The Business Times, 17 Aug 2022, Weds 5:52 AM
By Yong Jun Yuan
CONSTRUCTION companies have been on a tear this recent half-year on improved earnings following the relaxation of Covid-19 restrictions on the inflow of migrant workers.
But the industry may be sailing into troubled waters as Singapore’s red-hot property market begins cooling.
Investors should look past the currently elevated levels of earnings across the whole sector before wading in.
For instance, Chip Eng Seng : C29 0%’s construction division posted net profit of S$16.3 million for the half-year to Jun 30, a steep increase from the S$3.1 million reported for H1 2021.
Meanwhile, construction company Lian Beng Group : L03 0% reported a 67 per cent jump in net profit to S$43.5 million for its financial year ended May 31.
Companies supplying materials to the construction industry have also seen their profits surge despite increasing input costs.
Ready-mix concrete supplier Pan-United Corporation : P52 0%, for instance, reported a 94 per cent jump year on year in net profit to S$13.5 million for the half-year ended Jun 30.
In its financial results, the company noted that while the cost of raw materials like cement, granite and sand had risen in the first half of the year, the group’s earnings before interest, tax, depreciation and amortisation margin remained comparable year on year.
Steel solutions provider BRC Asia : BEC 0% also saw its gross profit jump 106 per cent to S$36.7 million year on year for the 3 months ended Jun 30. The company observed that construction order books have remained strong and that the HDB is on track to launch more new flats.
In December last year, HDB said it would increase the build-to-order (BTO) supply of flats by up to 35 per cent. This came only 1 day after a fresh round of property cooling measures had been implemented.
The cooling measures included a further rise in additional buyer’s stamp duty (ABSD) and a tighter total debt servicing ratio (TDSR).
Since then, other factors like rising inflation and interest rates have further weighed on property market sentiment.
The combined effect of these headwinds now appears to have trickled down to real estate agencies.
Apac Realty : CLN 0%, which has a 40 per cent share of Singapore’s residential property market under the ERA brand, posted a 2.1 per cent decline in earnings to S$16.7 million for the first-half ended June.
In its financial release, the company noted that developers had sold 40.2 per cent fewer private residential units – including executive condominiums – in the first half of the year.
Private residential resale market sales volumes also declined 21.4 per cent to 7,932 units, while HDB resale market transactions declined 6.1 per cent to 13,753 units.
Real estate agency PropNex : OYY 0% posted a decline in net profit of 20.7 per cent to S$13.1 million for the 3 months ended Jun 30. Revenue declined 11.4 per cent to S$230.7 million due to lower commissions received as a result of fewer marketing launches.
PropNex chief executive Ismail Gafoor noted that transaction volumes had softened as property cooling measures in December 2021 took effect and slowed price growth in the private residential sector.
Amid geopolitical uncertainties and rising interest rates, developers appear to also be showing some caution for large private residential development sites.
In June, 2 relatively large 99-year leasehold plots along Dunman Road and Pine Grove area received 2 and 5 bids respectively, falling short of property consultants’ expectations. The Dunman Road plot could yield about 1,040 units, while the Pine Grove area plot could yield about 520 units.
JLL senior director Ong Teck Hui said that large residential sites are riskier in the current market, and that it would be more appropriate to launch sites that can generate fewer than 500 units.
This weakening sentiment does not bode well for the construction industry, which needs the developers to sustain them with future orders.
If demand continues to sour, HDB could still adjust the number of BTO flats being built between now and 2023. During the February and May 2022 BTO exercises, HDB has launched 8,536 BTO flats. This was 12 per cent more than the 7,619 units it launched over both exercises a year ago.
Although there continues to be bids for private residential development sites, demand for them may progressively weaken if interest rates remain higher for longer.
As it is, the US labour market remains strong while inflation rates, which recently showed signs of peaking, remain uncomfortably high. These are factors that could continue to nudge the US Federal Reserve to raise interest rates.
The big question is whether the US economy sinks into recession before inflation is brought under control. In June, the Federal Reserve Bank of New York’s economic model showed only a 10 per cent chance of a “soft landing” for the US economy.
Against this backdrop, appetite for property in Singapore could be tested in the months ahead. And, investors should continue paying close attention to the order books of construction companies for any signs of decline.
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