SINGAPORE (Feb 18): As Singapore experiences the effects of the property cooling measures, listed real-estate agency APAC Realty, better known for operating under the ERA franchise, is now looking overseas to diversify from the Singapore property market. In an announcement on Feb 11, APAC Realty showed its intention to expand to Indonesia and Thailand by teaming up with local partners to buy its franchisees in those two markets.

The announcement on Feb 11 came right after rumours of yet another coup in Thailand, ahead of scheduled elections next month. “The Thai property market is very active now; property prices are still cheap for foreigners. We feel that we are able to add value to the property market; if we can open up this new marketing division, we can rake in the profits,” says Jack Chua, CEO of APAC Realty, in an interview with The Edge Singapore.

To be sure, APAC Realty’s move into Thailand and Indonesia is something the company had in mind even before its IPO in September 2017. Expanding overseas was a key growth plan. Last August, APAC Realty announced the move to form ERA Hainan, focusing on China’s southernmost province. For the Hainan joint venture, APAC Realty holds a 40% stake, with two other partners holding 40% and 20% respectively.

APAC Realty has 17,800 agents in 10 countries under its ERA franchise. Currently, ERA Thailand has 395 agents and 35 brokerage offices, while Indonesia has 6,490 agents and 103 brokerage offices — more than Singapore’s 6,912 agents. China, on the other hand, has only one agent and one office currently.

Indonesia listing

The deals to bring back the franchises are not that straightforward. According to Chua, the original franchise owner for Thailand was former prime minister Thaksin Shinawatra, and when he went into exile, there was a management buyout. In Thailand, APAC Realty will be entering into a cooperation agreement with Voradet Sivatachanon, CEO and managing director of ERA Franchise (Thailand).

Two new holding companies will be incorporated: APAC Holding (Thailand) and ERA Holding (Thailand). APAC Realty will hold a 49% stake in both companies, while APAC Holding will own a 51% stake in ERA Holding and Sivatachanon will own a 51% stake in APAC Holding. This gives APAC Realty an effective stake of 73.99% in ERA Thailand, with Sivatachanon holding 26.01%. 

For Indonesia, APAC Realty is entering into a share purchase agreement with local partners that will enable it to circumvent foreign ownership regulations. The two local partners are Darmadi Darmawangsa and Aan Andriani Sutrisno. This agreement allows the company to purchase their shares in Realti Jaya Abadi, which will hold a 99% stake in another holding company, Realti Indo Mandiri, which will own a 99% stake in ERA Indonesia. Darmawangsa will hold the remaining 1% of both holding companies.

APAC Realty will be funding the acquisition of the franchise by its Indonesian partners through a conditional share sale and purchase agreement. The total consideration amount for the proposed acquisition is about $13.8 million. APAC Realty plans to eventually list the Indonesian businesses there, but will keep more than 90% of the equity.

Exporting a model

Under the previous arrangement, APAC Realty could have just continued to collect fees from its Thai and Indonesian franchisees. According to Chua, he chose to acquire and own these operations because he sees significant new earnings growth.

“The property market in Thailand is growing; a lot of foreigners are buying up property in Bangkok. And for project marketing, normally in Thailand, most [developers] have their in-house sales team, or have open listings with an agency; no agency has been appointed as the marketing agency,” says Chua.

For example, APAC Realty has a long-running relationship with Sansiri Public Co, one of the largest Thai developers. So far, APAC Realty has helped Sansiri market 10 projects in Singapore and will help market projects in Bangkok as well. According to Chua, the commission rate for project marketing in Thailand ranges from 3% to 4%, which he says is “quite lucrative”.

“Also, there are many Singaporeans and Chinese who have bought properties in Thailand nearing completion. So, they need to lease or do a sub-sale. I [can tap] the potential of sellers and landlords, so why not take over the company and build on that,” he adds.

Chua, who joined APAC Realty in 1990, sees similarities between Thailand’s property market today and Singapore’s in the 1990s. Back then, Singapore developers began to use property agencies such as ERA to market their projects in a big way. He hopes to repeat this in Thailand. Pacific Star Development, another Singapore-listed developer, has already engaged APAC Realty to market its project in Thailand.

APAC Realty is also planning to introduce the same model in Indonesia. It will buy the ERA franchise from Intiland Development’s founder, Hendro Gondokusumo. The company is hoping to leverage this relationship to enter the primary property market.

Under an agreement with Gondokusumo, ERA Indonesia will be one of the lead marketing agencies for all future projects. Two projects by Intiland have hit the market already. One is 57 Promenade, next to Grand Hyatt hotel in Jakarta, where around 30% of the 240 units launched under the first phase have been sold. In the other project, 60% of the 340 units in the first phase have been sold as well.

