First Sponsor Group eyes more Dutch assets

Singapore

FIRST Sponsor Group, whose major shareholders are Hong Leong Group Singapore and Tai Tak Estates, is wasting no time to tap its first-mover advantage among Asians in Dutch commercial real estate.

Having made its first foray outside of China with recent acquisitions in the Netherlands, the developer of mixed-use developments and provider of property financing is gunning for more quality commercial assets in key business districts there.

"In the Netherlands, if we have a chance, we may also want to look at development projects and maybe property financing," First Sponsor CEO Neo Teck Pheng told The Business Times.

"It is still not easy for developers to get financing in the Netherlands because of the last crisis when the three Dutch banks went bust. The banks have turned very cautious on funding developments," Mr Neo said. But property financing in the Netherlands will not be as lucrative as in China where the credit market is imperfect.

First Sponsor was conceived through a joint venture between Hong Leong and Tai Tak Estates, a private company with a long operating history. Capitalising on China's banking system, First Sponsor started channelling cash flows from property development into property financing in 2012, lending at interest rates ranging from 17.5 to 20 per cent per annum through entrusted banks. Its loan portfolio has since grown to 1.1 billion yuan (S$238 million) as at March 31 and yields a 100 per cent gross profit margin since it has no direct costs.

But a slowdown in the Chinese economy has prompted the group to look outside China after its listing on Singapore Exchange last July, Mr Neo explained. With the help of its major shareholder Tai Tak, which has been in the edible oils, refinery and logistics business in the Netherlands for the past 20 years, First Sponsor entered the market swiftly.

It first acquired an office building Zuiderhof I in Amsterdam's new business district South Axis in March together with Tecity Group - one of its initial public offering (IPO) cornerstone investors - and two high net worth individuals for a total of 51.5 million euros (S$77 million). This was said to be the first direct Asian investment into Dutch commercial real estate. Within three months, First Sponsor snapped up two hotels in Amsterdam Southeast - a Holiday Inn and a Holiday Inn Express - with 509 carpark lots for 54.6 million euros.

"We find the Dutch property market to be an interesting choice as a hedge against our current significant economic exposure to the Chinese market," Mr Neo said. "With this diversification, we are also approached by new financial lenders to look into supporting us because they like the diversification and European investment story."

The Netherlands' open economy, stronger risk-adjusted yields compared to the more saturated markets of London, Paris and Frankfurt, and friendly business regime are among reasons why it is attractive, he added. Moreover, financing costs are kept low as the eurozone just started its own quantitative easing.

The acquired properties have an expected yield of over 7 per cent - which Mr Neo conceded to be a difficult level to repeat. "When we were there, we found that we were late in entering the Dutch real estate market compared to other European and American funds though Netherlands is still not a hot real estate market for the Chinese and Singaporean players yet," he said.

Europe has a number of good investment opportunities now, he added. But the group will prudently diversify into markets where it can tap the network and strength of its key controlling shareholders. For that reason, Germany is a viable market given Tai Tak's expansion of its industrial business there, he said.

Tai Tak still holds 44.8 per cent of First Sponsor, while Hong Leong's interest in First Sponsor is held through London-listed Millennium & Copthorne Hotels plc, which owns a direct 35.6 per cent stake.

In his over 15 years of managerial roles in Hong Leong Group Singapore, Mr Neo was involved in mergers and acquisitions, corporate finance and restructuring, including the listing of Hong Leong Asia and CDL Hospitality Reit. Now at First Sponsor, he continues to work closely with the group's major shareholders.

"Both the shareholders bring to the table different things," First Sponsor chief financial officer Lee Sau Hun told BT. M&C's involvement in the Chinese hospitality sector, for instance, has given First Sponsor "competitive advantage when it comes to bidding for land as the government wants to open up the commercial sector in addition to just purely residential", said Ms Lee, who was Hong Leong's vice-president for investment from 2006 to 2011.

With the recurring income from the new Dutch properties, strong residential pre-sales and brisk growth in its property financing business in China, First Sponsor is now in a financial sweet spot, Ms Lee said. Though the group's net profit slumped to S$21.7 million last year from S$48 million in 2013, core earnings - excluding one-off items related to the IPO - rose 8.3 per cent to S$29.9 million.

The group has been selling an average of 1,200 residential units a year since the launch of units in Millennium Waterfront (7,111 units in total) in phases since late 2012. Its next project in the pipeline - Star of East River in Dongguan - is slated for launch in the second half of 2016. Spanning 37,104 square metres on top of a train station, the project comprises some 1,000 residential units that will be rolled out in phases, as well as offices and retail.

These two development projects in Chengdu and Dongguan cost over S$1 billion each. "We may tender for new development land in Chengdu when the right opportunity arises," Mr Neo said.

As for its Shanghai-based property financing business, the group will continue to provide entrusted loans only in tier-one cities - namely Shanghai, Beijing and Guangzhou - and one non-tier-one city Chengdu because it has an operational base there. "Having said that, the bulk of our property financing business will still be in Shanghai," Mr Neo said.

The group hedges its risk in property financing by taking the first legal mortgage on collateral and accepts only income-generating commercial real estate or hotel assets in first-tier cities as collateral. Such prudence gives the company a backdoor entry into a tier-one real estate should the borrower default.

"Right now, if you look at First Sponsor from a big picture perspective, it reflects where we came from - it is a combination of CDL, M&C, and Hong Leong Finance," Mr Neo said.