The move by Singapore’s largest real estate company to split its business into a new, publicly traded investment manager and a privately owned developer may pave the way for local rivals to do the same.
Thinning profit margins from property development in the face of rising construction and land costs could spur others to focus on fund management, analysts said after CapitaLand Ltd. unveiled the plans this week. Builders have also been hammered by the pandemic, which battered markets ranging from hospitality to offices and led to record losses for CapitaLand and its biggest competitor City Developments Ltd.
“For real estate companies with sizeable scale of investment properties and fund management business, it also makes sense for them to consider doing the similar restructuring to unlock value,” said Patrick Wong, a Bloomberg Intelligence analyst. “City Developments may be another possible candidate to do a similar type of restructuring.”
CapitaLand is seeking to generate more shareholder value from its real estate investments by creating an “asset-light and capital-efficient business,” it said Monday. It wants to keep development projects in the private realm backed by its biggest owner Temasek Holdings Pte, given that they can take a long time to generate returns.
Shares of CapitaLand climbed 13% on Tuesday, the biggest jump since 2001, after a trading halt was lifted. The company plans to offer shares of the new entity at a 24% premium to CapitaLand’s previous closing price.
For the likes of CapitaLand, the next phase of growth involves competing as independent investment managers that can expand globally, said Priyaranjan Kumar, managing director at family office Alvarium Investments.
Privatizing the real estate development business, meanwhile, is appropriate because public trading tends to “misprice and discount the intrinsic value given the lack of visible income for relatively long periods,” Kumar said.
To be sure, some of Singapore’s other main listed developers, such as City Developments and Frasers Property Ltd., are already seeking to expand their investment management businesses. City Developments, for instance, aims to be a leading fund manager in Asia by 2023 by overseeing US$5 billion ($6.71 billion) in assets.
The fund management business generates stable recurring income that analysts can value easily, said Yap Chee Wee, founder and chief executive officer of Fleur Capital, a wealth management firm. CapitaLand will also gain management fees, while property development projects depend on the success of land bidding, which can be uncertain, he added.
“Fund management fees from property funds can be quite lucrative,” Yap said. “CapitaLand and CDL have lagged the Singapore stock market for some time, so I strongly support this restructuring.”
City Developments declined to comment.
Thin Margins
For Singapore builders, privatizing the development business could be advantageous given the thinning profit margins from housing projects. Rising land prices and construction expenses have squeezed margins from 50% for projects launched eight to 10 years ago to between 5% and 15% today, according to Alan Cheong, executive director of research at Savills Plc.
Additional duties imposed on developers as part of cooling measures in 2018 make the situation even more onerous.
Privatizing its development business will help CapitaLand pursue opportunities that may require more “patient capital” without being hampered by public disclosures, said Jennifer Chia, a partner at TSMP Law Corp. who heads the corporate real estate as well as banking and finance practices.
Still, she added, if the real estate development market picks up, any extra profits would no longer benefit the listed company.
For other builders, there are obstacles to privatizing their real estate development business. City Developments, for one, is grappling with its contentious investment with China’s Sincere Property Group -- a deal that led the Singapore firm to write down almost all of its $1.9 billion investment. That will make it tough to take such restructuring steps in the near future, Chia said.
“Privatizing a viable part of one’s business would take sizable capital,” Chia said. “A real estate company must have deep pockets to do so.”
