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Can real estate bring about world peace?

TES Capital
TES Capital • 9 min read
Can real estate bring about world peace?
SINGAPORE (June 25): At a rather rambling press briefing given by US President Donald Trump after his summit with North Korean leader Kim Jong-un, one sector stood out: real estate. “They have great beaches. You see that whenever they are exploding the
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SINGAPORE (June 25): At a rather rambling press briefing given by US President Donald Trump after his summit with North Korean leader Kim Jong-un, one sector stood out: real estate. “They have great beaches. You see that whenever they are exploding the cannons in the ocean. I said — look at that view. That would make a great condo. I said — instead of doing that, you could have the best hotels in the world. Think of it from the real estate perspective. South Korea and China, and they own the land in the middle,” Trump said. Was he trying to divine the future? Could North Korea have valuable real estate one day, like its respective southern and eastern neighbours, South Korea and China?

China is the world’s second-largest economy, snapping at the heels of the US, and forecast to overtake it in the next five to 10 years.

South Korean real estate is interesting. According to DWS (formerly Deutsche Asset Management), the aggregate size of invested real estate stock value in the country was US$249 billion in 2016, the fifth-largest in Asia-Pacific after China, Japan, Australia and Hong Kong. The size of Grade A office stock in Seoul is around 6.3 million sq m, or in fifth position in Asia after Shanghai, Hong Kong, Tokyo and Beijing as at December 2017. Real estate assets held by real estate investment trusts (REITs)
and funds stood at KRW62 trillion ($76 billion) as at end-2017. Of these assets, only KRW900 billion was held by listed REITs and public funds.

Global investors continue to be interested in Asia-Pacific properties, including those in South Korea. The 12-month rolling transaction volume up until 3Q2017 reached US$161 billion ($218 billion). Volume growth was driven by Singapore (54%), Hong Kong (41%), China (25%) and South Korea (12%).

Nearer to home, the real winner of the summit was probably Singapore’s real estate. Marina Bay Sands, Sentosa and Orchard Road are tourist hotspots. The Singapore government spent $20 million on the summit. Visuals and videos of MBS and Sands SkyPark, Capella Singapore and Sentosa looking very lush and green, as well as St Regis Singapore, South Beach and Shangri-La Singapore were shown to a global audience.

The real estate on display clearly impressed the North Korean leader. On June 11, Kim reportedly had a good time at MBS, owned by Las Vegas Sands. The major shareholder of LVS, Sheldon Adelson, is a close friend of Trump’s. MBS’ three towers and Skypark define the Singapore skyline. As at Dec 31, 2017, data from LVS’ annual report showed that MBS was valued at US$5.054 billion.

MBS has about 2,600 rooms and suites in three 55-storey hotel towers. Atop the towers is the Sands SkyPark, an outdoor area that houses a 150m infinity swimming pool, restaurants and nightspots. Images of a smiling Kim having fun at Sands SkyPark were beamed across the world.

The casino at MBS has 605 table games and 2,500 slot machines; LVS has a 30-year casino concession to operate it.

The Shoppes at MBS is a retail mall. After staying flat for the first three quarters of FY2016 at US$163 million, MBS’ trailing 12 months mall revenue inched up in the final quarter to US$165 million, where it stayed until 2QFY2017. It dipped to US$164 million the following quarter, rebounded to US$165 million in the next and hit US$171 million in 1QFY2018, a 3.6% y-o-y rise.

Based on LVS’ 1QFY2018 results for The
Shoppes, the drought in local retail sales may be near an end.

MBS reported property earnings before interest, taxes, depreciation and amortisation (Ebitda) of US$541 million for 1QFY2018, up 48% y-o-y and 18% q-o-q. The Singapore operations contributed to 36% of LVS’ consolidated property Ebitda during 1QFY2018. Macau was the largest contributor at 56% of Ebitda; the US was the smallest at 11%. LVS is listed on the New York Stock Exchange. Its 1QFY2018 adjusted property-level Ebitda of US$1.5 billion was 17% ahead of market consensus forecast.

Other properties in the spotlight

Kim stayed at the 299-bedroom St Regis Singapore, which is 33.33%-owned by City Deve­lopments (CDL). St Regis sits on a 999-year leasehold site, which is as good as freehold.

The White House press corps stayed at the JW Marriott Singapore South Beach. The development comprises a 634-room hotel and a 47,151 sq m office tower with 2,915 sq m of retail space. It was completed in 2015 after a tumultuous eight years in the midst of the global financial crisis. Initially, in 2007, three investors — CDL, El-Ad Group and Dubai World — took an equal share in the development. Subsequently, as the GFC took its toll, CDL bought out El-Ad’s and Dubai World’s shares. In 2011, IOI Properties acquired a 49.9% stake, leaving CDL with 50.1%.

