Listed developers are not going extinct

Singapore

LISTED property developer groups here are undervalued, going by the large discounts to net asset value (NAV) at which they trade.

This phenomenon is not unique to Singapore. In property-crazy Hong Kong, behemoths such as Sun Hung Kai Properties and CK Asset Holdings also trade at significant discounts to NAV.

In deriving the NAV, investment properties are typically carried at mark to market valuations done by independent valuers. As for hotel assets, these are usually carried at historical cost less depreciation. Properties under development meanwhile are carried at cost.

So unless physical asset prices are falling rapidly or development projects are loss-making, the NAV of a property group is probably a conservative figure.

A popular solution to this problem of undervaluation has been for major shareholders to privatise listed property groups. Examples from the past include Allgreen Properties, United Engineers, Sim Lian Group, and SC Global.

On Friday, Top Global's major shareholder launched an offer to privatise the group.

A different solution is being offered by Singapore's largest listed property group, CapitaLand.

CapitaLand's property development business will be taken private by its controlling shareholder while its real estate investment management activities and lodging business will remain in the public market under an entity called CapitaLand Investment Management (CLIM).

CLIM will be a real estate investment manager (REIM) that hopes to trade well relative to NAV. In its presentation on the proposed restructuring, CapitaLand highlighted that a basket of REIMs comprising Charter Hall Group, Goodman Group, Lendlease Group and ESR Cayman trade at a premium to NAV.

Investors going after yield from real estate investment trusts (Reits) have propelled the growth of this asset class. Today, Reits outnumber property developers in the 30-strong Straits Times Index.

Could the listed property developer become extinct?

Possibly not. Take Ho Bee Land, one of the larger family owned and managed developers. Listed in 1999, a year ahead of when CapitaLand made its debut on the local bourse, Ho Bee has been quiet on the corporate action front all these years.

In contrast, CapitaLand has been buzzing in corporate action be it the current restructuring, listing then privatising CapitaMalls Asia, acquiring Ascendas-Singbridge, privatising The Ascott Group.

Ho Bee continues to be led by its founder Chua Thian Poh, who has been chairman and chief executive officer (CEO) since 1999.

Operationally and strategically though, Ho Bee has transformed over the past two decades.

In Singapore, the group made its mark starting in the early 2000s as the pioneer developer in Sentosa Cove, eventually becoming the biggest developer building a total of eight high-end condominiums, terrace houses and villas.

Post the global financial crisis of mid 2007 to early 2009, Ho Bee made a concerted effort to grow its investment property portfolio.

Notably the group embarked on developing The Metropolis at One-North. Today, it continues to own 100 per cent of The Metropolis with a gross floor area of around 1.2 million square feet.

The group has also been aggressively growing its investment property portfolio in London, where it owns seven prime office buildings, mainly freehold in tenure, with a total net lettable area of around 1.6 million sq ft.

From owning S$330 million of investment property in 2008, the group's holding of investment property has grown fourteen times to S$4.6 billion in 2020. By operating segment, revenue from property investment jumped from S$17 million in 2008 to S$215 million in 2020.

As Mr Chua put it in the latest annual report: "Our group's resilient income base from our investment portfolio built up since the last global financial crisis has helped us navigate through the challenges."

For 2020, dividend per share is 10 Singapore cents, consistent with that of the previous three years, and up from two cents per share in 2008.

The lesson here is that the push to building recurrent income has been successfully executed and shareholders have received tangible benefits.

Ho Bee is not standing still operationally. Last year, it was awarded the concept and price tender to build, own and operate Biopolis Phase 6 at one-north, with its bid of S$223.6 million. This project will offer 35,000 square metres of business park space for biomedical sciences research and supporting activities, and 6,000 sq metres for office and retail use.

Last year, the group also acquired five sites in Australia to develop master-planned residential communities in Queensland and Victoria that will generate 2,000 lots for sale over the next few years.

Ho Bee's shares trade at about half of NAV of S$5.46 per share. Perhaps rectifying this valuation disconnect is not that high a priority for the group so long as it continues to execute well on its projects and business strategy.

Mr Chua who has a deemed interest of over 75 per cent in Ho Bee may be happy as long as operations move along, dividend can hold steady or improve gradually and succession to his son, deputy CEO Nicholas Chua, can happen smoothly in due time.

Meanwhile Mr Chua is well remunerated, drawing total remuneration in the band of S$8.25 to S$8.5 million in 2020.

Fellow property group Hong Fok Corporation paid executive director and joint CEO Cheong Pin Chuan and three of his siblings in excess of S$12.5 million in 2020. Pin Chuan also has two sons who are among the group's senior management. The Cheong family are substantial shareholders of Hong Fok, which has a market capitalisation less than half that of Ho Bee.

Family owned and run property groups are not uncommon in the listed space in Singapore. They are a diminishing breed on the Singapore Exchange but they are not going extinct any time soon.

Complying with listing rules may be a hassle. However, by being listed, family led groups can tap on the counsel of independent directors and strengthen their corporate governance.

Given the huge challenges confronting real estate in a post-pandemic world, it is likely a case of all hands on deck to get the strategy and operations right so business value can be sustained through generations.

Using a long lens, privatisation and corporate restructuring exercises can be put on the back burner as these are time consuming and fraught with uncertainty.