SINGAPORE (Sept 17): Many analysts and investors seem to be betting that the offer price for Wheelock Properties will be raised. The way they see it, the underlying assets of the company are worth more than the $2.10 per share that its controlling shareholder has offered to pay. As at June 30, Wheelock had a net asset value (NAV) of $2.60 per share, which is 23.8% more than the offer price. And, since the offer was announced, Wheelock’s shares have risen sharply, and are currently trading at $2.15, some 2.4% above the offer price.

Ironically, Wheelock was chafing about a miserly offer six years ago for SC Global Developments, in which it owned a major stake. On Dec 5, 2012, SC Global’s controlling shareholder launched an offer to acquire the company at $1.80 per share. While the offer price for SC Global was more than 15% above its NAV at the time, the company had a large amount of unsold luxury apartments. Wheelock publicly stated at the time that, in its assessment, shares in SC Global were trading at a discount of 40% to 50% to its revalued NAV (RNAV). It also expressed dissatisfaction with the offer by buying SC Global shares in the market at more than the offer price of $1.80 per share.

Yet, Wheelock soon gave in. On Jan 16, 2013, the company said it had accepted the offer of $1.80 per share, and sold its entire 17.9% stake in SC Global, which paved the way for it to be delisted. Wheelock said at the time that it had just won a large residential site in Ang Mo Kio and wanted to focus on that project. But the aborted attempt by Wheelock to extract a higher price for SC Global also came as the government was piling on more cooling measures.

On Jan 12, 2013, only four days before Wheelock said it had thrown in the towel, a raft of new measures took effect. Among them were hikes in the additional buyer’s stamp duty by between five and seven percentage points. ABSD was also imposed on permanent residents (PRs) buying their first residential property and Singaporeans buying their second. Limits on loan-to-value (LTV) ratios were also tightened. One could argue that this round of cooling measures was the straw that broke the back of bullish sentiment in the property market. Private residential property prices began falling in 2H2013, and kept falling for four years.

The backdrop to the current offer for Wheelock is very similar to that when SC Global went private. The offer for Wheelock was unveiled on July 19, only a fortnight after the government shocked the market with its latest round of cooling measures, which sparked a big selloff in property developer stocks. On July 5, the government announced hikes in ABSD for all categories of homebuyers, except Singaporeans and PRs buying their first home. It also said it would tighten LTV limits for mortgages.

Private residential property prices began recovering in the middle of last year, and accelerated strongly in 1H2018. While some market watchers were expecting the pace of these gains to moderate, the government evidently was not in the mood to take any chances. With its latest round of cooling measures, it delivered a clear message: It is determined to keep a lid on property prices.

Despite the chill of these new cooling measures, Wheelock’s shares are still trading above the offer price, and the rate of acceptances has apparently been low. As at Sept 7, the offeror had received valid acceptances equivalent to 1.37% of Wheelock’s total outstanding shares. Prior to the offer, the offeror held 76.21% of Wheelock’s shares.

This brings to mind Wheelock’s participation in an offer for Hotel Properties in April 2014. Wheelock teamed up with Ong Beng Seng and some related parties to inject their combined 41.9% interest in HPL into an entity called 68 Holdings, which then made an offer for the rest of HPL, initially at $3.50 per share. The offer price was later hiked to $4 per share, and then raised again to $4.05. These offer prices were well above HPL’s NAV of $3.09 per share as at March 31, 2014 (after adjusting for the previous year’s dividends).

But they were well below its RNAV, which the independent financial adviser (IFA) appointed for the deal estimated to be between $5.02 and $5.24 per share. The offer also revived long-running speculation in the market that Wheelock and HPL would unlock enormous value by jointly redeveloping their adjacent properties on Orchard Road.

In the end, 68 Holdings only managed to boost its stake in HPL by 14.6 percentage points, to 56.5%. And, four years on, nothing has come of the expected collaboration between Wheelock and HPL. Wheelock owns a 40% stake in 68 Holdings, which gives it an effective 22.5% stake in HPL. Prior to the offer in 2014, it held 20.2% of HPL. From June 26, 2019, Wheelock and Ong will have the right to require 68 Holdings to distribute all its assets in specie. Shares in HPL are now trading at $3.74.