Based on the valuation of Suntec REIT’s office space at Marina Bay Financial Centre of $2,927 psf and its retail space of $2,482 psf, South Beach could be valued as high as $1.6 billion. CDL is not known for retail mall management. Suntec REIT’s manager, on the other hand, has done a very good job with Suntec City Mall under its CEO Chan Kong Leong.

Assuming a valuation of $1.4 million per key (based on the valuation of InterContinental Singapore, owned by Frasers Hospitality
Trust, at $1.32 million per key), JW Marriott
Singapore South Beach would be valued around $900 million.

More interestingly, CDL is planning to launch its 190-unit luxury South Beach Residences this year. The saleable area is about 346,000 sq ft. Depending on pricing, this development could bring in revenue of more than $500 million for CDL’s 50.1% stake.

The US presidential delegation stayed at Shangri-La Hotel Singapore, owned by Shangri-La Asia. On June 19, OCBC Investment Research initiated coverage on Shangri-La Asia. Singapore’s hotel revenues contributed just 9.1% to Shangri-La Asia’s hotel revenues. OCBC sees China as Shangri-La Asia’s growth proposition. The hospitality sector is cyclical. It takes three to five years to develop a hotel, and the current demand-supply situation is likely to lead to a recovery in revenue per available room, or RevPAR, for several years, OCBC says. It has a HK$21.05 target for Shangri-La Asia, which last traded at HK$16.48.

Can Sentosa Cove recover?

A global audience had — through cameras — a ringside view of Capella Singapore and Sentosa. (Capella Singapore is owned by Pontiac Land.) Whether the glimpse afforded will attract the wealthy to Sentosa Cove — an enclave designed for the global rich — remains to be seen.

Interest in properties at Sentosa Cove remains low despite a recovery in the rest of Singapore. Part of the popularity of the area during the years leading up to 2012 was attributed to the Financial Investor Scheme. The FIS was introduced in 2004 to allow foreigners with a global net worth of $20 million to gain Singapore permanent resident status if they parked at least $5 million in the city state, of which $2 million could be put into property. In 2010, the minimum investment sum was doubled to $10 million. The scheme was terminated in 2012.

Sentosa Cove continues to be negatively affected by a few drawbacks. It continues to be an investment market, as demand from end users such as families remains low. It is inconvenient travelling to and from Sentosa as part of a daily commute (which is probably what made the island an attractive venue for the summit.) Land tenure is 99 years. Amenities, including healthcare and education, are not easily accessible. In addition, foreigners need to fork out a 15% additional buyer’s stamp duty, making the purchase cost of Sentosa Cove properties very high.

As gleaned from URA data, the median price of transactions in Sentosa Cove rose slightly from $1,479 psf in 1QFY2016 to $1,563 psf in 1QFY2018.

Ho Bee Land stands to benefit if Sentosa Cove attracts global attention. It has some $800 million to $900 million worth of unsold properties there. The developer is also looking elsewhere for earnings. On June 17, Ho Bee Land announced it had bought Ropemaker Place at 25 Ropemaker Street in London for £650 million (approximately $1.16 billion), taking its total investment in the cosmopolitan city to $2.6 billion.

CDL has a 42% stake in Quayside Collection, which comprises W Singapore — Sentosa Cove (a five-star hotel), Quayside Isle (a retail development) and apartments of The Residences at W Singapore. Quayside Collection is the focus of a unique investment platform devised by CDL called Profit Participating Security, which matures next year in December. A base price of $2,400 psf for units at The Residences at W Singapore is a major part of the valuation of the PPS.

Singapore property on recovery path

Maybank Kim Eng has a “buy” recommendation on CDL. The broker points out the disconnect between physical property prices and property stocks. In a report dated June 20, Maybank KE says home prices have rebounded 7% so far this year. However, property stocks have fallen 4% on average. CDL’s share price has fallen 10% since the start of the year, and 15% from its high.

“With the demand-supply outlook still supportive of a housing recovery, we see this divergence as an opportunity to raise sector exposure,” the report says. Maybank KE forecasts an annual net supply of 5,300 units for the 2018 to 2020 period. This is lower than the market’s long-term average absorption of 11,400 units a year. “Furthermore, replacement demand from the 6,000+ households displaced by en bloc deals announced since 2017 will soak up a large part of this supply,” Maybank KE adds.

LVS — the other beneficiary of the summit — has also garnered positive ratings from analysts. Stifel Research says, “LVS’ 1QFY2018 operating results further support our view that the shares are a must-own for every consumer investor.” Stifel cites the continued growth of LVS’ Macau properties in the near term as the basis of its conviction. For the long term too, LVS is banking on its Macau properties. It sees China’s Greater Bay Area as the next growth region, along with China’s outbound tourists. In its 1QFY2018 presentation, it had several slides focused on the GBA and the continued integration of cities in the Pearl River Delta.

As for the summit, it is too early to tell whether real estate can bring about world peace. But it has certainly put Singapore property in the limelight.

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