Singapore’s first listed hybrid real estate investment manager, CapitaLand Investment (CLI) has risen from a pro forma net asset value (NAV) of $2.93 as at June 30 to more than $3.52 as at Sept 29.
CapitaLand shareholders were given one CLI share at an NAV of just $2.83. Now, CLI’s market cap — excluding the development business which is in Capitaland Development (CLD) — is $17 billion. CLI shares are trading at around a price to net asset value ratio (P/NAV) of 1.2 times. Based on FY2020 pro forma numbers, its EV/Ebitda is at around 19 times, which is the same value that ESR Cayman is paying for ARA Asset Management.
CLI shareholders own a company with stakes in real assets including REITs and funds. Furthermore, CLI has taken on expertise to move into alternative assets and private equity. CLI is likely to take smaller stakes in these new funds than it has done previously so returns on investment (ROI) and returns on equity (ROE) can be higher.
On Sept 20, CLI announced the appointment of Simon Treacy as CEO of its private equity real estate (PERE) segment. Although Covid negatively impacted PERE deal flow with the total number of transactions falling by 39% y-o-y in 2020, PERE deal activity grew by a 10-year CAGR of 10% from 2009 to 2019.
The move by the original CapitaLand to kickstart a REIM has yet to encourage other developers to move down this road. But if CapitaLand’s restructuring into a REIM does start a trend, who would be the ideal candidates?
Many developers trade at significant P/NAV discounts (see Table 1). We have termed some of these investments as value traps, where investors are stuck in the stocks which trade perennially at significant P/NAVs.
The next REIM would need to have a sizeable investment property portfolio it can securitise as well as a development property portfolio that can be financialised into private equity funds. The best candidates with the balance sheets to support a REIM/fund management model are in Table 2.
The glaring standouts are Hongkong Land Holdings and Frasers Property (FPL). Hongkong Land holds US$28 billion ($38 billion) of prime commercial real estate in the heart of Central, Hong Kong. In addition, Hongkong Land owns a one-third stake in One Raffles Quay and Marina Bay Financial Centre (which comprises three office towers). These are valued at around $4.2 billion in peer annual reports. Securitisation of part or all of this portfolio would immediately narrow the perennially wide P/NAV discount.
Hongkong Land’s Singapore and Hong Kong office portfolios are arguably the most prime properties in the most prime locations in their respective cities to the extent they can be classified as trophy assets. These portfolios could easily be securitised into a REIT or a property fund or trust or another vehicle that would undoubtedly attract global investors. Surely the future of finance in Asia runs through these two cities.
Other likely candidates
FPL has a different offering. Its property portfolio of $33 billion, according to its FY2020 annual report, comprises logistics assets valued at $7.5 billion or 23%, business parks and commercial ($6.9 billion or 21%), retail ($7 billion or 21%), hospitality ($5 billion or 15%) and development properties of $6.6 billion or 20% of the portfolio. Its retail properties are resilient suburban malls and its logistics properties are seen as assets belonging to the new economy these days.
In terms of geography, FPL is exposed to Singapore (39%), Australia (23%), Thailand (14%), UK (10%), Europe (9%) and with China and other countries comprising the remaining amount. In FY2020 ended Sept 30, 2020, FPL recorded fee and other income of $84 million, which is barely 0.25% of its asset size.
If FPL is able to develop its industrial portfolio of warehouses through funds in the same way that LOGOS, ESR Cayman and Global Logistic Properties does, it could rapidly expand its funds under management. Excluding its development properties, FPL has around $27 billion in assets under management (AUM). If FPL kept its investments in its REITs to 20% to 30% and recycled capital into new funds and joint ventures, its fees could quadruple to a few hundred million.
“The group has a large REIT management role together with a large property development division. It may likely face similar restructuring drivers as CapitaLand and Keppel Group, in our view,” suggests Maybank-Kim Eng (MBKE) in a recent report, referring to FPL.
The MBKE report also points out that the largest M&A deals this year in Singapore were in real estate. First off is the acquisition of ARA Asset Management by ESR Cayman. Initially, the deal was valued at US$5.2 billion in a mainly share transaction. According to MBKE, that valuation has fallen to US$4.8 billion.
