Saturday, 27 November 2010

Mergers spice up the property sector,benefits for buyers

By TEE LIN SAY linsay@thestar.com.my



THE property sector has not witnessed more invigorating times than that seen in recent weeks, with the spate of mergers that promises to build large companies with huge market value and even larger land banks.

Starting the siren of mergers in the sector were UEM Land Bhd and Sunrise Bhd, to be followed by Malaysian Resources Corp Bhd and IJM Land Bhd, and Sunrise City Bhd and Sunway Holdings Bhd. The latter two were announced just over the week.

These will result in the creation of three property companies with over US$1bil in market capitalisation each.


In fact, the merged entities of UEM Land-Sunrise (RM9.8bil) and IJM Land-MRCB (RM7.2bil) will have higher capitalisations then property bellwhether SP Setia Bhd (RM5.2bil).

Why the deluge of M&A activities in the sector? Analysts attribute it to a combination of reasons, .

In the cases of Sunrise-UEM Land and MRCB-IJM Land, it is hoped that through these mergers, the government-linked companies (GLCs) can move forward to stamp their mark as regional champions.

What better way is there then to merge with companies which have strong branding, sound delivery and impressive track record? asks an observer.

A Light Rail Transit train passes a construction site in Kuala Lumpur. Potential takeover targets are companies with large land bank in KL. — AFP
 
Another reason for the current consolidation could be players trying to get a bigger slice of land redevelopment projects created by the proposed mass rapid transit (MRT) system.

CIMB research head Terence Wong says the mergers between the GLCs and private companies show that there is a significant push for execution and performance.

From my conversations with property developers over the last two weeks, I have the impression that there is now a greater urgency for M&As. The formation of two large companies from the mergers of UEM Land-Sunrise and IJM Land-MRCB would pose a threat to other smaller companies in that the former will have more resources and liquidity, says Wong.

Terence Wong ... ‘The formation of large companies would post a threat to other smaller companies.’
 
Another benefit for these entities which on a stand-alone basis were not too appealing to foreign investors given their size (or lack of it), would post-merger have the economies of scale to draw these investors' attention, says Prudential Fund Management Bhd fund manager Lee Hwa Seng.

The bigger size of these companies will make them more investable to foreign investors. These companies will now be able to compete with their regional counterparts, he says.

Indeed, as MIDF-Amanah CEO Scott Lim says, Malaysian corporates are entering an interesting phase in the market. For the first time, GLCs are actively looking for expertise from the private sector to ready themselves for the next phase of development.

In Malaysia, all major land banks are government-owned. The reason why private sector companies such as Sunrise and IJM Land are roped in, is because they have the branding and expertise. Hence, what you're seeing now is not just the making of bigger companies, but stronger ones, says Lim.

Lee concurs: If a property company has a good track record but is a small player, it may not be good enough as the company does not have the balance sheet to acquire landbank. On the other hand, what the GLCs may lack in expertise or branding, they make up in landbank and government funds. So the public-private partnership is a formula that should work.

Buy land vs companies

HwangDBS Research analyst Yee Mei Hui makes an interesting point. She says it makes sense for GLCs to buy over property companies rather than land as valuations of these companies are still relatively attractive, whereas land prices have appreciated significantly.

Driving home this point is the fact that property counters are trading at an average of 35% discount to their net asset value (NAV). In fact, most of them are also trading at a discount to their net tangible asset.

Almost all property companies that merge can break up their assets and unlock more value out of their existing land bank, says Wong.

Also over the week, YTL Corp Bhd announced a revamp of its property operations under a proposal to inject all its property development assets and projects into YTL Land & Development Bhd. Yee expects the deal to transform YTL Land from an urban renewal developer in Sentul and Sg Besi to a prime city centre developer in Kuala Lumpur and Singapore.

(YTL Corp has proposed to inject its wholly-owned YTL Westwood Properties Pte Ltd, which owns a parcel of development land at Orchard Boulevard, Singapore and its 70%-owned Lakefront Pte Ltd which owns 13 pieces of land at Sentosa Cove Singapore into YTL Land.)

In Kuala Lumpur, YTL Land owns land in the Kuala Lumpur City Centre, Jalan Bukit Bintang, Jalan U-Thant and Brickfields, which is next to KL Sentral.

So, who's next?

There is expectation that the spate of recent proposed mergers will unleash another slew of merger activities among other industry players to avoid being left behind in the race to be bigger and better. Potential targets, says an analyst, could be those with large prime land bank in Kuala Lumpur with shareholders that hold concentrated stakes. Those who fit these descriptions include Sime Darby Bhd, SP Setia Bhd and other property companies owned by Permodalan Nasional Bhd (PNB).

Lim expect the M&A phase to accelerate over the next few months.

