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CapLand to build on S$11b ASB deal in Singapore, China, India, Vietnam
CAN one plus one add up to three, five, seven or even twenty? CapitaLand group chief executive and president Lee Chee Koon hopes so.
The property giant will seek shareholder approval this Friday for its proposed S$11 billion mega-purchase of industrial and commercial real estate player Ascendas-Singbridge (ASB) from state-owned Temasek Holdings.
If the deal is completed, the enlarged group, with assets under management of S$123.4 billion, will double down on the key markets of Singapore, China, India and Vietnam.
It will use its newly-acquired exposure in industrial, logistics and business parks to cross-sell across various asset classes and countries. It will also step up on capital recycling, either through divesting to third parties or to its own Reits.
Although there's no fresh target for AUM yet, Mr Lee told The Business Times in a recent interview that he wants to "deliver on a sustainable basis, double-digit type returns" - after achieving 9.3 per cent return on equity (ROE) for the last fiscal year.
CapitaLand will allocate 80 per cent of capital for the enlarged entity to Singapore, China, India and Vietnam. The rest will go to other developed markets, as these could offer attractive yields and opportunities to create fund management products.
With ASB's new-economy properties and skills in large-scale urban development, Mr Lee says CapitaLand will be able to source land, negotiate with governments, design, build and manage assets and inject them into the Reits.
The 44-year-old said: "I'm not sure you'll find a competitor which has the same suite of capabilities across the four countries. It's not one that is easily replicable, especially in those complex markets like India or even Vietnam."
He is particularly excited about India. That is a market CapitaLand has had trouble unlocking before. There, ASB has S$2.6 billion AUM worth of properties like business and IT parks, industrial facilities and logistics properties.
The company will focus on Tier 1 and Tier 2 cities like New Delhi, Hyderabad and Pune, tapping on the growth in demand for technology and data as well as e-commerce, Mr Lee said.
But his focus will stay largely in business parks and logistics there. He said: "If we want to go into new asset classes in any new market we have to make sure we can build scale and be competitive."
In China, CapitaLand already has deep presence in retail, residential and offices, and now will get industrial properties and business parks within the five core city clusters it focuses on.
"We can offer new integrated solutions. We can negotiate with local government whether we can build facilities that bring in industries and companies, and at the same time do other types of developments."
ASB also has a number of joint projects with local governments in places like Jilin, Chengdu, Tianjin and Guangzhou. These are all income producing and don't have long gestation periods, he said.
He said such projects can take a long time to negotiate, but allow the company to add value and amalgamate land at attractive prices. That will build future pipeline and profits.
The company will not go out of its way to court such projects but will not say no to those that make commercial sense. In Singapore, CapitaLand also sees opportunities to rejuvenate ASB's business parks.
Fund management platforms will be another key area of growth. Though largely agnostic on geography or asset class, Mr Lee says CapitaLand's US multi-family portfolio and ASB's US suburban offices are "interesting opportunities where we can create fund management type products".
He added that the group will step up asset recycling. It will exit non-core assets where it cannot scale or be competitive, even if returns are "interesting". It will also sell to Reits or third parties assets that have reached stabilisation on its balance sheet.
CapitaLand will be watching closely its balance between development and investment property (the company has said it wants a 20:80 ratio in exposure) to boost ROE and earnings.
That means not just investing at below replacement cost and adding value to assets, but also selling to third parties and Reits, he said.
He said: "You need to keep the business model very, very disciplined, then you will be able to achieve good enough returns."
CapitaLand and ASB have been planning for their potential integration. The enlarged entity will boast 16,000 staffers. ASB now has 1,300 staff.
The new business structure and senior management have been finalised. Mr Lee said: "We wanted to be as ready as we can and do as much of the planning as possible so when the deal gets approved and legally completed, we are ready to hit the ground running."
The new CapitaLand is organised largely by country with three of the units being China, Singapore and International, and India; two globally-oriented units Lodging and Financial, and several "centres of excellence" for long-term trends in real estate.
He will have fewer than 10 direct reports - having too many would make it too easy to be sucked into the details rather than focusing on the big picture, he says.
Putting decision-making as much as possible in the hands of local managers is also key to overcoming what he acknowledged is "a contradiction between being big and nimble".
He said: "The most important part about being nimble is, don't centralise and keep the control at HQ. It goes back to the principle of hiring the best people with the best value system, and trust them and empower them so they know how to run."
He also does not forsee any board changes as a result of the transaction.
The deal has its critics, though. It is ROE and earnings per share (EPS) accretive, but slightly dilutive to net asset value (NAV).
Sticking points include the S$800 million goodwill and rise in gearing to 0.72 times from 0.51 times, although the group plans to reduce this to at least 0.64 times by the end of 2020.
Mr Lee said: "Whatever you inherit, you look at it, you look at the merits, you need to continue to work on it." He says that after visiting all the properties, he sees potential to unlock much value from the two companies.
Mr Lee, who has been in his role since last September, also rejects the idea that his age could be a concern, and points to his 12 years of experience at CapitaLand.
He joined as vice-president, office of the president, in 2007 from the administrative service.
He said: "It doesn't matter whether you are young or old, you always need a clear strategy and ability to lead your team."
As CapitaLand stands to begin another chapter, he makes it clear he will not settle for anything less than the best. He said: "I'm not one who is satisfied with the status quo. If you are given the responsibility to lead, there is a tremendous responsibility to build the company to make sure it's a winning company... so you can continue to win good projects, attract good capital and attract the best people to work for you."