Asset-heavy property groups may take the privatisation route

Singapore

AS the Covid-19 pandemic continues to ravage the UK, hotels are suffering, particularly in London, which is missing international visitors. Unsurprisingly, Singapore-listed GL Limited, whose core business is owning and operating 13 hotels in London, reported a loss for the half year ended Dec 31, 2020 last week.

Surprisingly, almost immediately on the back of the results announcement in which GL's board said it expects to continue to face a difficult operating environment in 2021, GL's largest shareholder made an offer to take it private last Friday.

Guoco Group, which owns 70.8 per cent of shares in GL, announced a voluntary conditional offer for GL at S$0.70 per share, with the intention of taking GL private. The offer price is at a 25 per cent premium to the last traded price pre-announcement and a 28 per cent premium to one month volume weighted average price. Sounds like a great offer to shareholders of a loss-making company whose near-term prospects are not good?

Perhaps, Hong Kong-listed Guoco Group, whose majority shareholder is tycoon Quek Leng Chan, has a long horizon. The offer price for GL is at a 27 per cent discount to book value and is at around the trading price back in early March 2020, prior to the UK government imposing a lockdown to deal with the worsening of the pandemic situation later that month. This takeover offer can be seen as a bet on a return to normalcy possibly within a few years.

Business travel may not recover fully as executives take to conducting more video meetings but leisure travel may well be back in full force with London continuing to be a top destination. Timing-wise, making a privatisation offer now, before the fog of the pandemic fully clears and with hope on the horizon, may well prove opportune.

It is left to be seen whether GL, which has been listed in Singapore since 2000, will leave the Singapore bourse. If GL is taken private, it would join a list of tycoon-owned property and hotel groups that have been successfully privatised over the last decade, such as Allgreen Properties, Wheelock Properties (Singapore), SC Global and Pan Pacific Hotels.

Property groups in which Temasek Holdings is a major shareholder have also gone down the privatisation route, with Keppel Corporation and CapitaLand successfully taking private Keppel Land and CapitaMalls Asia respectively.

The real story behind the GL privatisation offer could be that with economic recovery on the horizon amid the rollout of vaccines across various countries, the wealthy are ready to deploy their capital.

With low interest rates and the difficulty of finding good investment opportunities such as buying trophy buildings or in-demand data centres, controlling shareholders will find putting more money to work in listed companies they own and are familiar with, tempting. Therefore, the trend for asset heavy groups to be taken private could be inexorable.

A quick scan of the Singapore market throws up a host of property and hotel groups trading at substantial discounts to book value of around 40 to 60 per cent that have large shareholders who hold majority stakes.

For a start, there is GuocoLand, in which Mr Quek has a majority stake. GuocoLand is exposed to the Singapore residential market, where prospects appear good and where it owns premium integrated development Guoco Tower. GuocoLand's peer Frasers Property, which has an even larger market capitalisation, and much wider geographical foot print, also trades way below book.

For groups with smaller market capitalisation, look to hospitality groups such as Bonvests Holdings, which has properties in exotic locations such as Tunisia, Zanzibar and Maldives, or Hotel Grand Central, which has hotels in Singapore, Malaysia, Australia, New Zealand and China.

The reason cited in the offer announcement for GL of greater management flexibility to navigate a challenging and unprecedented operating environment is equally applicable to other hospitality groups.

Analysts and investors may have their bets as to which groups will be next in line for potential privatisation. Would privatisation of groups with exposure to markets such as Singapore or China where the pandemic seems to be well-managed - such as GuocoLand or Yanlord Land - be next on the cards? Or would more privatisation offers be made in beleaguered segments such as hospitality?

It would be a rogue's game to figure out when a privatisation offer will come and how attractive that may be. It is hard to know what the Ng family wants to do with the listed status of Far East Orchard, or the Tan family with Hotel Grand Central, or the Chua family with Ho Bee Land.

Investors buying into groups with a large shareholder and at deep discount to book value can take comfort from the large shareholder having plenty of skin in the game and from having some protection in terms of the discount to book.

But patience is required if the investment objective is to seek to benefit from the exit via a privatisation offer. Buying into potential privatisation plays can be akin to buying into a property in the hope of successfully exiting via a collective sale. Whether the hoped-for exit materialises is beyond one's control even if one has done all the homework based on publicly available information.

Like in a collective sale of a property, the decision on whether to privatise is beyond the control of the small shareholder. Then there is the right price at which the privatisation or collective sale, as the case may be, works.

What is clear though in the Singapore market is that real estate investment trusts (Reits), which first appeared on the Singapore Exchange in 2002, are the ideal listed vehicle for owning completed investment properties and hotels.

Large Reits such as Ascendas Reit, Mapletree Commercial Trust and Mapletree Industrial Trust can trade at premiums to book value of 25 per cent or more.

As these Reits trade well, they are able to tap into investors to raise equity post-listing to fund new acquisitions that then contribute to growing their distribution.

For Reits, the benefit of being able to use the listing status to do secondary fund-raising easily outweighs the costs of maintaining listed status.

Perhaps, Mapletree Investments' model points to the future. The group itself, which is owned by Temasek Holdings, is not listed, but it has four listed Reits in Singapore and probably has more in the pipeline.

• The Level Ground is a new column looking at the ins and outs of property investments and asset plays.