SINGAPORE (Dec 20): The local property market — which was subjected to cooling measures and experienced oversupply in the past decade — may be small, but in the 2020s, a home-grown developer will rank among global real estate companies such as Brookfield Asset Management, Unibail-Rodamco-Westfield (a merger formed with the former Westfield Corp) and Lendlease Group.
Lee Chee Koon, CEO of CapitaLand, told investors and analysts during the group’s Investor Day on Nov 29: “Our ambition is to become a global company. In five to eight years’ time, we hope CapitaLand is one of the top three to five names that come to mind when investors talk about a global company.” If the developer realises this ambition, it will be the first Asian company to break into global ranks.
The path to globalisation for CapitaLand took a serious turn on Jan 14 when CapitaLand announced a merger with Ascendas- Singbridge (ASB).
CapitaLand is the largest local developer by assets, market capitalisation and earnings. During the year, it overtook Hongkong Land in terms of market cap as the latter’s share price fell 12.9% this year, in reaction to unrest in Hong Kong and the impact on its investment properties. With Hong Kong entering into recession, there is a possibility that Hongkong Land’s net property income from its investment properties in Hong Kong (where it has 56% of its assets) could be under pressure. Investment properties are valued based on their cash flow.
Separately, and in comparison to some former large local deals, CapitaLand’s offer of $11 billion for ASB, paid for with shares and cash and completed at end-June, was larger than Oversea-Chinese Banking Corp’s $6.23 billion all-cash acquisition of Wing Hang Bank in 2014, and DBS Group Holdings’ $10 billion deal to buy Dao Heng Bank in 2001.
Almost as a bookend to the year, Yanlord Land Group, still a minnow, is starting to creep up the local ranks in terms of size. On Dec 16, Yanlord announced it was open to delisting United Engineers if the latter’s free float falls below local listing rules. In October, Yanlord had offered to buy the shares in UE it did not own but had said the plan was to keep UE listed.
In the top 10
For the first time, too, an Asian real estate investment manager has made it to the world’s top 10 list. Based on regular compilations by IPE Research, CapitaLand had been gradually climbing the ladder. For its November ranking, the company is No 9 globally for its total assets under management (AUM) for real estate investment managers (see Chart 1).
“CapitaLand is the first company with headquarters in Asia-Pacific to make it into the top 10. The Singapore-based company has jumped up the ranking after acquiring Ascendas-Singbridge,” IPE Research says. IPE Real Assets is a global market intelligence outfit for institutional real assets investment that compiles AUM of real estate investment managers. According to IPE’s survey, Brookfield Asset Management remains in top spot with €177 billion ($267.1 billion) in AUM, followed by The Blackstone Group with €135 billion and PGIM with €122 billion.
“The aim is for CapitaLand to be a global company with a strong Asian heritage. We will look for organic growth and not discount inorganic growth, but it must fit in with the overall group strategy,” Lee says.
Yet, Lee is cognisant that CapitaLand cannot just acquire for size alone. “If a portfolio is very good but valuation is not something we can unlock or add value to, it’s not meaningful [to us]. Whether in Singapore or globally, we will look at [potential deals,] but they must be a strategic fit and portfolio [quality] is very important. We can’t overpay,” he says.
Lee maintains, however, that CapitaLand will be a growth, and not a yield, stock. “We will not guide what dividends will look like in three to five years. But core dividend will be a function of cash Patmi (profit after tax and minority interest), and [dividends] will depend on opportunities that would create more growth and [higher] net asset value.”
As at Sept 30, CapitaLand had $71.3 billion of AUM in its private-equity funds and REITs, and management had a target of $100 billion by 2024.
Setting the standard
CapitaLand was the first local developer to implement a capital-recycling strategy by listing its real estate investment trusts. This model has been now adopted by Frasers Property (FPL), City Developments, Keppel Corp and Mapletree Investments. UE has also divested properties into REITs, first at MacarthurCook Industrial REIT (now AIMS APAC Industrial REIT) and Viva Industrial Trust (now ESR-REIT).
Smaller companies have also tried to recycle capital into REITs, with limited success so far. Vibrant Group was sponsor to Sabana Shariah Compliant Industrial REIT but sold out to ESR Cayman. Soilbuild Group is sponsor to Soilbuild Business Space REIT, which has had its hiccups.
Capital recycling is still an important facet of its strategy. On Investor Day, Lee re-emphasised CapitaLand’s key strategies of scale, focus, balance and agility. As Lee sees it, scale is important to be competitive. “You need to deploy a significant amount of capital so that you can attract the best people and be competitive,” he reasons.
CapitaLand will continue to focus only on real estate. “I want to dispel the market rumour that we are exploring a digital banking licence,” Lee says. People have approached CapitaLand for partnerships for digital bank licences because of the data it has collected from its shopping malls in China, Singapore and Malaysia. But financial services are not a focus for the developer.
