Banks slow lending to small developers

Kasikornbank executive vice president Patchara Samalapa said recently that the bank had slowed its extension of loans to small developers since late last year, because of concern over an overheating of the property market in the provinces.
Major developers’ expansion of projects to the provinces has encouraged local small companies to rush to develop their own projects, he said.
The banks are now more cautious about the rapid growth of the property sector and should not participate in lending to those developers that possess neither the land nor the funding, despite the property boom in the provinces, he said.
The Bank of Thailand’s warning about the property market is reasonable grounds for slowing down project financing for smaller developers, he added.
“Major developers have enough capital to buy plots of land, unlike small developers, which don’t have their own plots and seek credit to purchase land. We are therefore unable to support them because of the high risk,” Patchara said.
Kasikornbank’s outstanding lending to small developers accounts for Bt10 billion of its overall small and medium-sized enterprise portfolio of Bt450 billion, he said.
Thanachart Bank, meanwhile, will also only consider lending to local developers if they have their own plots, to avert the likely risk from this segment of the market, said executive vice president Jiratchyuth Amyongka.
The bank has been paying less attention to small developers for a while, unless they have enough cash flow and/or a sufficient backlog of work, he said.
With local developers having been influenced by the arrival of major developers, which have broadened their projects to the provinces, Thanachart Bank has had to be more selective and lend only to those with potential in order to ensure their ability to repay debt, he added.
“Some local developers might see an opportunity from provincial urbanisation and seek project finance to operate on a larger scale than before, which is a worry for the bank. We suggest to these companies that they develop their projects phase by phase.”
There is still room at the bank for local developers, but it has to select those involved in segments with good potential, such as low-rise developments, because such projects are not the target of speculators, unlike the projects of major developers in the provinces, he stressed.
According to the Bank of Thailand’s latest monthly monetary-policy report, the property sector in some areas has rapidly expanded and the central bank has found a higher rate of speculation.
The Monetary Policy Committee (MPC) will closely watch the situation to reduce the impact from the increased speculation, the April report said.
Even though lending by commercial banks and the repayment ability of borrowers remain stable, it found signs of lending relaxation, reflecting the ratio of income to debt, which fell to 4.4 times in February from the average of 4.6 times five years ago.
The central bank surveyed property developers in the provinces and found that the number of condominium projects had increased and some speculation had been observed, reflected by the high rate of lease agreements, causing the projects to be sold rapidly. The report noted that the number of lease agreements sold to other buyers was increasing as well.
Ruechukorn Siriyothin, assistant BOT governor in charge of financial-institutions policy, said it was not clear how much speculation was going on because developers had not provided much detail; however, the central bank’s regional offices were monitoring the matter.
“Some projects sold out from attractive promotions,” she said.
The debt-to-equity ratio of listed property developers increased between 2010 and 2012. Land and Houses had a D/E ratio of 1.05 last year against 0.75 in 2010. Pruksa Real Estate’s ratio was 1.18 in 2012, up from 0.45 in 2010, and Sansiri’s was 2.11, up from 1.5.
According to a survey by the Agency for Real Estate Affairs (AREA), Phuket had 15,500 new condominium units worth Bt34.6 billion as of the end of last month, some 75 per cent of which had already been sold.
Sales average 1,630 units a month, so the inventory remaining in the Phuket market would only take about 2.3 months to sell out.
Chiang Mai had 10,700 new residential units worth Bt23.4 billion as of March 31, some 71 per cent of which had been sold. The absorption rate in the province is 2,010 units a month, so the inventory will take only six weeks to be depleted.
Meanwhile, the Pattaya market had 122,600 new condos worth Bt321 billion. With 75 per cent having been sold and demand averaging 5,850 units a month, the market now has 5.2 months of inventory, AREA said.