According to Chua, even though Gondokusomo owns ERA Indonesia, Intiland has never given it any business. “Traditionally, they had their own marketing agents or they got [a property] consultancy to do the marketing. We will impart our project marketing knowledge to ERA Indonesia and open up a profit centre for them,” says Chua.

The speculative future

As the recent political developments in Thailand have shown, businesses are exposed to uncertainties. Besides Thailand, which is holding elections in March for the first time since May 2014, Indonesia is also voting this year. President Joko Widodo is facing off an old rival, former general Prabowo Subianto, at the ballot box.

Chua is not too worried about political risks in Thailand. He points out that property prices are buoyed by longer-term positive trends. “The property market [in Thailand] is more active because there are a lot of foreign investors. And partly because the property quantum is lower, at US$100,000 [$135,692] to US$150,000,” says Chua. This allows Chinese investors to remit money to pay for the property while not running afoul of the capital control laws.

“We believe the market will still be strong, as seen in the previous election cycles,” says Bernard Lee, senior vice-president of Asia-Pacific development at APAC Realty, in the same interview.

However, the picture is not too clear for Indonesia. Chua admits that the Indonesian property market is seeing a slowdown, partly because of restrictions on foreign ownership of residential properties, compelling foreigners to buy and own indirectly through various vehicles. “People are speculating that after the April election, when things are more settled, the market should pick up. Maybe after the election, the government will open up the market to foreigners. After all, there is a lot of pressure on the government. Once they open up, the market will be better. Generally, the property quantum is still quite low compared with Singapore and China,” he says.

APAC Realty also maintains that the Singapore market remains an active one, despite the slew of cooling measures, including an increase in buyer’s stamp duty last July.

So far this year, APAC Realty has helped launch three projects, and there are more to come. “There are 43 more projects to be launched [this year],” Chua says.

He notes that Thailand and Indonesia, which are already profitable, will help drive APAC Realty’s overall earnings. Last year, ERA Indonesia contributed $150,000 in royalty fees to APAC Realty and netted $500,000 for itself. This does not include the project marketing revenue or profits that were logged under the franchisee rather than the franchise. ERA Thailand is also making money, albeit at a slightly lower quantum, he adds.

This year, ERA Thailand is expected to remain profitable and contribute to APAC Realty’s earnings, although the actual quantum will not be material to APAC Realty’s bottom line.

As for ERA Indonesia, its contribution will depend on when the listing on the second board of the Indonesia Stock Exchange, targeted to be by year-end, can be done. Even so, the contribution will not be material to APAC Realty’s bottom line.

The competition

How does APAC Realty stack up against its listed rival PropNex? In its recent 3QFY2018 results ended Sept 30, it appears that PropNex is edging out APAC Realty. PropNex’s revenue for that period was $124.2 million, a 26% y-o-y rise, and its earnings were $7.2 million, a 41.6% increase. Meanwhile APAC Realty’s revenue grew 8.8% y-o-y to $114 million and earnings rose 18.8% to $6.5 million.

Both counters saw an increase in cost of services in 3QFY2018, with PropNex’s rising 24.1% to $110.5 million and APAC Realty’s growing 9% to $100 million. PropNex’s rise in revenue was driven by an increase in commission income from agency services and project marketing services, owing to the growth in sales force and improved productivity. APAC Realty’s revenue increase was owing to an increase in brokerage income from resale and rental properties, and new home sales.

APAC Realty’s IPO price was 66 cents. It closed at 55 cents on Feb 13, up 24.7% year to date, but down 15.9% since its IPO. As for PropNex, its IPO price was 65 cents. Its shares closed at 55 cents on Feb 13, up 14.6% year to date, but down 15.4% since its IPO. At these prices, APAC Realty is trading at 6.7 times forward earnings and PropNex, 9.7 times.

Analysts appear divided on APAC Realty, with Bloomberg data showing one “buy” and one “hold” call. DBS analyst Ling Lee Keng is more cautious on APAC Realty, with a “hold” recommendation and a price target of 56 cents in a Feb 11 flash note. Ling cites that earnings forecast will be maintained, owing to no immediate impact on earnings from the acquisitions.

“Furthermore, contributions from ERA Indonesia (net profit of $440,000 in FY2017; FY2018 higher with project sales) and ERA Thailand are still relatively small, compared with the Singapore operations,” says Ling.  

This story appears in The Edge Singapore (Issue 869, week of Feb 18) which is on sale now. Subscribe here