relatively better compared with luxury condos.

Chow said developers had been surviving on their huge unbilled sales built up in recent years, hence it was not a surprise that most were still able to report an impressive set of earnings figures in their latest quarterly results.

“However, as most of these developments are due for completion soon, much of these huge unbilled sales will be largely exhausted towards the later part of this year,” he told StarBiz.

An analyst at TA Securities concurred that some developers were sustaining on unbilled sales, and that they must have new launches to boost revenue.

“As long as companies have huge unbilled sales, they will still show resilient performance,” he said, adding that many developers were holding back on new launches now because buyers were adopting a “wait-and-see” attitude in anticipation of declining property prices.

Meanwhile, ECM Libra’s Ching said with the Malaysian property market in a downcycle for at least a year now, listed property companies had seen their market values decline significantly.

“Based on the KLSE Property Index, these companies’ market values have fallen by 48% since July 2007,” he said.

The TA Securities analyst said: “We will see price correction for mid-cap (property) companies by the end of the third quarter.” - By Rachael Kam (The Star)

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