Developers in Singapore may follow CapitaLand’s move of splitting its business into a privately owned developer and a publicly traded investment manager, said analysts. Photo: One Pearl Bank by CapitaLand
Analysts believe the thinning profit margins from property development due to rising land and construction costs may spur other developers in Singapore to follow CapitaLand’s move of splitting its business into a privately owned developer and a publicly traded investment manager, reported Bloomberg.
Builders have also been affected by the COVID-19 pandemic, which hammered markets ranging from offices to hospitality, leading to record losses for CapitaLand as well as its biggest competitor City Developments Limited (CDL).
Specifically, CapitaLand seeks to generate more shareholder value from its real estate investment by positioning itself to be an “asset-light and capital-efficient business”. The company wants to keep development projects within the private realm backed by its largest owner, Temasek Holdings, since they take longer to generate returns.
“For real estate companies with sizable scale of investment properties and fund management business, it also makes sense for them to consider doing the similar restructuring to unlock value,” said Bloomberg Intelligence Analyst Patrick Wong, who sees CDL as another possible candidate to conduct a similar type of restructuring.
CapitaLand saw its shares climb 13% on Tuesday (23 March), its biggest increase since 2001, following the lifting of a trading halt. Shares of the new entity will be offered at a premium of 24% to the previous closing price of CapitaLand.
Family office Alvarium Investments’ Managing Director Priyaranjan Kumar said the next phase of growth for the likes of CapitaLand involves competing as independent investment managers that could expand globally.
Privatizing the real estate development business, on the other hand, is appropriate as public trading tends to “misprice and discount the intrinsic value given the lack of visible income for relatively long periods”, noted Kumar.
In fact, other main listed developers in Singapore, such as CDL and Frasers Property, are already looking at expanding their investment management business. CDL, for example, targets to be Asia’s leading fund manager by 2023, overseeing $5 billion in assets.
Wealth management firm Fleur Capital Founder and Chief Executive Officer Yap Chee Wee said the fund management business offers stable recurring income that can be valued easily by analysts.
“Fund management fees from property funds can be quite lucrative,” Yap said as quoted by Bloomberg. “CapitaLand and CDL have lagged the Singapore stock market for some time, so I strongly support this restructuring.”
Privatizing the development business for Singapore developers could be advantageous considering the thinning profit margins from residential projects. Increasing construction expenses and land prices have squeezed a project’s profit margins from 50% eight to 10 years ago to around 5% to 15% today, according to Savills’ Executive Director of Research, Alan Cheong.
The situation is made more onerous with the imposition of additional duties on developers as part of the cooling measures rolled out by the government in 2018.
Privatizing CapitaLand’s development business will help the company pursue opportunities which may need more “patient capital” without being hindered by public disclosures, noted Jennifer Chia, a partner at TSMP Law Corp, who heads the banking and finance as well as corporate real estate practices.
Other builders, however, may face some obstacles in privatizing their real estate development business. CDL, for instance, is struggling with its contentious investment in China’s Sincere Property Group – a transaction which led the firm to write down nearly all its $1.9 billion investment. That will make it hard for CDL to take similar restructuring steps in the future, said Chia.
“Privatizing a viable part of one’s business would take sizable capital,” Chia said as quoted by Bloomberg. “A real estate company must have deep pockets to do so.”
Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this story, email: victorkang@propertyguru.com.sg
