A FEW years back, Liew Mun Leong, chief executive of CapitaLand, came to Singapore Press Holdings and gave a talk to journalists. His talk left a deep impression on me.
The topic was how he saw the property market going through a strategic inflection point. Mr Liew drew the idea of strategic inflection point from the book Only the Paranoid Survive by Andy Grove, the chief executive of Intel.Mr Grove defines a strategic inflection point as a time in the life of a business when its fundamentals are changing significantly, and these would be times when critical decisions can make or break a business. In the book, Mr Grove said only those who constantly try to anticipate change will survive when change happens.
Indeed Mr Liew has thoroughly absorbed the essence of the book and put it into practice with great effect. He successfully steered CapitaLand in directions which subsequently positioned it to enjoy the developments which had played out in the last few years.
Today, CapitaLand is a completely different animal. Not only is it the largest real estate company listed on the Singapore Exchange, with a market capitalisation of $16 billion, it is also the largest in South-east Asia. It is now the leading foreign real estate developer in China, with about $6 billion worth of its balance sheet represented by assets in China.
There, it has stakes in over 70 malls as well as serviced apartments which will hit 10,000 by 2010, and has a pipeline of more than 35,000 residential homes. It is the largest retail mall owner/manager in Asia, the largest serviced residence owner-operator globally, and the leading real estate fund and investment trust manager.
More than 50 per cent of its assets are now outside Singapore. It has footprints in more than 100 cities in over 20 countries. And its assets range from residential to commercial and integrated leisure, entertainment and convention centres. Another new business to be built is industrial and logistics real estate.
I don’t envy analysts who have to cover CapitaLand. I can’t imagine how they go about ascertaining the revenue from its numerous sources in over 100 cities. However, I was offered the opportunity to have a chat with Mr Liew last week and that helped in gaining a somewhat deeper understanding of the group.
CapitaLand, says Mr Liew, is positioning itself to capture the one big long-term inevitable trend, which is the economic development of Asia. As the trend plays itself out, there will be increased economic activities, rising income, urbanisation of cities, increased consumer spending and rising demand for leisure and entertainment.
Each of CapitaLand’s products is tapping into two or more of these ’sub-trends’. For example, the residential business will thrive as economic activities pick up, income increases and more people migrate to the cities. Retail is poised to benefit from all the five ’sub-trends’.
And for each of the product offerings, the group is capturing profits at almost every stage. The biggest value is created at the development stage when the group buys a piece of land to build one of its products, be it a condominium, commercial building or other real estate. Here, it will have to bear risk that the market may turn bad, make sure that the products to be built will be what the buyers want, source for funding for these projects, etc. Once the product is built, CapitaLand can either sell it or offer it to one of its Reits. CapitaLand has stakes in the Reits which earn stable income from the rental. Meanwhile, it also earns management fees for running its five Reits as well as 15 private equity funds. CapitaLand is where it is today because it was able to see ahead of the curve.
Inflection points
The first inflection point for the real estate market in the last 10 years was soon after the Asian financial crisis, said Mr Liew. The crisis was caused by excesses in Asia, companies borrowing ever more to fund projects based on very bullish assumptions. ‘Banks were lending money to property companies, earning debt returns but assuming equity risks because there was no recourse. The recourse was only the property.’
During the crisis, central banks limited commercial banks’ exposure to the real estate. ‘That was one inflection point. Our thesis is that we must learn to tap the capital markets. So we started commercial and residential mortgage-backed securities (CMBS and RMBS).
‘We also decided that going forward, real estate companies cannot be run like a traditional family-run type of business. Asian real estate has to be institutionalised, that is institutional investors have to come in. One way was through Reits. We think that if in the US, Reits can be a solution to the savings-and-loan crisis (of 1989 to 1992), then it should be something we could use.’
The process of pitching the idea of Reits to the government took six years, said Mr Liew.
