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Top firms in bid to cut borrowings

By on Jun 22, 2012 in Property News

Developers trying to raise funds by issue of debentures, property funds

Though there has been initial growth in terms of sales and market share for the top 10 listed property firms, they also show a high debt-to-equity ratio – between lower than 1:1 and average 1:1 in 2008 to higher than 1:1 as of the first quarter of this year. This has forced them to reduce their debt by speeding up sales of residential projects and reducing financial cost by issuing debentures that pay interest rate lower than what would be incurred on loans from commercial banks.

According to surveys, the debt-to-equity ratio of the top 10 listed property firms as of March 31, 2012 was higher than 1:1.

This means their growth since 2008 has been funded by project loans, while it was through issue of debentures before 2008.

Most property firms had maintained their debt-to-equity ratio at lower than 1:1 since the 1997 financial crisis.

Even when they expanded their investments after 1997, they would spend their cash and be cautious about borrowing to ensure their debt-to-equity ratio was not higher than 1:1.

But now, the property market in Bangkok and its suburbs is showing strong growth with demand for 80,000-100,000 units a year, worth Bt240 billion to Bt300 billion a year.

This poses a challenge to property firms, especially listed property developers, to expand their investments and launch residential projects outside Bangkok. When their cash flow did not support their business growth, they increased their debt to drive business growth.

Funding came from project loans from commercial banks, issue of debentures, and property funds.

According to a survey by The Nation, listed property firms issued debentures worth more than Bt20 billion in the first half of this year.

They include Sansiri, Land & Houses, Pruksa Real Estate, Property Perfect, SC Asset Corporation, Asian Property Development, and Central Pattana.

The issue of debentures or property funds is aimed at reducing interest rate cost. Asian Property Development senior vice president of finance and accounting Phumipat Sinacharoen said the company plans to issue debentures worth Bt1.2 billion in the second half of this year.

The debenture will offer interest rate of 4.49 per cent, which is lower than the minimum loan rate that is currently between 7.25 and 7.75 per cent.

Following the high debt-to-equity ratio, most property firms are trying to reduce their debt and maintain debt-to-equity ratio at lower than 2:1 by speeding up sales of their residential projects to generate cash to pay back loans, and reduce their inventory.

Pruksa Real Estate CEO Thongma Vijitphongpun said that the company is trying to reduce its financial cost and debt-to-equity ratio to lower than 1.36:1 by speeding up transfer of residential units to buyers by combining the prefabrication system and the real estate manufacturing system.

This will speed up the construction process and reduce defects from the construction process.

Property Perfect CEO Chainid Ngowsirimanee said the company is trying to reduce its debt-to-equity ratio from 1.8:1 now to 1.4:1 in 2014 by speeding up construction of residential projects and transfer to buyers.

That will generate revenue to pay back loans.

The company also plans to launch a property fund when its dormitory and shopping centre is completed in 2013 and 2014.

source : The Nation 22 June 2012

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