Sinarmas Land ramps up overseas expansion

Singapore

SINARMAS Land, majority owned by Indonesia's well-known Widjaja family, is speeding up its overseas expansion by riding on the momentum from its recent acquisitions in London.

The Singapore-listed developer is now eyeing more commercial assets in central London and continental Europe to beef up its international portfolio and recurring income - even as it continues to accumulate land bank in its home country.

Its first London acquisition was New Brook Buildings in 2013 which it held for only 18 months before selling for a whopping 70 per cent return on equity - a "very credible performance" for a new market entrant, in the words of group executive director Robin Ng.

"That was an opportunistic divestment," Mr Ng told The Business Times. "But it's not a hit-and-run play. As you can see, we reinvested every single cent of the profit that we've made from the property that we sold. In fact, we put in more equity into the London market since we've completed the third building acquisition."

The group has acquired two other Grade-A office buildings in London, Warwick House in 2014 and Alphabeta Building this year, for £57.3 million (S$120.5 million) and £259.3 million respectively. The Alphabeta Building acquisition on Oct 8 is by far the company's largest single asset acquisition.

Sinarmas Land is hoping for at least one to two acquisitions overseas each year to beef up its recurring income portfolio, which accounted for only 11.4 per cent of total revenue in the first nine months of 2015 versus its 25 per cent target.

The group also wants to shore up its international revenue to 20 per cent of total group revenue between three and five years, up from 3.2 per cent as at Sept 30.

Upcoming overseas acquisitions could take place in London or a new European city - "very likely in Germany because of the very favourable financial returns" that the company sees possible in the country.

Low-cost financing in Europe, strong blue-chip tenant profile, long leases on triple net lease basis (where tenants bear all outgoing expenses) are among conditions favouring landlords there, Mr Ng said, citing an entry yield of 5-6 per cent for Germany's Grade-A office market and 4.5 per cent for central London offices.

In assessing its targets, the group is looking out for those that have room for capital appreciation and enhancement opportunities because they are under-rented or under-managed, Mr Ng said. But he stressed that speed of execution is of the essence as more players are eyeing the same markets.

Despite Sinarmas' aggressive overseas expansion, it still spends some S$300 million each year accumulating landbank in Indonesia even though it is still sitting on huge land reserves.

Likening the company to a "marathon runner", Mr Ng said: "In the near term, we believe that there is still room to grow for Indonesian property prices though the pace of growth will probably be slower."

He conceded that recent demand has not been as impressive as in the heyday of 2010-2013. "In recent launches, we haven't seen as hot subscription as in the past when you can have five times, 10 times demand over the number of residential units launched. But we have been very selective in our product launches. We try to time the market carefully in terms of our sales and we try to build our specifications around what the market likes and supplement it with amenities."

The group is slated to launch premium high-rise condominiums The Elements in Kuningan, South Jakarta next year. Last year, it launched a high-end residential development project, NavaPark, in a joint venture with Hong Kong Land in its flagship residential township project BSD City in the southern outskirts of Jakarta.

Having owned large tracts of land in Indonesia over decades, Sinarmas Land is able to unlock their value by selling land parcels at stunningly high margins of 80-90 per cent, going by recent transacted prices in its township development projects. For instance, its sale of some 68-ha of land in BSD City to its JV company with Hong Kong Land yielded a gross profit margin of 85-90 per cent; it will also enjoy 51 per cent share of profits from the sale of residential units through its stake in the JV.

Mr Ng pointed out that the group's large industrial landbank also puts it in a sweet spot at a time when many of its competitors do not have enough land to offer to foreign investors. "Some of these foreign investors that we talked to, particularly the auto manufacturers, sometimes require parcels in the likes of 40-50 hectares in order for them to build their facilities and ancillary space. In an average year, we probably sell around 100 to 150-ha of industrial land."

Industrial land sales in its industrial townships Kotas Deltamas and Karawang International Industrial City (KIIC) have seen a pickup in demand from foreign investors since Indonesia's presidential elections last year, according to Mr Ng. The two industrial township projects are jointly developed with Japanese partners Sojitz Japan and ITOCHU Japan respectively. There are still nearly 1,800-ha of land at Kotas Deltamas and about 200-ha of land at KIIC left for development.

Since 2013, Sinarmas Land has roped in other JV partners to offer new products in its township projects, leading to the opening of Japanese Aeon Mall in BSD City in May and the opening of an exhibition hall with Kompas Gramedia Group in January. Half of the 6,000-ha of land at BSD City is left for development.

"So as you can see, as we move to a more mature stage of development in BSD City now, we start to bring in brand names from overseas to enhance the image and product quality," Mr Ng said. The group is now keen to work with international schools to set up campuses in BSD City. A second Aeon Mall is also planned for Kotas Deltamas.

A relatively young population, rising household incomes, rising urbanisation and decent GDP growth of above 5 per cent are among reasons why Mr Ng is confident of the Indonesian real estate market. In the near to mid-term, he also expects the recent stimulus packages released by the Indonesian government to boost real estate demand and consumption.

But it seems that investors have not priced it all in. Mr Ng said: "We are still a deeply undervalued stock by virtue of our conservative accounting policy whereby we take a cost basis for all our assets including land bank. At the same time, we have a very strong balance sheet, not to mention that we are still sitting on S$1.2 billion of cash."

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