Presently, PNB is the major shareholder of SP Setia with a 32.9% stake. PNB also owns unlisted property assets I&P Bhd, Petaling Garden Bhd and Pelangi Bhd as well as Sime Darby Property Bhd via its 52% stake in Sime Darby. PNB also has a 22% stake in Mah Sing Bhd.

Currently, Sime Darby has one of the largest landbanks in the country. Its subsidiary Sime Darby Property Bhd owns 3,653 ha of development properties in Selangor and Kuala Lumpur. It also has 5,022 ha of development properties in Australia and China.

A merger between Sime Properties and SP Setia will see an even bigger creation than what we've seen so far, says Lim.

As activity heats up in the sector, the guessing game on who will buy who, no doubt, is set to continue.

Property buyers can benefit from M&As

THE REAL ESTATE By ANGIE NG


PROPERTY buyers can hopefully look forward to wider choices, more innovative and quality property products to choose from if the spate of mergers and acquisitions (M&As) involving property companies translate into integration of skills, resources and innovation among industry players.

With more Malaysians turning to property investment these days, it will be welcomed by property buyers if these M&As promote the coming together and fusion of talents and capabilities among industry peers to bring to the market more well-planned and quality projects.

I believe one of the main factors for the sudden urge for developers to want to become part of a bigger entity is the fact that the Federal Government is opening up a number of its prized land bank around Kuala Lumpur and the Klang Valley for redevelopment.

Among the government-owned prime land in Kuala Lumpur and other parts of the Klang Valley are the 50 acres at Jalan Cochrane; 20-30 acres in Ampang Hilir (near KL city centre); and the 3,300 acres of Rubber Research Institute land in Sungai Buloh. Others comprise smaller parcels in Jalan Stonor, Brickfields, and Bukit Ledang (off Jalan Duta).

Notwithstanding the intense competition for the rights to develop these government-owned land, it is important to ensure optimum benefits for the people and country by upholding the utmost transparency through open tenders in the award of the land for development.

For both the public and industry players, the redevelopment of these land offers a huge opportunity to turn around and inject more vibrancy into the city's property landscape. Most importantly, all the attributes should be in place for Kuala Lumpur to be accepted into the list as one of the most livable metropolis in the world.

Kuala Lumpur and the Greater Klang Valley can certainly do with an efficient and well integrated public transportation system; a clean, green and safe environment; and a lively cultural and performing arts scene which are among the missing links in the city today.

The project planning should not be motivated just by profits, but should be demand-driven, and add value to the living, working and leisure environment.

It is imperative that a thorough and in-depth market study be conducted when drawing up the master plan for the redevelopment programme. In the planning and execution of these projects, input from the public, community groups and industry players should be sought and be given due consideration.

There is certainly a shortage of affordable landed housing (priced between RM200,000 and RM300,000) in the Klang Valley today and ensuring more such projects in the new development plans will be a timely gesture to ease the burden of the common folks.

If the implementation of the enlarged Kuala Lumpur master plan is done with best practices and attention to details, the people will be able to enjoy a more holistic and vibrant city. It will also be a boon to property values given the higher value perception bestowed on a Kuala Lumpur address.

With such massive development opportunities opening up, it is no wonder there is this sudden expansion frenzy among industry players.

Since UEM Land Holdings Bhd stated its intention to take over Sunrise Bhd earlier this month, two other mergers involving MRCB and IJM Land, and Sunway Holdings Bhd and Sunway City Bhd have been announced.

The first two mergers involve government-linked entities with private developers while the third involve two sister companies in the Sunway stable. It marks the creation of Malaysian property giants that have the heft and ambition to go regional, if not global.

The merger will boost their land bank, product offerings and expertise to enhance their market position.
With the growing competition, industry players see the need to strengthen their market capitalisation, land bank, geographical presence and expertise.

The marriages of these companies will allow the involved partners to leverage on each other's strengths and ensure better utilisation of resources. They will also create a bigger vehicle with a stronger balance sheet and market capitalisation to undertake bigger projects.

With their enlarged capacities and capabilities, there are better chances of winning bids for larger projects. Of course, all eyes are on the redevelopment of the massive Rubber Research Institute land in Sungai Buloh.

Besides flexing their muscles locally, developers are also seeing the need to venture offshore as the home market, while still robust, has a limit to its growth potential.

Globalisation is taking on a new vigour and there are opportunities for local developers to spread their wings to become international players.

Having a good brand and stronger financial backing and expertise are some of the prerequisites to carve a niche in the international market place.

While there are merits to being big, let's not forget that many conglomerates have failed after they grew too big and clumsy. Most of the time, these gigantic organisations lost track of their business forte and started to diversify into too many non-related activities. So it is important for them to keep level headed and not become arrogant and lose their footing in the process.

Despite the frenzy to go BIG, there is certainly room for the smaller and medium-sized developers which are appreciated for their quality projects, timely delivery and good after-sales service.

Deputy news editor Angie Ng believes industry players who uphold the basic tenet of appreciating and engaging with their customers will survive the good and bad times.