Posted by: donmihaihai | November 14, 2019

How easy to forget

The recent 180% turn in the treatment of interest cost for property development resulted in substantial changes in the financial of companies like UOL and Oxley.

In short, borrowing cost for development property is no longer being capitalised into the cost of the development but expenses as incurred. Basically, it means higher gross profit and higher borrowing. Nothing changed except for timing differences and where the cost goes.

Watch out for companies that bark at the changes, these companies are likely to be the same that have been barking on their non recognition of revenue from sold overseas units until upon completion of the development.

Property development is inherently lumpy, so do the financial of property developers. The attitude of these developers says more about their financial health than their words. Those that keep pointing to their sold but not recognised units “forgot” that they are currently recognising the sold but not recognised units previously. What more they are still building the property. Developers who bark at the increased in borrowing cost “forgot” to say that they are benefiting from the expansion of gross profit margin due to the same changes in accounting treatment.

How easy to forget. REIT forgot to say that REIT work best when they are trading at a premium to their NAV. This is when REITs go shopping like crazy. Why not? When you have cheap money, almost any acquisition is accretive. All you need to do is to make sure that you give less than you take.

Using Keppel DC REIT scenario in recent acquisition announcement as example. The REIT is buying Data Centres at close to 8% yield with debt is taken into consideration, using money from placement at just over 4% yield.

How easy for REIT manager, when investors are like bees to honey giving the manager money at just over 4% yield allowing them to buy something with debts that produce close to 8% yield. Stupidity doesn’t need a reason. Oh yeah, at 4% yield, investor is paying close to 1.6X BV for Data Centres or REIT or investment property or property company.

When was the last time you paid 1.5X BV for a property company? That was the question I asked my colleague when he was so excited with it. Of course he was still excited. Why not, when share price jumped like crazy, why care about logic.


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