CapitaLand's game plan to achieve 8% ROE
TWO of the biggest drivers for CapitaLand in the future will be its ability to continue its asset recycling programme and asset-light expansion.
Both will be key for the property group to achieve its target return on equity (ROE) of 8 per cent. Already, it is well on track to meet - even exceed - that target, with its annualised ROE at 10 per cent for the first nine months of fiscal year 2017, according to Morgan Stanley Research.
CapitaLand's management said last November that it plans to maintain its current run of S$3 billion in divestments each year. According to Morgan Stanley, close to half the group's earnings is already derived from revaluation and divestment gains.
Its announcement two weeks ago of its sale of 20 malls in China, mostly in tier-two and -three cities, to a consortium led by China Vanke for S$1.7 billion is a clear illustration of its strategy.
DBS senior vice-president for group equity research Derek Tan estimates the exit portfolio yield - the property's income over capital value at time of sale - on cost for CapitaLand's 20 malls to be close to 3 per cent. "This sets the group on the path towards maintaining its 8-per-cent ROE target in 2018, which calls for a sustainable increase in dividend in FY17 and FY18," he said.
The latest sale of the 20 malls is a continuation of CapitaLand's disposal of CapitaMall Anzhen and CapitaMall Kunshan in China last year, and also in India, where it offloaded its stakes in six malls last month.
Of course, the term "asset recycling" means the group is not just selling assets, but also reinvesting capital to add new assets to its portfolio. In fact, in 2017, the entire group acquired S$5.5 billion worth of new properties, more than twice the S$2.5 billion value that it divested.
As for the second pillar of its strategy, the group is also proceeding well, expanding in an asset-light manner by taking on more management contracts for malls and serviced residences.
Under these management contracts, CapitaLand is paid a fee by building owners to run their properties, which means the company does not have to sink heavy costs into acquiring brick and mortar.
Its serviced residences run by management contract currently make up about 55 per cent of its hospitality portfolio. On the retail side, as at end-Sept 2017, it had six malls in China and one in Singapore (SingPost Centre) operating under management contracts.
These properties help to build its recurring income base, even as the company sharpens its market focus on its existing portfolio.
Shunning Singapore competition
Sometimes, focus means not being sidetracked even when one's peers are revelling in their fortunes.
It could be a case of bad market timing, but CapitaLand has found itself with little exposure to the Singapore residential market at a time when the market appears to be in a recovery mode.
Mr Tan from DBS noted that the group has sold most of its available residential development projects here. CapitaLand's Singapore residential inventory makes up less than S$1 billion or below 2 per cent of its total assets.
Seeking Alpha, a crowd-sourced content service for financial markets, said given that CapitaLand has not been acquiring land to develop new properties in Singapore, "the cupboard is almost bare".
"Given the time it takes to develop properties, CapitaLand doesn't have a lot of good options, and I believe management would rather take its lumps and miss a cycle (particularly with more-than-worthwhile opportunities elsewhere) than buy into projects with expected returns below the company's hurdle rate."
While CapitaLand's management has certainly said it will continue to be "aggressive but disciplined" when tendering for land to bulk up its Singapore residential land bank, it has not had much to show in terms of results. The last government land sales tender that it took part in was last July for a Woodleigh Lane site, which it did not win. It has also not clinched any en bloc sites recently.
Mr Tan said: "Strategy-wise, it appears that the group has chosen to stay out of the current euphoria in the Singapore residential market and focus on investing in its core competencies and recycling its portfolio assets."
RHB analyst Vijay Natarajan also thinks that it is not a bad thing to be more prudent and not jump into wild buying especially when land prices have risen so much that eventual selling prices will have to be 20-40 per cent higher than current market prices in order for developers to still make the same margin. He expects CapitaLand to potentially acquire one or two sites in Singapore in 2018.
Perhaps the group is waiting for the aggressive land-buying behaviour here to taper off before it re-enters the market. It has emphasised at briefings that it has not sworn off the Singapore residential market yet, but as a regional player, it has more cards to play with.
For example, in China, its residential sales momentum remains strong, with the group looking to launch another 7,000 units for the rest of 2018. CapitaLand also has close to 10.5 billon yuan in unrecognised revenue which will be booked in 2017 and 2018. This leaves it in less of a hurry to amass land in Singapore.
