THIS week saw the culmination of the corporate restructuring of CapitaLand Limited (CLL), with the trading debut of CapitaLand Investment (CLI) on Monday. 

 

CLL split its business into a privately-held development arm and a new listed unit for investment management platforms and lodging under CLI, which is positioned as a real estate investment manager (REIM).

 

Based on pro forma net asset value (NAV) of S$14.7 billion as at December 31, 2020, excluding the effect of acquisitions and disposals, CLI' s NAV per share is S$2.823.

 

On its first day of trading, CLI&rsquo s share price closed at S$2.95. The share price has rallied further and closed at S$$3.40 on Thursday, which is 20.4 per cent above the end-2020 pro forma NAV.

 

In an investor presentation, CLL pointed out that a basket of REIMs &ndash including Australia&rsquo s Charter Hall Group, Goodman Group and Lendlease Group, as well as Hong Kong-listed ESR Cayman &ndash trade at an average of 2.9 times NAV.

 

Perhaps CLI' s board and management may think that CLI should trade at an even loftier premium to its end-2020 proforma NAV. 

 

Still, shareholders of CLL, who are now shareholders of CLI, have much to cheer about. Shares in CLL were trading at more than 20 per cent discount to its latest reported book value prior to the announcement of the corporate restructuring in March.

 

Many property related plays on the local bourse trade at large discounts to book values. This has led to various property groups being privatised by their major shareholders. 

 

Among property plays, the exceptions that trade at or above book value tend to be some of the real estate investment trusts (Reits). 

 

By modelling itself as a REIM, CLI with S$119 billion of real estate assets under management as at June 30, 2021, appears to be succeeding in convincing investors that it deserves to fetch a premium to book value. 

 

The group, which is behind six listed Reits and business trusts, and over 20 private funds, is also beefing up in its private equity business with senior new hires from BlackRock Real Estate and Brookfield Asset Management. 

 

To be bold, not reckless

 

How well CLI trades from here on will hinge on CLI' s ability to capture global capital flows into Asia to deliver robust financial numbers.

 

For now, the bold move by CLL to split itself and introduce CLI to the local market, where there is no peer, is paying off. 

 

The management and board of CLL are to be lauded for being bold. Simultaneously, it is the trait of financial conservatism typically associated with Singapore property developers and the virtue of this trait that comes to mind when looking at the woes of Chinese property giant China Evergrande Group.

 

The potential collapse of Evergrande and the risk of contagion is rattling markets in China and beyond.

Evergrande is faced with over US$300 billion in liabilities. It has overdue payables related to property development and some of its projects have stalled. Lenders worry over the group' s ability to meet debt obligations.

 

Meanwhile, the pro forma gearing of CLI is about 0.56 times, which is lower than the 0.68 times gearing of CLL as at Dec 31, 2020, the scheme document released in July showed. Given this, shareholders will effectively own a direct stake in a company that is more-asset and capital-efficient, and with a lower gearing ratio, compared to CLL prior to the scheme, said the independent financial adviser.

 

Debt is a vital cog in property development. Taking on debt allows a developer to embark on larger scale projects and spread equity across more projects, thereby improving the return on equity and overall profitability.

 

Importantly, cash generation needs to be carefully monitored and managed so that a developer is timely in paying contractors, suppliers and lenders.

 

Miss making such payments due to cash flow shortages and a loss of confidence by service providers and lenders can send a business teetering.

 

Singapore groups tend to recognise that the property development business can be cyclical. Markets can overheat and then enter a period when sales slow be it due to excess supply or government intervention.

 

Earnings from property development are typically lumpy, being tied to progress of sales and project construction.

 

What this has led to is property groups generally being conservatively geared and building strong recurrent income from investment property portfolios. 

 

All this helps provide certainty in meeting payments to service providers and lenders. It also helps groups tide through times when property sales are slow or when a group has few ongoing development projects.

 

Financial discipline

 

Singapore-listed property group UOL Group earned about 55 per cent of adjusted earnings before interest tax depreciation and amortisation in 2020 from property investments, which are largely office and retail properties.

 

The group' s gearing as at June 30, 2021 was 0.29 times. Veteran banker Wee Cho Yaw has a direct and deemed interest totalling around 37 per cent in UOL. 

 

Singapore-listed Wing Tai Holdings, which is active in the property and hospitality businesses, had a net cash position as at June 30, 2021. Wing Tai' s chairman Cheng Wai Keung has a direct and deemed interest of around 60 per cent in Wing Tai.

 

According to its latest annual report, the founder and chairman of Evergrande, Hui Ka Yin, has a majority interest in the group. 

 

Having a tycoon own a large stake in a listed group can give minority investors assurance that the tycoon has skin in the game.

 

Still, what the problems engulfing Evergrande show is that a tycoon having skin in the game may not offer much protection if a group becomes too aggressive in going for growth.

