IOI Prop thrives on diversity

Posted:
Source: The Star

Property developer’s project in Marina Bay set to become signature point of Singapore

THERE are stocks that do defy market sentiment. In times when the outlook of a particular sector is bearish, there will be a small number of standouts that seem to go against the grain.

One such company in the property sector is IOI Properties Group Bhd (IOI Prop). The stock, which has seen a bit of a correction of late, has been on a general uptrend for more than a year.

It is the largest property stock in terms of market capitalisation and profitability and its good ride has seen it joining a list of companies waiting to be included into the FTSE Bursa Malaysia KLCI.

 

One of the reasons for its large profit is the diversity of its business. Projects in China and Singapore stand out in terms of driving earnings which the company says were responsible for both an increase in revenue and operating profit.

That diversity is also a plus when mitigating a slowdown in the real estate business in Malaysia, which the company says is expected to consolidate. It remains positive on the prospects of its property development projects in Xiamen and Singapore.

It was however in Singapore where the company made big news of late. IOI Prop won a tender just over a month ago to buy 2.69 acres of leasehold land at Central Boulevard in the Marina Bay area for S$2.57bil (RM7.77bil).

The purchase raised concerns over the increase in debt the company would need to take on to construct the project but that has been mitigated somewhat by a cash call it made in November where it would sell one new share for every four shares held by its shareholders. The rights issue will raise RM1.52bil and will go towards defraying the cost of purchasing the land.

For IOI Prop, the acquisition was a golden opportunity to expand its business in Singapore.

“The site is a highly-prized land parcel in Singapore with seven bidders comprising both local Singapore and several consortium of foreign international developers vying for the prime land. It has been eight years since a white site has been sold in Marina Bay by URA (Urban Redevelopment Agency). It is all about the location.

“The land parcel is strategically located within two prominent frontages along Central Boulevard and Raffles Quay-Shenton Way in a premier financial and business district.

“Occupying the corner at the junction, the site has a prominent location and is set to become the signature focal point of the city. The development is the group’s maiden office development within the Marina Bay/Shenton way CBD,” says IOI Prop general manager Lee Yean Pin, who is the head of its Singapore business unit.

She says the land parcel that IOI Prop will purchase will become a choice location for major financial institutions and multinational corporations to the Marina Bay financial district that is next to the established Raffles Quay/Shenton Way central business district (CBD).

“With the success of the group’s South Beach development, we are confident that the new development in this highly-desirable location will be an iconic and prime landmark in Central Boulevard, joining the ranks of the prestigious commercial development within Marina Bay and Singapore CBD,” she says.

Challenging times

The Singapore real estate market has been going through a correction after the Government put the brakes on escalating property prices a few years ago. Coupled with a slowdown in the global economy, there is ample office space available to companies on the island.

“The office market, like any other property segment in Singapore, is under pressure from the current global economic meltdown. Prime office rents have declined and an over-supply market is not helping,” says SLP International Property Consultants Pte Ltd executive director David Neubronner.

He points out that IOI Prop has a few projects in Singapore, which are mainly residential developments.

“Sales of IOI residential projects in Singapore are in line with local market sentiments. Mass and city fringe projects like Triling and Cityscape have enjoyed some success while the high-end developments like Seacape and Cape Royale have suffered like all luxury developments in Singapore. This is due to draconian tax structures and borrowings imposed by the local government on foreigners and investors.

“For the record, the unsold residential units may be a blessing in disguise given the rapid appreciation of the Singapore dollar against the ringgit in recent years,” Neubronner says.

But for the office space, he says IOI is capitalising on a window opportunity, not in terms of capital value but in the supply cycle anticipated in the period 2019 to 2021 when the new office block is expected to be completed.

Lee concurs by acknowledging the oversupply in the office market in Singapore but adds the group is taking a long-term view on the potential of riding the expected market recovery and the development’s positive contribution to revenue.

“The Singapore government has managed to transform the economy. Singapore is no longer just a regional financial centre. It has also done well attracting renowned companies to set up large regional HQ like Google and Facebook. The group’s current South Beach Office Tower is enjoying almost full occupancy with multinational tenants including Facebook, Rabobank, Lego amongst other notable international brands,” she says.

“The current supply of completed offices will be tapering off from 2018. With the anticipated completion of the development in 2021, it will be well-positioned to offer a much-desired supply of Prime A office space to new tenants seeking quality prime office and existing CBD tenants looking to move in from the older office spaces in Raffles Place.”

With total development cost of the project expected to be more than S$3bil, with the cost of land constituting around 50%-60% of total cost, IOI Prop will be building a prime grade A office development with retail at the lower floor and basement towards the MRT on the land in Marina Bay.

Analysts think IOI Prop will keep a large number of units from its project as investment income and with the right issue, the gearing level of IOI Prop will drop.

“The gearing level of the group will increase following the purchase of Central Boulevard, which was successfully bidded at S$2.6bil. The group takes cognisance of the increased gearing level and have proactively proposed a 1-for-4 rights issue on Nov 18, 2016 for the purpose of paring down the group borrowings,” says Lee.

The rights issue planned by IOI Prop though has brought about some scrutiny. Analysts have pointed out that the group has embarked on a cash raising call ever since it was re-listed on Bursa and wondered just how long such a strategy can continue.

“The rights issue will bring gearing to a comfortable level but investors are wondering just how much does the group need to continue raising cash for its landbanking,” asks an analyst.

 

THE Global Financial Crisis of 2008 has caused a number of Malaysian developers to venture abroad while keeping their footprint on their home turf. The interest to go global seems to be gaining ground, spurred by internal and external issues.

As two Singapore-based property consultants say, “push and pull factors.”

