Property developer debt in a number of Asian countries has increased rapidly over the last decade or so since the global financial crisis, raising concerns over developers' vulnerabilities to a potential market correction, according to a study included in the latest quarterly review published by the Bank for International Settlements.
High levels of property-linked leverage have played a role in setting off financial crises in recent memory, and in previous cases, higher interest rates, drops in property prices and exchange rate depreciation have happened simultaneously, leading to a rapid weakening of fundamentals, according to BIS.
Developer debt as a portion of GDP in China, Hong Kong, Indonesia, Malaysia, Singapore and Thailand rose sharply between 2006 and 2016, BIS found, based on data from Capital IQ. Hong Kong is the only economy of the six studied that has seen total debt as a share of GDP start to slow in the last several years.
BIS estimated that at year-end 2016, developers' debt stood at 30% of GDP in Hong Kong, 15% in Singapore and 5% in China. Because the study does not include all developer debt, BIS noted that the true figure for debt as a percentage of GDP is likely much higher.
The portion of debt from bonds and other non-bank sources has increased in China and Hong Kong in the last several years in the wake of measures aimed at slowing bank lending to real estate activities, according to the study. Thailand also saw a sharp uptick in other debt.
The study also noted that in all of the markets except Thailand, developers' profitability has weakened and the median firms also say their return on assets drop to roughly even with their cost of debt. On the positive side, while debt-to-asset ratios increased between 2010 and 2016, leverage ratios are still relatively low, meaning developers can still cover their costs of debt.
"But past episodes have shown that developers' financial health tends to be very sensitive to property prices, interest rates and, possibly, exchange rates," BIS said. "This effect can be quite immediate, as a drop in prices may force developers to revalue their inventories of unsold housing."