The benefits of balance (and diversification in geography and asset classes) are obvious, for stabilised earnings in times of volatility. A key rationale for acquiring ASB is for CapitaLand to diversify its asset classes further and obtain a foothold in the business, science and IT park sector, and logistics.
In addition, CapitaLand aims to balance its earnings from emerging markets and developed markets. “[Balance] is important for us. [Staying] in the FTSE EPRA NAREIT Developed Market Index is an important criterion for us. Thus, being able to have that balance is important. It’s good for risk diversification as well,” Lee emphasises.
A larger CapitaLand is also good for Singapore, as it raises Singapore’s weightage — currently at 2.7% — in the FTSE EPRA NAREIT Developed Market Index. The US has the largest weightage with more than 50%, followed by Japan with around 11%. The higher the weightage, the more likely both country and company attract investors to its capital markets.
Geographical diversification
RHB Research says in a note to clients, following CapitaLand’s Investor Day: “Capital allocation will be split equally between developed markets (30% for Singapore and 20% for other developed markets) and emerging markets (35% China, 10% India and 5% Vietnam), thus allowing it to build on scale and balance with growth.”
China, India and Vietnam are CapitaLand’s core market in Asia. In China, the merger with ASB gave the company business and industrial parks where CapitaLand can negotiate with local governments to bring in companies, create jobs and use the business parks as a way to gain access to development land for integrated projects.
Vietnam has a young and hungry population, and it benefits from the trade war. For CapitaLand, the country is reminiscent of China 20 years ago, but on a smaller scale.
The ASB merger gave CapitaLand an important market in which it had difficulty finding its way: India. CapitaLand develops and runs IT and business parks. When these are stabilised, they can be offered to Ascendas India Trust, which has also acquired Arshiya Warehouses, near Mumbai. The most remarkable achievement by A-iTrust has been to grow distribution per unit by 47% since its IPO in 2007, despite a 48% decline by the rupee against the Singapore dollar.
“Salesforce.com, Huawei and Facebook are setting up R&D hubs in Asia, and they are in our IT parks. We are an integrated developer, with A-iTrust as a take-up vehicle for every IT park we build in India,” Lee notes. Moreover, CapitaLand is now ranked No 3 in logistics warehouses in India [in terms of assets]. As India’s population grows wealthier, e-commerce is likely to be an increasing part of their lives, and logistics assets are part of the e-commerce value chain.
In addition, logistics parks are situated between the city centres and airports. “We also like logistics [assets] because they are a long-term optionality for CapitaLand to get clean land. In time to come, we could rezone this for other purposes,” Lee says.
All in, CapitaLand has plans to double its commercial footprint to 40 million sq ft and AUM to $7 billion in the next five years, RHB Research notes.
Other developers are also diversifying geographically. FPL has Singapore and Australia as its main markets, along with a growing presence in Europe through its hospitality and logistics business. FPL is also increasing its presence in Thailand. UOL Group has diversified into China and the UK, although local development is its main focus.
Breaking into the big league
What of the other locally listed developers? On Dec 17, Yanlord Land announced it had “always reserved the right to re-evaluate its position on the listing status of United Engineers. Having evaluated its current level of shareholding in UE shares, the offeror has decided that, in the event that the free float requirement is not satisfied, [Yanlord] does not intend to preserve the listing status of UE.” In October, Yanlord had stated in the offer document that it intended to keep UE listed.
If Yanlord delists UE, its own market value should rise. It is now No 8 by market cap (see Chart 2), and should overtake GuocoLand to rank No 7 after United Industrial Corp, which may also be delisted in the next few years, as it has only two major shareholders and a few minority shareholders.
If so, Wing Tai Holdings and Oxley Holdings would move into the top 10, at No 9 and No 10 respectively. This would be a remarkable feat for Oxley, which is home-grown and controlled by Ching Chiat Kwong. Oxley has a knack of turning over its capital fast — buying land, building and selling. On Dec 17, Oxley announced it had entered into a memorandum of agreement to sell No 3 Dublin Landings in Dublin, for €115 million.
ltogether, Oxley had developed five commercial buildings in Dublin Landings, comprising office, residential and retail space, and No 3 Dublin Landings was the fifth. The other four commercial buildings have been sold. In addition to the commercial space, Oxley has developed 298 residential apartments, which have been sold and are to be delivered progressively from November 2019 to June 2020. Oxley divested Chevron House this year.
As the new decade dawns, traditional developers are likely to continue moving away from the old model of acquiring landbank, selling residential units offplan, building, then, with the cash flow from the sales, starting the cycle again. Ho Bee Land, for instance, has acquired investment properties in the UK. CDL has a young asset management business and it has taken a stake in IREIT Global and its manager.
The next 10 years could see a continued tussle for size as developers look for new strategies to raise their game.