Elsewhere, Keppel Corp is acquiring the non-media assets — once again mainly property — from Singapore Press Holdings. The combination would result in AUM of $50 billion under Keppel Capital, Keppel Corp’s management indicated. Keppel Capital could easily stand on its own as a listed company. The $50 billion AUM isn’t static; it is set to grow.
When ARA was listed in 2007, its AUM was between $10 billion and $12 billion, which quickly grew to over $20 billion. When it was privatised in 2016, its AUM was over $30 billion. Therefore, a Keppel Capital listing is not likely to be out of the ordinary.
During a results briefing on Aug 12, group CEO of UOL Group, Liam Wee Sin said it is premature to look at fund management but he is studying what is “best use” for the various assets. UOL has investment properties valued at $11.3 billion, which are retail, office and hospitality. While UOL has no plans to securitise these assets in a REIT, such an endeavour would result in one of Singapore’s largest REITs.
Perhaps in the future, the group as a whole may consider the financialisation of its real estate. Jonathan Eu, the CEO of Singapore Land Group, UOL’s subsidiary, is young, forward-looking and in an interview earlier this year, spoke admiringly of the CLI model. He also did not rule out a REIT platform.
Guocoland could be the closest to narrowing the P/NAV discount. Guoco Tower is likely to have stabilised and could easily be securitised. Guocoland has a Bursa-listed ready REIT, Tower REIT that owns commercial buildings and could accommodate Guoco Tower. Additionally, Tower REIT could seek a secondary listing on the Singapore Exchange because Guoco Tower would be the main asset if it were to be acquired by the REIT.
The case for a REIM
According to an industry overview in CLI’s circular, a REIM generally involves the management of real estate investments by third-party managers on behalf of investors. The REIM global business has been growing steadily at a CAGR of approximately 13% from 2015 to 2020. As of 2020, the total value of real estate AUM worldwide was estimated at US$4.1 trillion based on data in the ANREV, INREV and NCREIF Fund Manager Survey 2021.
Based on the CLI circular, the REIMs’ CAGR growth is a result of an increased pool of savings and pension assets being invested in real estate. In addition, the general increase of liquidity in the market given easy monetary policies adopted by governments, coupled with investors allocating more to real estate as a long-term investment asset class, continues to fuel overall real estate assets under management growth globally.
While REIMs offer a wide range of fund products across geographies and asset classes, the most popular assets are logistics assets, data centres and multi-family properties, say property investment managers The Edge Singapore spoke to.
REIMs are flexible in the funds they manage. These can be listed REITs, open-end or closed-end private funds, In return for managing these funds, REIMs earn management fees. REIMs can also manage a property development or investment through club deals, co-investments, joint ventures, and partnerships. Such deals generally involve the real estate investment manager investing alongside a handful of capital partners, with the real estate investment manager earning a fee for managing the assets.
For instance, CapitaLand invested in and managed joint ventures. These include a couple of its Raffles City portfolios in China, where CapitaLand had one or two partners. Going forward, based on its recruitment and focus on PERE, CLI is likely to take smaller stakes in the PEREs it manages, rapidly increasing AUM and possibly driving ROE.
Mid and small developers
For small-cap developers, the best route is either to continue trading at these large discounts to NAV or go down the path of Roxy-Pacific Holdings and privatise. In the past, developers trading a hefty P/NAV discounts such as Wheelock Properties and SC Global Development have gone down this road.
Companies with major shareholders owning stakes of 70% or more and which are trading at discounts of more than 50% to their NAV may take this route but investors could have a long wait (or maybe never) before their investment reaped gains.
For instance, Bonvests Holdings is quite static, as is Hong Fok Corp. A few years ago, analysts thought Heeton Holdings could privatise. Instead, it announced a rights issue. A couple of months ago, one of the local brokers attempted to drum up interest in Far East Orchard, which rose for a day, then settled into its normal P/NAV mean.
No surprise then, that many of these small developers with hefty P/NAV discounts are seen as value traps (see Table 1).