CapitaLand Chiefs Defend Strategy

Source : The Business Times, September 30, 2008

CEO refutes concerns over exposure in China, says group has strengthened risk management

AMIDST a raft of downgrades by analysts and a slump in the company's share price, CapitaLand's top brass have defended the group's strategy.

On the prowl: Mr Kee (left) and Mr Liew. CapitaLand is in a position to replenish land supply at more competitive prices as it does not have a huge China landbank

'We are a company that's much stronger than when we first started in terms of our balance sheet. We've also strengthened our risk management. We have an independent risk management team to countercheck all business initiatives. At the same time, we've built up a company with enough liquidity to not only weather the current position but take advantage of it,' CapitaLand Group president and CEO Liew Mun Leong said in a recent interview with BT.

'I can't think of any project that we have invested in during the last two years that is a lemon. I can think of a lot of projects that we have divested and made money (from). That's because we're very prudent and paranoid about risk analysis,' he says.

The property giant set up the strategic corporate development team in May to study acquisition opportunities - especially in China and Japan - to grow the company.

Said CapitaLand's chief investment officer Kee Teck Koon: 'To be able to leapfrog your competitors, usually it has to happen during a crisis.'

The current financial market turmoil emanating from the US has its origins in lax macro-economic policies that led to low interest rates, excessive liquidity and high leveraging.

'Our company, if you check our history, we have not done that,' Mr Liew stresses. The group had $3.4 billion of cash as at June 30, 2008 and this was not counting recently recycled capital of $2.9 billion from the divestment of properties like 1 George Street and Somerset Orchard in Singapore, the Raffles City projects in China, Capital Tower Beijing and Citibank Menara in KL. On a proforma basis, assuming these divestments were completed on June 30, 2008, and all things being equal, the group's net debt-to-equity ratio would have been 0.43.

Besides the $3.4 billion cash, the group's private equity funds had undrawn equity commitments of $2.2 billion and an average gross debts to assets ratio of 0.24 (inclusive of equity bridges) as at end-June 2008.

Mr Liew also refuted market concerns about the group's exposure in China. 'Unlike many other Chinese residential developers, we do not have a huge landbank. This leaves us in a position to replenish land supply at more competitive prices.' The group has a 1.5 million sq metre gross floor area residential pipeline in the Beijing, Shanghai and Guangzhou regions.

Some analyst reports recently highlighted that major Chinese residential developers have been chopping prices, which will put pressure on CapitaLand to do the same. Mr Liew says land for the projects it is marketing now was bought a few years ago, when land prices were lower. As residential land values in China go down, CapitaLand, with its strong balance sheet, will be on the prowl to restock its landbank.

Strong fundamentals

Asian real estate markets have started to tank but Mr Liew maintains that 'Asian economies and real estate will outperform western economies', citing strong demand fundamentals. 'In the Asian context, the buying power and source of funds through capital markets or other sources is still not as seriously affected as in USA, where the thing has completely frozen. The Arabs also have money.'

Mr Kee said German core funds and North European funds have also raised their allocation for Asian real estate over the years.

CapitaLand's head honchos also dis- agree with the view that the group has increased its risk profile in the past few years by undertaking more development projects, moving away from the earlier stated asset-light strategy underpinned by stable recurring income from investment properties and fund management.

Sharing risks

Despite undertaking more development projects lately, Mr Liew said the group has reduced its exposure by sharing the risks with joint-venture partners or by undertaking the developments through its private equity funds.

The group has also been collecting a steady stream of recurring income from its funds. Its five Reits, with about $16 billion of assets under management as at June 30, 2008, last year generated $124 million distributions to CapitaLand. In addition CapitaLand Financial produced $70 million earnings before interest and tax last year from managing various funds in the group. CapitaLand's stake in Australand also produced recurring earnings of A$58 million (S$67.5 million) from investment properties in 2007.

Some say CapitaLand has earned handsomely from divesting assets in the past few years but with the choicest ones sold, it may be a tough act to repeat.

Mr Liew acknowledged that the investment sales market will slow down for now and possibly next year, but says the group has in the meantime built up a portfolio of investment and development properties in various private equity funds - including the Raffles City mixed development projects in China and a string of malls across China - and through joint ventures, as in the case of Ion Orchard. 'These were acquired at prices which would still enable us to monetise, at the right time, for good returns to our shareholders,' he added.

Mr Liew also notes that over the past two years, the group has divested more than $9 billion of assets, double the $4 billion it has invested over the same period. 'I want to conserve liquidity. My principle is: If you want to buy $1 of assets, you must give me $2 (of divestments).'

Singapore assets divested in the past 24 months include Hitachi Tower, Chevron House and Temasek Tower. 'On hindsight, we think the divestment of many of our stable assets was nearly perfectly timed. The main point is that we have recycled (capital). We have sold at high prices and bought at low prices. Because of that, every time we do a divestment, we have a gain. It's no point telling shareholders we have divested at a loss. Then you're in trouble. We are always selling at a gain. All of them. I'm quite proud of it.'

Looking back, Mr Liew says CapitaLand has emerged stronger from weathering two crises - the Asian Financial Crisis in 1997 and the prolonged economic slowdown from 2001 to 2003 that took place after the group's formation in 2000 from a merger between Pidemco Land and DBS Land. 'We've emerged as a stronger company, further extended our leadership in the real estate sector and adopted lessons to address this current global financial crisis.'

With its disciplined capital management culture and stronger risk management checks put in place recently, 'we're aggressive in our growth as before and not emotional in divesting our mature properties when return targets are reached, generating liquidity for the next business cycle'. 'This disciplined aggression is the hallmark of our management team,' says Mr Liew.