Saturday, October 11, 2014

A quick look at Aspial Corporation

The decrepit, degraded, budget constrained Australian Bureau of Statistics begrudgingly released regional building approvals this week. You can find an update on this at Conus: Building Approvals continue to strengthen in the Far North

The big news in Cairns was that a number above zero appeared in the "other residential building" column. This is such as unit and apartment dwellings. There were six (6). This is the first in Cairns (ex 4 in Douglas) since a duplex in Bentley Park back in August 2012. A look at the SA2 data indicates these latest approvals were comprised of 3xWoree + 3xFreshwater. Big stuff.

If you have been following the trends in national building approvals the key driver has been the more volatile high rise unit sector in the capitals. A sector entirely absent in Cairns since the GFC. Also a sector which has attracted some attention as the focus for foreign investment particularly from China. Which brings us to Aspial Corporation.

Aspial is the Singapore company behind the proposed high density development on the vacant Spence St land opposite Cairns Central. Listed on the Singapore exchange with a market capitalisation around A$700 million probably appropriately described as a medium sized property developer in Singapore. The corporate background was actually jewellery retailing where it is still active. This was an inherited family business of Koh Wee Seng.

The property development division has been the driver of growth and a rapid expansion of the balance sheet over recent years:

Note: Calendar FY. 2014 is the half year to June 30

That expansion has pretty much entirely coincided with the period of a debt fuelled property boom in Singapore post the GFC. Singapore has introduced a series of macro-prudential controls and restrictions to try and cool their hot property market while maintaining extremely low interest rates.

This has in turn fuelled Singaporeans to turn to foreign property investment. Singapore ranks #4 for foreign investment in Australian real estate behind China, Canada and the USA. There was a good report on this in the Sydney Morning herald a few months ago: Singaporean investors hungry for a piece of the Australian housing market.

The Singapore property market has now turned with valuations falling in recent times despite the low interest rates, and some further falls anticipated. Aspial have about half a dozen ongoing projects in Singapore but beyond that all future projects listed in their most recent report and described as their focus for the next year are in Australia:

These sites have been acquired over the past year. Some of these appear to be somewhat larger than previous Aspial developments in Singapore, albeit the Cairns development is staged. Southbank is proposed to be the tallest residential tower in the southern hemisphere. This project has been kicking around for a while, at times with some controversy, before Aspial picked it up. So far Aspial haven't turned a sod on any development in Australia but have paid up well for the land.

It's pretty obvious that a key target market for these projects is going to be investors from Singapore and China. The Singapore central bank earlier in the year issued a warning on foreign property investment. There has also been oversupply in some locations in Australia: Landlords hit by glut of apartments; Apartment glut puts tenants on top. The scale of the Cairns proposal could be interesting down the track for sectors of the local real estate market.

Broader financial aspects are where the bigger risks could arise with some concerns currently on imminent debt rollover for Singapore developers: Singapore Condo Builders Facing $19 Billion Wall. The FY2013 annual report indicated that the bulk of Aspial debt was on a 2-5 year duration.

I wont delve into the complexities of the Singaporean exchange rate and interest rate mechanisms but interest rates generally align with US benchmarks. The SMH link above reports a variable mortgage rate as low as 1.17%. The Aspial 2013 accounts indicate that they capitalise interest at an average weighted rate of 2.14%. This allows Aspial to turn a rather modest return on assets into a far more impressive return on equity.

There are some Catastrophists on a Singapore debt bubble, as there are with China. One doesn't need to be in that camp for a more balanced awareness of the risks in both now more widely acknowledged: Asia's borrowing plunge

This isn't also meant to be either too cynical or critical of Aspial which I haven't really delved into very deeply. Rather lets just say that when it comes to Aquis and Aspial, both the proponents and the projects, neither are exactly at the lower end of the risk spectrum should there be any economic accident.

Meanwhile I trust that Aspial have a competent CFO and they remember to send Janet Yellen a Christmas card this year, or perhaps a present of a new punch bowl.

Previous post: Land valuation weirdnesses revisited
Cairns Post: Asian developer Singaporean Aspial Corporation buys another CBD site
Also posts: Chinese investors are pushing into Melbourne and Sydney
Risk and the chance of an economic accident: Volatility and Market Pricing

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