The pandemic has disrupted supply chains and dampened demand for products and services across the world.
In Singapore, the situation is no different.
Numerous companies in badly-hit industries have reported declining sales and plunging profits.
Blue-chip companies have not been spared, either.
Last week, two of Singapore’s real estate giants, City Developments Limited (SGX: C09), or CDL, and CapitaLand Limited (SGX: C31), announced profit warnings.
CDL’s share price has plunged around 29% from a high of S$10.50 last year, while CapitaLand is down almost 10% during the same period.
Given the situation, should investors bail? Or is this just a temporary phenomenon that will pass with time?
Let’s take a look at what happened.
Being sincere about its impairment
For CDL, the root of its troubles lies with an investment called Sincere Property Group (“Sincere”).
Sincere is a China property group in which CDL owns a 51% joint venture equity stake in, amounting to around S$900 million.
Aside from this equity stake, the group had also subscribed for US$230 million worth of bonds issued by Sincere and provided a working capital loan of around S$133 million.
To add to that, CDL’s investments in Sincere also included an RMB 1.5 billion liquidity support for its maturing bonds and another RMB 1.5 billion corporate guarantee on another of Sincere’s loans.
Totalling up all these numbers, the total commitment on CDL’s part is a staggering S$1.9 billion.
In its profit warning last week, CDL flagged a material impairment for its investment in Sincere after a preliminary audit by Deloitte and Touche, though the quantum could not yet be determined.
Worryingly, CDL’s troubles with Sincere had led to the resignation of three board members: Kwek Leng Peng, cousin of executive chairman Kwek Leng Beng, Koh Thiam Hock, and Tan Yee Peng.
The group has appointed a special working group in light of the situation that is focused on improving Sincere’s liquidity and profitability.
As of 30 September 2020, the group held S$3.3 billion in cash and had available undrawn committed bank facilities totalling S$4.7 billion.
Fair value losses
CapitaLand announced last week that its financial performance for the fiscal year 2020 will be “materially and adversely impacted”.
Profit from business operations is expected to decline in the range of 20% to 30% year on year.
Additionally, the group also expects to incur fair value losses relating to a portion of its portfolio of properties, as well as impairments on residential projects and equity investments.
The total impact of these losses and impairments is around S$2.35 billion to S$2.55 billion.
Due to the occurrence of these financial items, CapitaLand is expected to report a loss for its fiscal year 2020.
However, the group assures investors that these adjustments are non-cash in nature and that it continues to generate healthy cash flow to support its dividend payments.
Further cooling measures?
Recent numbers from the Urban Redevelopment Authority’s (URA) flash estimates showed that private home prices increased by 2.1% for the fourth quarter.
This increase was the steepest since the second quarter of 2018 before property cooling measures were introduced in July that year.
Global interest rates are now hovering at multi-year lows as governments focus on stimulating their economies due to the pandemic.
As a result, a flood of money has found its way into both the stock and property markets, pushing asset prices up despite the downturn.
Talk is now rife of a further round of cooling measures to keep property prices in check.
The government has warned that it wishes to “keep the property market stable” to ensure prices remain affordable for those who wish to own a property.
Moving forward, the government seems more inclined than before to introduce measures to prevent an overheated property market.
It has been making a clarion call for prudence that should set the tone for policy measures in the years to come, thus putting a lid on surging property prices that would have offered some respite for developers.
Get Smart: A tough slog
The outlook remains murky for property developers such as CDL and CapitaLand.
Despite assurances that such fair value losses and impairments are non-recurring by nature, investors may see more of the same in 2021 as the pandemic continues to depress the value of real estate assets.
Rental yields may also be negatively impacted as rental demand remains subdued in the wake of the crisis.
If we layer on possible intervention from the government to cap property price appreciation, we are looking at a multitude of factors that will continue to depress developers’ earnings recovery.
Investors may thus be better served by allocating their money to other more promising sectors or companies.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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