Did bearishness about the property sector prompt Northstar to divest Apac Realty at steep discount?

APAC Realty , which provides real estate agency services under the ERA brand, had a change of majority ownership recently – with the divestment happening even as it reported a stellar financial performance for FY2021.

Private equity firm Northstar Group sold a 59.8 per cent stake to Morgan Stanley Private Equity Asia at a price of S$0.61 per share, or S$0.57 after netting off the S$0.04 dividend. This represents a discount of about 30 per cent to Apac Realty's last trading price before the transaction was announced.

The divestment came even as Apac Realty, a key property service provider with about a one-third share of the market in Singapore, reported that its FY2021 topline jumped 87.2 per cent to S$739.8 million, while earnings rose over 110 per cent to S$35.3 million.

Given this investee's record financial performance, Northstar's divestment – particularly at such a steep discount to the market price – makes one wonder about the rationale behind it.

Assuming that Northstar is not in need of funds and this is not a fire sale, the natural inference must then be that Northstar is bearish about the property industry's near term prospects.

In December 2021, Singapore implemented a further set of cooling measures to tamp the red-hot property market. These measures appear to be taking effect. In Q1 2022, the luxury non-landed segment slowed down by 45.5 per cent quarter on quarter and 17.3 per cent year on year, said real estate agency Huttons Asia in its latest report on the luxury and Good Class Bungalow market released last week.

The en bloc residential market has also reported a slowdown in successful sales since the cooling measures came into effect, as developers take a more cautious approach.

Property is a big-ticket item. There are very few who can afford to make such purchases without taking up a mortgage loan. Imminent interest rate hikes – with the upcoming May 4 decision by the United States central bank being widely tipped to be a 0.5 percentage point adjustment – will add to the financial burden of servicing loans, and will be a key consideration when prospective buyers do their sums.

In fact, some lenders now offer only floating rate loans for mortgages, withdrawing the option for property buyers to lock in rates.

Then there is the spectre of a recession, as foretold by the inversion of the US yield curve. Even if one brushes this off as mere coincidence, rising energy and commodity prices are undeniably driving up prices of everyday goods. Without an accompanying decent pay hike, one would either buy less or buy a lower-priced version of a good, leading to a reduction in aggregate demand.

All these factors make for a perfect storm for the cyclical property industry.

DBS Group Research wrote in a recent report that the cooling measures and higher interest rates are expected to dampen property market sentiment in the near term, at least for the next 1 to 2 years. 

With fewer new launches in the pipeline for 2022 compared to 2021, and a depleting inventory of unsold apartments, DBS has lowered its transaction volume projections by as much as 26 per cent for new home sales, 10 per cent for private home resales and 12 per cent for public housing flat resales. Overall transaction value is expected to decrease by 30 per cent in 2022, DBS projects.

While Apac Realty and listed peer PropNex had a bumper year in 2021, that might well be the apex of the property cycle.

Northstar bought Apac Realty for S$130 million in 2013, when the firm was owned by Hershing Realty, and relisted it in 2017 at S$0.66 a share while retaining a stake of over 70 per cent. Now, Northstar has divested most of its stake at S$129.5 million.

With the property market expected to slow down, Northstar might have decided that this was an opportunity to divest the investment and deploy the capital on other attractive opportunities that might become available during an economic downturn.

One man's meat is another man's poison. Even if Morgan Stanley Private Equity Asia might have taken these factors into consideration, it could still hold a view or investment horizon different from Northstar's, or have strategic plans for Apac Realty.

Now, the ball is in the minority shareholders' court: to accept or decline the offer from Morgan Stanley at S$0.57 a share. This is a steep discount that watchers see as unlikely to entice small investors, who might rather wait for the market to turn around, especially when the firm has low debt.