Now we are entering a second inflection point. Bank lending has seized up. Meanwhile, the window to tap the capital markets through asset securitisation is not as open as before. In the current crisis, the well-capitalised real estate companies will emerge even stronger. While those with weaker balance sheets will have difficulties getting funding - ‘the juice to do business dries up’ in the words of Mr Liew.
Meanwhile, those who can have access to funds will get them at cheaper rates than before as the US Federal Reserve continues to lower interest rates.
Achievements
Mr Liew has achieved a lot since he took over Pidemco Land which then bought over DBS Land in 2000. Along the way, he had to make some very difficult decisions and take harsh criticisms.
In the second half of 1990s, he resisted the pressure of initiating new investments in countries like the Philippines, Indonesia, Thailand, China, Hong Kong and Vietnam at sky-high prices. But when he bought Furama Hotel in Hong Kong in 1998, he was severely criticised.
‘One of the key decisions which made us what we are today was to buy DBS Land. That gave us scale,’ said Mr Liew. Then he sailed into the perfect storm of the dotcom bust, the 9/11 terror attacks, Sars, Iraq war and the two Bali bombings which lasted nearly four years.
In 2001, he decided to revive the Shanghai Raffles City project, which had been abandoned a few years before. He was questioned why he wanted to throw good money after bad. Today, Raffles City in Shanghai is worth at least twice its investment cost of $350US million. It is now a recognised brand and three more are being constructed in Beijing, Chengdu and Hangzhou.
In the years immediately after the merger, the group’s share price languished at just $1-plus, about half the price Pidemco Land paid to buy DBS Land. ‘I was almost in tears when I spoke to my management in one of our retreats,’ said Mr Liew. ‘I said we were ex-civil servants, professionals, very good people. Surely we can run the company well so people can recognise the value in our shares.’
Then recognising the need to have an alternative source of funding, the need to get institutional investors in, the need to create a steady stream of income for the group, CapitaLand introduced Reits to Singapore. ‘It took us six years to pitch it to the government. We had to convince them of tax transparency, then we had to get the green light from MAS, MND and Ministry of Finance.’
As with most successful businessmen, luck had some role to play at some point. Mr Liew said that perhaps it was a blessing in disguise that CapitaLand did not get the integrated resort projects. ‘If it was in our books, it’d occupy a few billion dollars debts. Under the current landscape of credit crunch, it’s going to be a strong burden on the balance sheet. In terms of creating value, I’m not sure we could recover it so fast.
‘If I have to do a $5 billion project, I’d rather do it in various pieces in a more distributed way. So from the standpoint of creating value for shareholders, from the standpoint of economic value added, it’s much better if we don’t do it.’
The capital, he said, has since been invested in Vietnam and China. ‘That’s why we can buy nearly 100 malls in China,’ said Mr Liew.
In the last seven years, Mr Liew said CapitaLand has amassed profits of $4.9 billion and created shareholder value of $18 billion as at end February. Mr Liew stressed that it was not because of the good run in the market in the last two years that record profits were made. ‘The fruits were planted during the difficult years.’
I did some calculation. Between 2002 and 2007, the group generated cash totalling $7.5 billion - from operations or from sales of investments after netting off new investments but before paying interest charges and dividends. Relative to its capital, the return works out to about 7.8 per cent a year, a rather decent number.
There’s no doubt CapitaLand is a good company. But as a very astute investor told me this week, it’s very easy to identify good businesses. ‘Any cab driver can tell you DBS, OCBC are good businesses. But the question is: It is reasonably priced?’ That, of course, is the difficult part. The astute investor says he generally will not pay anything more than the revalued net asset value for a property company.
CapitaLand last traded at $5.68 and its net asset value per share is $3.54. Which means it is now trading at 1.6 times its asset value. So it’s up to one’s judgement if you think property inflation will continue, and whether all the positives of CapitaLand will continue to add value to its asset portfolio.
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