Property Singapore - UOB Kay Hian 2015-10-09: Your Ultimate Guide To Extension Charges

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Singapore Property WING TAI HLDGS LTD W05.SI  CAPITALAND LIMITED C31.SI 

Property − Singapore ~ Your Ultimate Guide To Extension Charges 

• Our burn-down analysis of extension charges reveals that big developers remain relatively unscathed, with the worst-case impact limited to 2-7% of book value. In contrast, some small/mid-cap developers face greater risk at 13-21% of their books. 
• Developers are resorting to aggressive sales strategies, bulk sales and other novel strategies to mitigate the impact. We believe the market has over discounted the negative prospects for the sector. 
• Maintain OVERWEIGHT with CapitaLand and Wing Tai as our top picks. 

WHAT’S NEW 

• Sifting through the statuses of over 400 projects in Singapore, and the developers behind them, we took an uncompromising look at the potential impact on property developers in Singapore assuming failure to sell any remaining inventory. 

ACTION 

• Maintain OVERWEIGHT; deep value remains even after burn-down. Big developers remain relatively unscathed, with worst-case impact limited to 2-7% of book value, while some small-cap developers face greater risk at 13-21% of their books. We prefer deep value and diversified developers with Wing Tai Holdings (Wing Tai) and CapitaLand as our picks. 
• Size does matter. Singapore’s largest developers under our coverage remained relatively unscathed, with extension charges accounting for about 2-7% of book value. CapitaLand, for example, saw a light 2% hit on book value. Most were able to stomach the potential losses with sizeable cash. In contrast, smaller players like Goodland (21.4%), Heeton Holdings (20.7%) Sing Holdings (20.5%) bore the brunt of the severe impact on book value. 
• Near-term extension charges for high-end projects acquired via en-bloc in 2005-07. The projects that could see the highest extension premium in our severe scenario are OUE Twin Peaks (S$254.5m), Nouvel 18 (S$222.9m) and 3 Orchard By-The-Park (S$208.8m). 
• Novel strategies put into play by developers. These include bulk sales of unsold inventory to parent companies, contractor companies, or even related parties. City Developments’ (CDL) inspired approach in securitising its Sentosa properties could well pave the way for others to do likewise, noting that Wing Tai also happens to be CDL’s Nouvel 18 joint venture partner. 
• Other options available to developers. These include: 
  1. delisting and cancelling Qualifying Certificate (QC) charges, 
  2. setting up special purpose vehicles (SPV) and leasing out injected projects, and 
  3. appealing for waivers, after the exhaustion of all possible avenues of project sales.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-09

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