Singapore-based Cushman & Wakefield’s research director Christine Li says year-to-date, with data as at Nov 21, total foreign investment into Singapore amounted to US$5.96bil, which is almost double the US$3.29bil from 2015.

Li says the figures include all property purchases from residential, office to industrial land, at both corporate and individual levels.

“This shows that foreign investors are more active compared with the past few years. It could be due to global market volatility as a result of Brexit, the oil and gas sector and the Trump factor.

“Foreign investors see Singapore as a defensive play where investment is fairly protected due to the strength of Singapore dollar,” says Li.

Land deals

On Dec 7, Selangor Dredging Bhd reported to the Bursa Malaysia that it was buying a parcel of less than one acre, or about 32,000 sq ft, in Serangoon Road, Singapore for RM146.96mil.

The land is located along the main thoroughfare of Serangoon Road, in a residential cluster of landed, mid- and high-rise condominium developments with a view of the Kallang River, city skyline and 600 m from the Potong Pasir MRT on the North-East line.

Selangor Dredging says although the purchase is subject to “risks inherent in Singapore’s property development industry” the board considered it “reasonable and in the best interest of the company.”

Selangor Dredging is no stranger to Singapore. Its first foray into the city-state was in 2007. It has four completed projects there and one which is on-going, excluding the latest purchase.

The focus on Malaysian developers in Singapore started when IOI Properties Group Bhd bought a 99-year leasehold land at Central Boulevard in Singapore’s Marina Bay area. It has other projects in Singapore but what jolted the investing public and analysts was the cool S$2.57bil (RM7.77bil then) forked out for the 2.69 acres.

Property investments across the different sub-segments of residential, office and industrial in Singapore have been brisk amid today’s global uncertainties.

Li says as of this year, Malaysia is the second highest investor in the city-state with a total investment of US$2,034.2mil, driven mainly by the IOI Properties purchase of Central Boulevard. This represents a near eight-fold increase compared to a year ago when Malaysia’s total investments amounted to US$263.3mil.

Qatar took the top position with a total investment of US$2,477.1mil in year-to-date 2016.

Says Li: “It was rather muted last year in terms of total volume. The pick-up came in the second quarter this year.

“Singapore’s investment properties picked up pace because of a few high-profile deals, driven mainly by sovereign wealth fund such as Qatar Investment Authority’s purchase of Asia Square Tower 1 and Malaysia’s IOI Properties buying Central Boulevard site.

“This year also saw more ultra-high net worth individuals such as Dr Tahir buying Straits Trading Building at a record price on per sq ft basis.”

Indonesian tycoon and philanthropist Dr Tahir, who goes by one name like most Indonesians, bought the Straits Trading for S$560mil, or S$3,520 per sq ft (psf) based on a net lettable area of 158,897 sq ft.

This sets a new record price on a per sq ft price.

Record-setting prices

According to CBRE Group Inc, IOI’s purchase of the Central Boulevard land, the first sale of land in Singapore’s Marina Bay in nine years, also set a record for government land sale.

IOI’s bid, equivalent to S$1,689 per sq ft of gross floor area exceeded the earlier highest price set in 2007 when the Asia Square Tower 1 site was sold for S$1,409 per sq ft.

Singapore-based SLP International Property Consultants Pte Ltd executive director David Neubronner says there are a lot of push and pull factors with the IOI Properties deal.

“IOI Properties Group is (seen as) capitalising on a window opportunity, not in terms of capital value but in the supply cycle anticipated in the period 2019 to 2021 when the new office block is expected to be completed.

“But their reasons (for the purchase) can be compelling if we view it from the geo-political perspectives, the push and pull factors,” he says.

Neubronner explains that in Malaysia, mainland Chinese “are crowding and pricing out the big boys from their key playgrounds.”

This has been one of the complaints by local developers when Chinese developers entered Johor. Their willingness to fork out unprecedented high prices spooked the market, pushing up land prices particularly in Iskandar Malaysia.

The other issue bedevilling the property development sector is the oversupply situation in virtually every sub-segment of the Malaysian property sector including high-rise residentials, hotels, office and retail space.

“Singapore always has the edge given the proximity, familiarity and strong Singapore dollar,” Neubronner says.

The last several years post-2008 Global Financial Crisis saw quite a number of Malaysian developers and funds entering the global arena, be it property development or purely as an investment income.

Permodalan Nasional Bhd, the Employees Provident Fund (EPF) and civil service pension fund Kumpulan Wang Persaraan (Diperbadankan), also known as KWAP are among them. Most of their interests are predominantly British although they do have a few properties located in Australia and Europe.

Eyes on Battersea

Probably, the most well-known foray abroad is by a consortium comprising SP Setia Bhd, Sime Darby Bhd and EPF to develop Britain’s Battersea Power Station in a 40:40:20 venture project. The development on about 40 acres will have a gross development value of £8bil.

Phase one, known as Circus West, comprising 865 units was completed this month and owners will be picking up keys to their units over the next six months. There will be some interest on how the British vote to leave the European Union will impact Battersea Power Station and the broader British property market going forward.

Other developers who have gone abroad include the Eco World group. Parent company Eco World Development Group Bhd is trying to build its international property business through Eco World International, which is scheduled for listing early next year.

Interestingly, it is Tan Sri Liew Kee Sin, Eco World Development Group Bhd chairman who spearheaded SP Setia’s move into Britain when he was heading the SP Setia team. This may explain the current interest in Eco World International imminent listing.

There have been other private sector developers who have entered Britain like Eastern & Oriental Bhd (Princess House), IJM group (mixed development Royal Mint Garden), MTD Capital Bhd (One Crown Place) and privatedly-held Beneton Properties Group who has several projects in Britain.