Costs the main challenge

Despite new tax incentives, runaway inflation threatens to curb purchasing power and property stocks' upside gains

KANANA KATHARANGSIPORN

Bangkok is the main battleground last year, with condominiums of all shapes and sizes sprouting everywhere.

The property sector is expected to improve from last year but developers should be wary of higher inflation rates and rising costs, according to Jiraporn Linmaneechote, a director at Phatra Securities.

She said property developers were concerned about higher inflation rates as they affected the purchasing power of homebuyers, while rising costs would affect their margins.

"Overall, the property market looks good due to the government's tax incentives. But the market remains unclear as the incentives benefit all of the sector, not only the listed companies," she said, adding that a better performance would depend on how developers adjusted to the negative factors.

In 2007, the property sector performed better than in the previous year. It was the first year that many developers saw a good performance, Ms Jiraporn added.

"During 2005 and 2006, oil prices started to rise while the detached housing segment had a problem with larger [unsold] stock. But a year later developers were able to adjust themselves and their performances had become positive again. So stock prices last year reflected the companies' performances," she said.

Large developers last year benefited from increased market shares as financial institutions clamped down on project loans to small developers. At the same time, listed developers were increasingly turning to debentures as a financial instrument to obtain lower-cost funding.

The sector, which has a market capitalisation of 446.12 billion baht, posted a 31.39% average one-year total shareholder return (TSR) last year, putting it in 11th place among 25 sectors on the Stock Exchange of Thailand. The one-year return was higher than the sector's three-, five- and 10-year returns of 18.26%, 26.73% and 27.39%, respectively.

The industrial estate developer Hemaraj (HEMRAJ), whose 10-year TSR of 11.27% was below the sector average, led all property stocks last year with a 315.85% return. It also beat the average three- and five-year TSR with 57.61% and 55.26%, respectively.

At the same time, three of seven listed industrial estate firms generated higher one-year TSRs than the sector average. The three-year TSR of six of them was positive compared to others in the sector.

Sirichai Chalokepunrat, an analyst at Phatra Securities, said industrial estates were at the front lines of investment. When the government is stable and the economic outlook is good, investment and economic growth will follow, leading to land sales in industrial estates.

"Political issues are the key," he said. "If there's a change in the government, that will be fine. But if a coup occurs, all confidence will be gone. Industrial estates normally take three to six months to be good or bad while property development takes longer."

The industrial estate outlook in 2008 would be better than last year due to an entry of newcomers to the auto industry, including Suzuki, Volkswagen and the Indian automaker Tata.

Combined, they would use about 1,000 rai, accounting for 25% of the current total market of 4,500 rai. "Industrial estates this year will be driven by the industry and investment with automobiles and eco-cars," Mr Sirichai added.

Among the 64 firms in the sector, the residential developer Everland (EVER) was the worst performer in 2007, with a one-year TSR of -61.03%, followed by Navanakorn (NNCL) at -43.53%.

At the same time, only eight of 29 listed developers achieved a higher one-year TSR than the sector's average. Most of them were residential developers with better performances.

Suwanna Bhuddhaprasart, a senior executive vice-president of Quality Houses Plc (QH), said her company's sales growth was higher last year compared to 2006, as the company shifted to the middle-priced segment.

"Investors were interested in our stock as we had the potential to get revenue from normal businesses [housing sales] with profit growth of 200% last year, and the potential to expand our business from selling our Q House Lumpini office building to a property fund," she added.

She said the property fund was affected by the Bank of Thailand's capital controls on foreign funds, which typically were big investors in property funds. Thai investors did not favour the fund very much so the number of Thai investors was limited. But conditions should improve this year as the capital controls have ended.

Prasert Taedullayasatit, chief business officer of the second-largest developer Preuksa Real Estate Plc (PS), said his company's one-year TSR was higher than the sector's average thanks to a change in strategy and rapid growth.

"We shortened the business cycle and sped up construction, which helped to reduce costs. Our investment structure also changed. We scaled down the size of our projects to close sales faster."

Mr Prasert said that PS shares were attractive among investors, as the company had the highest total asset turnover in the industry. Its financial status was also strong, with a debt-to-equity ratio of 0.37 times, the lowest among listed developers.

"With 65 projects on hand, we can move on with our strengths. We plan to launch 40 to 50 new projects this year and also tap into every housing segment," said Mr Prasert.

Among 13 construction firms, only Italian-Thai Development (ITD), EMC, Sino-Thai Engineering and Construction (STEC) and PAE (Thailand) posted a positive one-year TSR of 52.78%, 36.37%, 18.03% and 0.57%, respectively.