Banks in Singapore have forecast up to S$3 billion in debt maturities by the end of 2017 which they believe will put extreme pressure on smaller builders and property investment companies. This comes at a very difficult time for the singer property market which has seen its 11th quarterly price fall in a row with prices having fallen by 9.4% since their peak in 2013. The Singapore government has also reduced expected economic growth across the region in the short to medium term.
Debt maturities and money markets
Debt maturities are nothing new in the world of finance but the problem is that Singapore property prices have fallen and the economy is certainly weaker than it was 12 months ago. As a consequence, it would appear that investors did not correctly factor in potential risks when many of these financial arrangements were put in place five years ago. It now seems as though many of Singapore’s smaller building companies and property trusts will see a significant increase in their finance costs if indeed they are able to secure refinancing.
Knock-on effect to property prices
The main problem is that if builders and property trusts are unable to finance their debts then ultimately they will be forced to sell off their assets. If we see a flurry of issues within the refinancing market then we could see a significant increase in property stock for sale. This is not the right time to be selling off the family silver with confidence falling and investors sitting on the sidelines. It could indeed turn into a race to the bottom if builders and property trusts are forced to sell off assets to raise short term capital to cover their financial liabilities.
One of the main issues seems to be that the smallest 50 real estate companies quoted on the Singapore stock exchange will see their operating earnings drop from 15.8 times interest expenses just five years ago down to 9.2 times this year. As the headroom between profits and interest payable has reduced significantly over the last five years this will alert many money market investors.
Creating buying opportunities
It is most certainly always darkest before the dawn and with an 11th quarterly reduction in Singapore property prices there is certainly darkness hanging over the sector. In what could be described as a perfect storm, the Singapore government has added to the problems by downgrading economic expectations in the short to medium term. We may need to see some of the smaller building/property trust companies going to the wall to inject more confidence into the sector going forward. While this may seem ruthless the fact remains that some companies in the Singapore property sector will be unable to refinance their debts and will have serious issues going forward.
It looks as though the near S$3 billion in property related debt maturities expected throughout 2017 could test markets in the short term. However, the terrible run on property prices will end at some stage and we may well be nearing the panic sell-off which often precedes a rebound in property prices. Time will tell?