Looking back on this brief history of Wheelock left me scratching my head about a few things: Why do property stocks so often trade at substantial discounts to their NAV and RNAV? And, why do investors spurn offers that present them with a means of getting out at a higher valuation? What can property companies do to improve their valuations in the public? Should any of them even be listed?

The way analysts explain it, companies need to generate consistently high returns on equity in order for their shares to garner high market valuations versus their NAVs. However, traditional property developers have a tendency to report lumpy earnings, and their businesses are quite cyclical. For this group of stocks, NAV and RNAV provide guideposts to their potential long-term value. And, the discounts to which their stocks trade at any given time reflect the confidence the market has in their NAVs or RNAVs being quickly realised.

So, for instance, the strong performance of property stocks in early 2017, which narrowed their discounts to NAV and RNAV, might be attributed to confidence that the property market was recovering. The reduction in seller’s stamp duty in March last year also led to optimism that we had seen the worst of the cooling measures. Conversely, the recent widening of discounts has come amid concerns about rising interest rates and more cooling measures.

Of course, property developers that grow their businesses faster — by launching more projects and achieving strong selling prices — would outperform their peers. But their earnings would still be highly cyclical. Tellingly, real estate investment trusts, which generate more stable earnings than developers, and deliver a significant portion of their total return through cash distributions, tend to trade at much narrower discounts to their NAVs.

Unsatisfactory market valuations and alternative means of raising capital could result in there being fewer property companies listed over time.

Property developers, like most other companies, have traditionally sought public listings in order to cultivate a broad base of investors to support their growth. However, plunging debt costs in the wake of ultra-loose monetary policy since the global financial crisis and the rise of private-equity funding are making it less worthwhile to remain listed. Now, a privately held property company that makes aggressive use of cheap debt funding might be able to outbid public listed players when it comes to acquiring assets, and outrun them when it comes to moving into new fields.

Early this year, Global Logistic Properties was delisted, following a $16 billion privatisation deal involving a consortium of Chinese private- equity players. Last year, Croesus Retail Trust was acquired by <strong>Blackstone Group</strong> at a 20% premium to NAV, after spending more than four years trading well below its NAV in the public market.

Will local property developers who remain listed ever be able to garner valuations that exceed their NAVs and RNAVs? It could happen if there is a strong and sustained rise in property prices, creating an expectation that the NAVs and RNAVs of the developers will also steadily grow. But this seems unlikely, in my view, given the emphasis regulators are now placing on home affordability.

In fact, it could be time for Singapore’s property developers to think carefully about the sustainability of their business models. What service are they really providing to society? Is their business just about capitalising on property booms, and maximising selling prices and rents? How does achieving record selling prices for a luxury condominium enhance Singapore’s long-term competitiveness and economic prospects? Are developers able to provide leadership on the big issues of our times — such as ageing, home affordability, climate change and inequality? In the meantime, I would invest in a local property developer only if its shares were trading at an exceptionally big discount to its NAV and RNAV, and there was some prospect of that value being quickly realised. And, when that value-realising event arrived, I would try to make the most of the opportunity. The fact that other property stocks are still trading at big discounts to their NAVs and RNAVs at that point would be neither here nor there.

Returning to the offer for Wheelock, what should minority investors do? Should they give in, as Wheelock did with SC Global? Or should they hold out for more, as the minorities of HPL did?

My view is that the minority investors should press the offeror to pay a price close to the company’s NAV of $2.60 per share; or at least its RNAV of $2.50 per share (as estimated by the appointed IFA). The reason is that there seems to be little risk in Wheelock’s asset profile — meaning that the offeror has little reason not to pay up, and minority investors who bought the stock prior to the offer being announced have little reason to be in a hurry to get out.

As at June 30, Wheelock had total assets of more than $3.25 billion. More than 90% of this consisted of its local investment properties (namely Wheelock Place and Scotts Square Retail), its stake in 68 Holdings, quoted securities and cash. Its development properties were carried on its books at just $244.6 million. Given the nature of these assets, it seems unfair for minorities to not receive a price close to its NAV or RNAV.

The offer for Wheelock closes on Sept 21 at 5.30pm.

Thinking about the future of property stocks as market awaits better offer for Wheelock

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