(Oct 23): Property developers often report lumpy earnings and erratic return on equity, and their shares tend to advance in fits and starts. Even over three-year periods, their annualised total return, net profit growth and ROE can be quite volatile.

This year, the property developer that garnered the highest overall score was Yanlord Land Group, a China-based developer. Its shares delivered the highest annualised return by a long way for the three years to March 31, 2017. It also chalked up relatively strong net profit growth and weighted ROE over the last three years, though the difference between what it achieved versus the top performers on each of these metrics was very wide.

Hongkong Land Holdings had the second-highest overall score, though it did not rank any better than third place on any of the three metrics. GuocoLand was in third position overall, as a result of having the strongest net profit growth by a long way and the second-highest weighted ROE, which compensated for its relatively weak stock return. Oxley Holdings, which had the highest overall score last year, was in fourth position this time around. It had the highest weighted ROE by a long way, and the second-highest net profit growth, but well short of what GuocoLand achieved.

Looking past their volatile financial metrics, it is clear that most of these companies have made big strides over the years. For instance, Yanlord’s earnings have increased several times over since its IPO in Singapore in 2006. For FY2006, the Chinese developer reported a net profit of $170.7 million. For FY2016, it posted earnings of almost RMB2.7 billion ($556 million). In fact, its earnings for the year were 86% higher than for FY2015. And, this was despite the cooling measures imposed by the Chinese government and concerns about an oversupply of property in the Chinese market.

One reason for Yanlord’s strong performance is that it has been developing properties in cities and districts where supply is in deficit. These include Shanghai as well as Nanjing and Suzhou. The company also has projects in Zhuhai, Shenzhen, Chengdu, Tianjin and Tangshan. In 2010, Yanlord acquired land in Sanya, Hainan, where it is developing the 408-room Crowne Plaza Hotel.

Last year, owing to the dearth of land parcels in Yanlord’s key cities, it started collaborating with other developers. Riverbay Gardens in Suzhou, Yanlord Centre and Yanlord Landmark in Shenzhen as well as Nanjing Daji Land Parcels were projects in which the company took a controlling stake with partners. It has also acquired equity stakes in companies with development sites in Nanjing and Tianjin.

Yanlord continued to report strong growth this year. For 1HFY2017, it posted a 3.3% y-o-y rise in revenue to RMB10.598 billion, on higher average selling prices and increased car-park sales in the period. Its earnings more than doubled to almost RMB1.4 billion on a sharp improvement in gross margins. The developer has pre-sold more than RMB27.8 billion of property, which it has yet to recognise as revenue. The monies received of RMB23.2 billion are in escrow accounts. This year, Yanlord Land expects the completion of a smattering of investment properties. Besides the opening of the hotel in Sanya, Yanlord will also open the Riverside Plaza Phase 2 in Tianjin, with 42,000 sq m of office space.

In Singapore, Yanlord bid unsuccessfully for the Central Boulevard site, which was awarded to IOI Properties Group. It also partnered with Capita- Land in an unsuccessful bid for the Bidadari site, which was clinched by Singapore Press Holdings and Kajima. Its most audacious move was to form a joint venture with Perennial Real Estate Holdings to buy a 33.4% stake in United Engineers from Oversea-Chinese Banking Corp and Great Eastern Holdings. As at June 30, Yanlord’s net asset value (NAV) stood at RMB10.66 a share.

Revaluations lift Hongkong Land
The story at Hongkong Land is somewhat different. A subsidiary of Jardine Strategic Holdings, the developer is synonymous with the choicest office buildings in Hong Kong and Singapore. For instance, it owns 100% of Exchange Square in Hong Kong and a one-third stake in One Raffles Quay in Singapore and all three towers of Marina Bay Financial Centre. The company also has a 50% share in the upcoming World Trade Centre complex in Jakarta.

As at Dec 31, 2016, Hongkong Land had investment properties worth more than US$27.7 billion ($37.5 billion) on its books, up from almost US$24.6 billion at the end of the previous year. For FY2016, the company booked a revaluation gain of more than $2.5 billion. The revaluation gain caused earnings to rise 66% y-o-y to more than US$3.3 billion. However, underlying operating profit fell 4.6% to nearly US$1.2 billion and underlying net profit was 6.5% lower at US$848 million.

Hongkong Land’s underlying profitability appears to be improving. For 1HFY2017, its underlying profit rose 32% y-o-y to US$517 million. As at June 30, Hongkong Land’s NAV stood at US$14.54 a share, up 9% y-o-y. Meanwhile, the company is undertaking more projects. In June this year, IOI Properties roped in Hongkong Land to take a 50% stake in the Central Boulevard site that it won in a tender. In 2016, IOI Properties paid $2.57 billion, or $1,689 psf per plot ratio (ppr), for the 1.1ha site. The partners are likely to develop the site into two office towers with about 1.26 million sq ft of leasable space and a small retail podium of about 30,000 sq ft. Hongkong Land will need to cough up around $300 million in capital expenditure for its share of the Central Boulevard development.

GuocoLand’s earnings surge
Much of the strong growth in net profit at GuocoLand actually took place during its financial year to June 30, 2016. For the period, the company posted a net profit of $607 million versus $226 million for FY2015. This steep increase was mainly owing to a gain from the company’s disposal of Dongzhimen, a troubled, mixed-use development in Beijing that had been weighed down by litigation for seven years. In June 2015, the Hainan High Court ruled in favour of GuocoLand and restored ownership of the development to the company. Dongzhimen was sold for RMB10.5 bil lion in August 2015, for a gain of RMB1.58 billion.

For FY2017 ended June 30, GuocoLand’s earnings were boosted by the fair-value gain on Tanjong Pagar Centre. That lifted the book value of the company’s investment properties to $3 billion. During FY2017, GuocoLand also managed to sell Leedon Residences. It has also been collecting progressive payments for Martin Modern, which is now largely sold. In the meantime, GuocoLand has splashed out on a site on Beach Road with its sister company Guoco Group. Together, they are spending $1.62 billion for a 21,026.9 sq m site that can be developed into an office building with gross floor area of 950,247 sq ft.

Oxley maintains high ROE
As for Oxley, one key reason the company has managed to maintain the highest ROE in the sector is because of its relatively high debt load. However, its gearing has been gradually declining — from 6.4 times as at June 2012 to 1.9 times as at June 2017. The developer managed to report positive operating cash-flow figures for the past two financial years. Now, UOB Kay Hian is expecting gearing to fall further to 1.35 times by 2020 as its debt gets paid down with cash inflow from the handover of units at Royal Wharf in London. “In the next 12 months, we expect some $1.12 billion out of $2.46 billion in unbilled contracts for development properties to obtain temporary occupation permits and handover,” UOB Kay Hian says.

In the meantime, Oxley is acquiring more development sites in Singapore. Oxley also owns a 27.5% stake in a couple of parcels of land in Gaobeidian, a county in China’s Hebei province. Gaobeidian lies between Beijing and Xiongan, an area that is to be turned into a special economic zone to rival Shenzhen and Pudong. In a recent interview, Ching Chiat Kwong, chairman and CEO of Oxley, says Oxley’s share of the profit from the project will be $1 billion. The consortium is planning 18,000 units in the first phase to be launched by year-end.