Property developers' profitability under pressure amid intensifying competition

As bidding prices for land in Taipei continue to climb, Macquarie Equity Research yesterday reiterated its cautious view on the nation's property sector and developers' profitability amid rising competition.

"Increased competition for land in Taipei City has raised our concerns over the sustainability of developers' earnings," Macquarie said in a research note, titled "Taiwan Property Update: Limited Competitive Advantage," released yesterday.

The Australian brokerage turned conservative on the nation's red-hot property sector in January on rising concerns about margin pressure for developers that had aggressively purchased lands at high prices despite a cool down in housing pre-sales figures.

limited landholdings

Unlike established developers in other markets that could cash in on long-term landholdings during a real sector rally, most developers in Taiwan do not carry land inventory for more than two years and therefore have limited competitive advantage over new entrants, the report read.

While businesses with a small land bank may fare well in a stable housing market, they may be affected by a land shortage if property prices were to grow rapidly, it said.

record bid

The local property sector has seen several record-setting land bids lately, including Taipei-based Huang Hsiang Construction Corp's (皇翔建設) winning bid of NT$5.34 billion (US$160 million), or NT$3.88 million per ping (3.3m2), to acquire a plot of land at the intersection of Chengde Road and Civic Boulevard last month.

The offer broke a record set just one week earlier by Rich Development Co (力麟建設), which offered more than NT$2.91 million per ping for a 957.72-ping lot in Zhongzheng District.

The sharp markups in the primary housing market driven by the rollout of luxury projects has caused demand to shift to the secondary market, where transaction volume in Taipei grew 21 percent year-on-year in the first quarter, compared with a decline of 13 percent in new house sales, Macquarie said.

Annual growth in mortgage lending has been decelerating since the fourth quarter of last year after the government moved to tighten credit, Macquarie said, applauding the policy to reduce speculation and prevent overheating.

The equity research firm expects growth in housing prices, especially for smaller-size units or apartments, to slow in the wake of the credit tightening. Prices for more upscale units are likely to perform better given prospective buyers' lower reliance on mortgage.

profit taking

Considering the expensive valuation of Taiwanese developers compared to their Hong Kong counterparts, Macquarie advised caution and suggested investors take profits.

Macquarie also upgraded its rating on Sinyi Realty Estate Inc (信義房屋), the nation's biggest housing agent, to "outperform" from "underperform," given its improved transaction volume growth in the secondary market and its faster-than-expected branch openings. However, it was bearish on a group of developers, including Cathay Real Estate Development Co (國泰建設) and Hung Poo Real Estate Development Co (宏普建設).