 

Evergrande' s woes provide a timely reminder of the need to run a business with adequate provision for contingency as business plans may not always pan out the way they are supposed to. 

 

In property development, it may mean holding back from taking on more leverage to take on one project too many or bidding beyond a price that one is comfortable with for a site simply because one is short of landbank and other bidders are flushed with liquidity.

 

In the current low interest rate environment, financial discipline still matters as credit conditions can tighten with credit becoming both more expensive and scarce.

 

Also, investors in property names would do well to take heed of how government actions play a major role in the property space. It was government efforts to push for deleveraging of properties groups that exerted pressure on debt-laden Evergrande. 

 

Investors who are now banking on government intervention in resolving Evergrande' s debt woes because it is too big to fail are in for a nerve-racking ride. 

 

A business may languish by being too cautious but it can perish by being too adventurous.

 

Against a backdrop of economic uncertainty and disruption to various real estate asset classes, property groups and investors can study the developments at CLL and Evergrande and pick the right lessons to back the likely global winners.

 

Knowing when and where to be bold and cautious are critical for long-term success.

 

THE ongoing shake-up in China' s real estate sector levels the playing field and could throw up interesting opportunities for foreign property players such as CapitaLand, said group chief executive of CapitaLandInvest: 9CI NaN% Lee Chee Koon.

 

On Monday, CLI made its trading debut on the Singapore Exchange as one of the world&rsquo s largest listed real estate investment managers (REIMs) after property giant CapitaLand carved up its business into two separate entities &ndash namely, CLI and privatised property development arm, CapitaLand Development (CLD).

 

As a listed global REIM, CLI has about S$119 billion of real estate assets under management (AUM) as at June 30. Meanwhile, CLI&rsquo s real estate funds under management (FUM) stood at about S$83 billion, held across six listed real estate investment trusts (Reits) and business trusts, and over 20 private funds.

 

Responding to a question at a briefing on Monday morning, Mr Lee said: &ldquo Fundamentally, the three red lines and the regularization of the real estate sector provides, for a foreign real estate player like CapitaLand, a more even playing field.&rdquo

 

&ldquo Over the last couple of months, and I believe in the coming few months, we&rsquo ll see a lot more interesting opportunities. We do hope that we will have interesting deals to share.&rdquo

Dubbed the three red lines, Chinese policymakers have implemented new financing rules for real estate companies that will assess refinancing against certain thresholds to rein in debt build-up among Chinese developers.

 

In the meantime, CLI is keeping a close watch on the evolving situation in China. Mr Lee added: &ldquo We expect to see more measures, at least until the end of next year.&rdquo

 

Meanwhile, high on the agenda for the REIM will be building a strong team to execute its private equity business as well as to continue to grow as a global organization by expanding further in key mature markets such as Europe, the United Kingdom, the United States and Australia. In Australia, where it has over S$3 billion in AUM, it is targeting &ldquo four to five times that in a few years,&rdquo said chairman of CLI, Miguel Ko. Presently, over 80 per cent of its S$119 billion of real estate AUM is in Asia.

 

&ldquo Our foundation strength is definitely in Asia as compared to Europe and US at this point in time,&rdquo said Mr Lee, adding however that CLI is investing in capabilities to strengthen its deal sourcing and fund-raising capabilities in developed markets.

 

As part of efforts to beef up its private equity fund management business, CLI announced two new additions to its leadership team - Simon Treacy and Patrick Boocock. Formerly a managing director at BlackRock Real Estate, Mr Treacy is CLI&rsquo s chief executive officer (CEO) of private equity real estate, while Mr Boocock assumes the role of CEO of private equity alternative assets, joining CLI from Brookfield Asset Management.

 

On its private funds management business, Mr Lee sees growth opportunities in assets such as data centres as well as business parks, while the group plans to do more in areas such as purpose built student accommodation assets (PBSAs) and rental apartments. &ldquo As a company, you will see us moving on all fronts, and if you can find interesting products that can deliver returns, I don&rsquo t think it is difficult to bring in investors to invest and grow alongside us,&rdquo Mr Lee asserted.

 

For its part, privately-held CLD will explore new markets - on top of its existing core markets such as Singapore, China and Vietnam - and new asset classes. In addition, it will act as a potential pipeline to CLI, the Reits and funds.

 

CLI&rsquo s management also said on Monday that they continue to see keen appetite from investors who want to build and own serviced apartments despite the pandemic, since serviced apartments have generally weathered the storm better than hotels have. In the first seven months of this year, the group has signed contracts for 40 per cent more units than the corresponding period in 2020. Last year, it had a record year, with over 14,200 units inked.

 

CLI is striving to hit S$100 billion in FUM by 2024, and to grow its lodging business to 160,000 units under management by 2023. This is up from 123,000 units in 2020.

 

Shares in CLI were among the most heavily traded on Monday, ending the day at S$2.95 with 25.53 million shares changing hands. Shares in CapitaLand ceased trading on Sept 10.