Strategic decisions pay off for Ho Bee

WHEN property prices rebounded sharply after the global financial crisis and cues from the Singapore government on cooling the residential market grew louder, Ho Bee Land reckoned then that it was time to relook its strategy.

A shift in focus from development to investment projects and from Singapore to overseas projects in Australia and London is now yielding dividends for the group as industry players battle headwinds in the domestic residential market. Ho Bee is in a "fairly comfortable position though the industry is sailing into stormy waters", group chairman and CEO Chua Thian Poh told The Business Times.

This storm, which he predicts will last another two to three years, has kept Ho Bee - once known for its high-end condos with posh addresses - from taking on new projects here. The group has not bid for residential land sites here since 2009 even when prices were still rising.

While the group will not rule out residential sites if "the price is right", it is more open to commercial sites and white sites from which it can derive recurring income, said Mr Chua.

One move that fast-tracked its strategy shift was the acquisition of The Metropolis site in Buona Vista in 2010. With the one-north precinct being an untested location for office development, the site attracted only two bidders. Ho Bee put in the top bid of S$411 million, or S$342 per sq ft per plot ratio (psf ppr), with the hope of achieving office rents of S$5 per square foot (psf).

But The Metropolis has exceeded expectations, with recent rents hitting S$7.80-S$7.90 psf. After the completion of the two office towers in 2013, The Metropolis's total 1.2 million sq ft of gross floor area is now 96-97 per cent leased out with an average yield of about 4.5 per cent.

Mr Chua described this as an example of Ho Bee's "first-mover" initiatives, also seen earlier when the company pioneered the development of luxury homes in Sentosa Cove.

So far, Ho Bee has sold 44 units at the 91-unit Turquoise and 48 units at the 151-unit Seascape. No unit has been sold at the unlaunched Cape Royale. The group started leasing out the remaining unsold units at its Sentosa Cove condo projects a few years ago before Sentosa Cove bore the brunt of the cooling measures.

"We are considered quite lucky. We didn't own the high-end property in the mainland of Singapore and we are allowed to lease out our Sentosa projects," Mr Chua said.

Singapore's Qualifying Certificate (QC) rules, which affect developers with non-Singaporean shareholders or directors, require developers to sell all units within two years from the project's completion or incur fees to extend the sales period. As developments in Sentosa are not subject to the QC conditions, developers are able to lease out unsold units.

Mr Chua said the group will continue to rent out the unsold units at Sentosa Cove until demand recovers. Now, the unsold stock at Turquoise is 85 per cent leased, while those at Seascape and the 302-unit Cape Royale are 83 per cent and 40 per cent rented out. Having bought the sites there at low cost, there is no need for impairments to be made for these projects yet.

But he expressed concern that the Singapore market will not rebound immediately even if some cooling measures are rolled back or tweaked, citing the example of China where recent relaxation of cooling measures only stemmed the downward pressure at best.

"The (Singapore) market has lost its momentum," he said. "The government should be very aware of this and they are monitoring very closely. I do not think they want to see the property price collapse too."

In China, Ho Bee is also managing the market slowdown by releasing units in its mega projects with joint-venture partner Yanlord Land Group in phases. The duo has sold some residential units in Nanhu Eco-city in Tangshan, Shanghai's Xujing and Zhuhai's Tangjiawan. Profits will be recognised upon the projects' completion based on Chinese regulations.

Increased apprehension about the Singapore and Chinese property markets in recent years turned Ho Bee's attention to Australia and London. It is no novice in London though, having sold almost all 190 units in Parliament View, a residential project overlooking the River Thames that was developed in the late-1990s.

But in its more recent forays, it set its eyes on trophy office assets, acquiring Rose Court in 2013, which was constructed over the remains of the historical Rose Theatre, and 1 St Martin's Le Grand, which originally served as the General Post Office of London in the late 19th century before it was redeveloped and refurbished into a Grade-A office building. Its latest buy was 60 St Martin's Lane last October, a Grade-A office asset at the heart of Covent Garden.

London's office market turned out to be relatively unscathed by the UK's recent property tax measures, such as the capital gains tax, which are targetted at the residential market, Mr Chua said. When these investment properties reach the tail-end of their leases, Ho Bee will look at ways to enhance these assets.

In Australia, Ho Bee has sold 65 per cent of 185 residential units at Pearl in Doncaster, Melbourne, and 15 per cent of 223 units at Rhapsody in Surfers Paradise, Gold Coast. Ho Bee also sold 88 per cent of 307 available residential units in Eporo Tower in central Melbourne, a joint venture with the Coptic Church. The remaining units at Rhapsody will be marketed in Singapore and Hong Kong, Mr Chua said.

Plans for two mixed-use sites in Gold Coast, Australia - a 11,356 sq ft site at Surfers Paradise and a 122,085 sq ft site in Broad Beach - are still on the drawing board. Notwithstanding the low cost of holding land in Australia, Mr Chua said it is still in the group's interests to launch these projects earlier given the higher development risks in Australia, where buyers only fork out 10 per cent of the purchase price before paying the balance at project completion.

Ho Bee's overseas leap showed up prominently in its financials last year. Overseas contribution accounts for 25 per cent of Ho Bee's turnover, up from just 5 per cent in 2013. In the next two years, this proportion could go up to one-third or 40 per cent, Mr Chua said.

But due to an absence of development income, Ho Bee's net profit slipped 47 per cent to S$315 million in 2014. It declared a first and final dividend of five cents per share for fiscal 2014 - unchanged from the year before - but without a similar special dividend as in 2013.

"Last year, we had a 100 per cent contribution from investment income but we hope to build a 50-50 balance between investment and development income," Mr Chua said.

"Development arm gives the turbo engine - the extra charge to our P&L (profit and loss). But with a steady recurring income, our earnings become less lumpy, which allows for a more consistent dividend policy."