W

hile Indonesian developers are apparently heading in the same direction as their Chinese counterparts in term of credit trends, a more stable outlook is expected in the next few years than in the more mature East Asian market, in which large unsold stock is slowly being absorbed, despite higher currency exposure, research by Standard & Poor (S&P) suggests.

S&P recent research said that, as in China, land acquisition in Indonesia could not be funded by domestic bank loans because of a shallow domestic capital market that constrains funding, leading local players to increasingly tap offshore bond and bank loan markets.

'€œThe property development industries in these countries differ in their stages of development, regulations, and market dynamics, but a comparison of the sectors in these countries is meaningful for investors. We expect Indonesian developers to largely go through the same credit trends as the cycle expands and matures,'€ argues S&P'€™s credit analyst Kah Ling Chan in a written statement.

The agency, however, rated five Indonesian property developers as '€œstable'€, while giving 51 property developers in China a negative report as nearly one-quarter of the companies have negative rating outlooks, adding that they were pessimistic the rating would improve until 2016. The negative outlook for Chinese developers, the research explained, was due to a significant increase in leverage since last year due to a downturn in the business cycle.

'€œWe view Indonesian property developers'€™ credit profiles as more stable than those of Chinese property developers, partly due to their lower leverage. Their scale is also more limited, and projects are still largely concentrated in the capital city,'€ he said. '€œGiven the potential growth for Indonesia, we believe developers'€™ credit profiles could improve if the issuers maintain disciplined financial management while pursuing growth.'€

Indonesian developers, according to the rating agency'€™s estimates, are expected to record a 10-15 percent increase in sales this year, as the property sector is still in a high-growth stage, thanks to a growing population and expanding middle class with a housing shortage of roughly 15 million units.

According to S&P data, Indonesian property developers having 70 to 95 percent of their debts denominated in US dollars as of the end of last year, and the rupiah having depreciated against the currency by nearly 40 percent over the past three years, Indonesian developers have high exposure to offshore debt and currency risks.

However, Indonesia developers have kept their leverage below their Chinese counterparts by managing their currency exposure and maturities proactively, having partly hedged their debts and extended their bond and loan tenures through refinancing, with the bulk of their maturities shifted to 2019.

A number of local developers have recently issued global unsecured bonds in the past year, citing higher liquidity and flexibility as the reason why they opt for US dollar bonds instead of sourcing from local capital markets.

The developers include Bumi Serpong Damai and Alam Sutera Realty, who had earlier this year issued five-year global bonds worth US$225 million each. Pakuwon Jati is a step ahead, having issued a $200 million of bond in July last year.

Pakuwon Jati financial director Minarto Basuki said that the company had little concerns about currency exposure, saying that his company has thoroughly calculated the risk and the bonds have been hedged.

'€œIt is not easy to source funding from the domestic market, especially for big projects that require a lot of capital. There is also a limitation to what kind of investment domestic bond can be applied,'€ he told The Jakarta Post over the phone.

'€œDomestic bonds are usually secured, meaning we have to put our assets as collateral and being a developer, such a scheme is limiting our future expansion.'€