Developers need to find new ways to improve value

LOCALLY listed property developers keen to arrest persistent undervaluation may need to take a leaf out of CapitaLand's book and consider different formats for their listed vehicles. The current go-to means of improving value - share buybacks, recycling capital via real estate investment trusts (Reits), and even privatisations - are not living up to investor expectations.

In March, CapitaLand said it would place its development business under private ownership while consolidating its investment management platforms and lodging arm into a newly created entity to be listed on the Singapore Exchange (SGX).

CapitaLand shares rose as much as 16 per cent to S$3.85 after the announcement. They have fallen since but remain above where they were before the deal was announced, ending Friday at S$3.51 or 0.8 time book value.

Quite a few market watchers have suggested the same model would not work for most developers here, given their lack of similar scale, asset management platforms and fee business. But are there other options?

Share buybacks

RHB analyst Vijay Natarajan noted that cash-rich developers have been able to buy back their shares at a steep discount: "Why do you have to buy other assets, when buying back your own shares is itself a value-accretive strategy?"

This makes more sense than acquiring and building on raw land, given rising land costs today.

SGX data shows property developers - including OUE, Stamford Land and Tuan Sing - have spent S$12 million buying back shares this year.

But not only is this unsustainable; it could also reduce the float, trading liquidity and consequent valuation of the shares in the longer run.

Privatisation

Developers that have gone down the privatisation route include the likes of SC Global, Keppel Land, Sim Lian Group and Wheelock Properties; at price-to-book multiples of 1.15, 0.88, 0.95 and 0.78, respectively.

More recently, GL was taken private at 0.84 time book. Privatisations offers for Top Global and World Class Global have been made at 0.53 and 1.54 times book, respectively.

The price acquirers would pay is usually discounted by the return they need to make. While some value is unlocked, it will inevitably have to be shared with the acquirer, said Kelvin Tan, senior vice-president and co-head of real estate M&A at DBS.

But privatisation, for small and mid-sized developers in particular, removes a halo accorded to listed companies when it comes to securing projects or better lending rates.

Founders of private companies often have to give personal guarantees when taking loans, whereas for publicly listed companies this is not needed.

Reit creation

The biggest developers here - CapitaLand, Mapletree Investments, City Developments and Frasers Property - all have Reit vehicles into which they can inject assets in exchange for cash.

UOL has been named a likely candidate to spin off its own Reit given its high recurring income base, which is supported by rental income, hotel operations and investment holdings. The stock currently trades at 0.6 time book.

Its subsidiary Singapore Land Group (formerly United Industrial Corp), which owns a portfolio of office buildings in the central business district, has also not ruled out setting up capital recycling platforms such as funds or Reits for fee income in future, it recently told The Business Times.

Meanwhile, City Developments has said it is planning to launch a Reit holding commercial assets in the United Kingdom. Market talk is that it could happen as soon as in the second half of this year.

But creating and sponsoring a Reit is not a suitable path for every developer. Some, for instance, have a mixed bag of assets with varying qualities, which would make it difficult to construct into a Reit with a clear mandate that can be easily embraced by investors.

Boosting recurring income

Many developers have added income-generating assets to their portfolios in the last half-decade in order to create recurring income streams, said DBS Group Research analyst Derek Tan.

But Mr Tan said such moves have not paid off too well, and investors continue to prefer the Reits over the developers.

Office and retail Reits are trading at an average of 0.9 time book, while industrial Reits are currently trading at 1.2 times book. Hospitality Reits - the hardest hit by Covid-19 - trade at an average 0.8 time book.

"The market has gravitated to the Reits, which are more transparent and liquid as they pay out nearly all their cash flow. The developers don't. With these developers, you get a fairly Reit-like exposure with residential policy risk, and then not as high a dividend yield," he said.

End game

Property development remains a substantial and even essential business in Singapore, not just because of the local interest in home-buying but because it supports many other ancillary segments such as construction and real estate advisory.

But the publicly listed developers now need to get creative about how they can increase the efficiency of their corporate structures so that investors can realise the true value and potential of their investment.