Wednesday, February 27, 2008

CapitaLand's Strategy Hints At Outlook For Residential Market

Source : The Business Times, February 27, 2008

THE property market is getting round to the idea that there won't be much good news in the first half of 2008. However, while many property developers including CapitaLand are content to say that they are cautiously optimistic about the second half of the year, actions seem to tell a different story.

CapitaLand, one of Asia's biggest real estate developers, kicked off the year with several interesting moves that suggest it is looking for other sources of revenue, rather than depend on its main income generator - residential sales.

The first was its $990 million offer for the 33.5 per cent stake in Ascott that it did not already hold.

While M&A activity is quite common in periods of market volatility, with many companies trading below NAV, CapitaLand's offer for Ascott, which will result in it being taken private, can only mean one thing - that it intends to grow its serviced residence business much more aggressively, and perhaps in more frontier markets like Russia and Kazakhstan.

Ascott is already the biggest operator of serviced residences in Europe and Asia, providing stable recurring income for the group. And CapitaLand's serviced residence unit did grow its business in 2007, with Ebit for FY07 jumping 66.5 per cent to $337.2 million year on year.

Some analysts have even suggested that CapitaLand could park some of its China properties in Ascott. How this will work, given that most of CapitaLand's pipeline is in residential properties, and China's increasingly stringent property guidelines, will need to be figured out first though. Still, it does suggest that some analysts feel CapitaLand may somehow have to deal with its huge residential landbank in China.

To date, CapitaLand's pipeline of residential projects in China is around 35,000 homes. Tellingly, it only expects to launch 2,000 units in 2008.

China's booming economy has been a boon to CapitaLand's coffers in the past years, but the Chinese government's efforts to cool the property market - the more recent being the implementation of property tax - appear to have had some effect.

While it is difficult to read the Chinese property market, a Citigroup report notes that recent government directives suggest that the housing demand of the low-income group is to be satisfied by public rental housing and some economic housing, while the demand of the middle-income group is to be satisfied by capped-price projects and economic rental housing, with housing for the higher-income group left to the market.

Even in Singapore, where residential sales have helped CapitaLand achieve record profits in 2007, robust home sales are no longer a certainty, a fact underscored by the number of units it expects to launch this year (800-1,000) compared to the number of units it has in the pipeline (3,500-4,000).

To be sure, CapitaLand did say at a recent press briefing that it was not 'de-emphasising' its residential business. But it did choose to announce that it would establish a new unit to generate more business in the Asian industrial and logistics sector at the same time.

The move is prudent, given that the logistics sector in India and China is set to grow, even if the global economy slows down - thanks to the growing appetite of consumers there. So while exports from China to the West may slow down, internal exports within India and China will drive the need for internal logistics facilities.

Again, a stable source of recurring rental income seems to be the objective here. And coupled with the possibility of a pan-Asian industrial and logistics Reit, there could also be more manager's fees to collect.

For good measure, Reits were also given a plug as a logical 'defensive' play in volatile times at the press briefing.

All this, plus CapitaLand's recent bond issue of $1.3 billion - which cannot possibly be for the purposes of building its residential landbank - does seem to suggest that CapitaLand is planning to nimbly sidestep any possible downturn in the residential sector.

This in itself does not say much except reinforce the standing of the company's business acumen - unless, of course, if you are thinking of buying a home yourself. In which case, you should probably be cautious too.

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