It was all going so well. A little over a year ago, CapitaLand was announcing its first-half results for 2007: S$1.5 billion ($986 million) profit after tax and minority interests, five times higher than the previous year, with an eightfold year-on-year growth in Singapore ebit as luxury development sales hit a record S$5,500 a square foot.
Just seven years after its formation from DBS Land and Pidemco Land, CapitaLand’s real estate and hospitality empire had spread to 120 cities in more than 20 countries. Investors loved it, and investors in its five real estate investment trusts particularly so: CapitaMall Trust was by then up almost 400% since listing, and CapitaCommercial Trust, Singapore’s first commercial Reit, by more than 200%.
It doesn’t look much like that any more. Between November 1, 2007 and October 28, 2008, the stock fell by 71%. The Reits are looking even worse. Ascott Reit, a trust launched in the serviced residence sector, was trading at more than S$2 a share in July 2007 but plunged to 40 cents in October 2008; even after a modest rally it was down 73% from its highs at the time of writing. All emerging markets and property stocks have been punished in the past year but this is extreme by any standards.
But is there anything really wrong with CapitaLand or is it just being oversold? A look at its earnings numbers makes the market reaction seem puzzling. When CapitaLand announced its third-quarter results on October 31, it was able to boast S$1.18 billion in profit after tax and minority interests for the year to date – a big drop on the previous year when S$2.08 billion had been amassed by this stage but sizeable income nevertheless.
The problem is not really the earnings, nor is it just about the outlook for property in CapitaLand’s key markets of Singapore, China and Australia. It’s about the change in attitude towards the whole model that CapitaLand represents.
For years, CapitaLand has won praise for its model and its efficiency. Throughout this decade it has frequently been named as Singapore’s best-managed company by leading magazines. It made itself a player in every stage of the property supply chain: an investor, a developer, an operator, a manager, active in everything from retail to office, residential and hospitality. Crucially, it bolted on property fund management and real estate financial services as a key part of the business. By September 30 this year it had S$24.8 billion of assets under management. Thinking of CapitaLand as just a property developer, and not a financial services group as well, is to miss the point.
In some respects CapitaLand came to resemble the Macquarie model of acquiring assets, putting them into separate trusts, listing some of them (five Reits in CapitaLand’s case, more than any other Asian developer) and keeping others private (of which CapitaLand has 17). Also like Macquarie, it believed in partnership with local experts in unfamiliar markets. CapitaLand’s partnership with Arcapita in Bahrain is an example.
For years it worked like a dream when liquidity was plentiful, debt affordable and asset prices rising. In Singapore it rode the growing sense of optimism that the City State was becoming a big player on the world stage, whether in financial services, luxury living or marquee events such as Formula One. CapitaLand moved into China and Vietnam early, anticipating that those markets would boom. It can justly claim to be the premier shopping mall developer and operator in China.
Investor alarm
Everything that worked in CapitaLand’s favour on the way up is now hurting it. Singapore and China are two of the markets with the biggest headwinds in their property markets. Liquidity has gone and debt, if accessible at all, is more expensive. On top of that, nobody likes leverage or financial services any more. There also appears to be alarm among investors, who feel they cannot quite get a grasp on a complex business that combines property with finance and is exposed to a host of separate satellites. Which is, once again, something it shares with Macquarie.
CapitaLand can point to the fact that its model has worked perfectly well so far, and that if it gets through all of this, it should be well positioned for the next step-up. In written responses to questions about the viability of its model, CapitaLand says: "Reits and private equity real estate funds are central to CapitaLand’s capital efficient business model and recycling of capital. The Reit model is still very much valid. Reits will remain viable and an important asset class as these are tax efficient vehicles for holding real estate on a long term basis."
CapitaLand says Reits have improved the liquidity of large-scale properties, and that even if they can’t make yield-accretive acquisitions in this market, they can still create value through organic growth.
Chairman Richard Hu put it like this in October: "Our model, developed and honed over the years, has allowed us to be very nimble and quick in unlocking value in stable assets and maintaining high liquidity and financial flexibility to take advantage of the market situation. Today, the group has also built up a portfolio of investment and development properties in its various private equity funds and joint ventures. At the right time, they can be monetized for good returns to our shareholders."
That last sentence leads to another point. CapitaLand has made a series of big sales recently whose timing looks to some observers to be a scramble for cash rather than monetizing for good returns at the right time. Foremost among them was the sale of Capital Tower Beijing in September for S$498 million: a landmark property and exactly the sort of place one would expect to retain pride of price in CapitaLand’s burgeoning China portfolio.
"When they start selling assets like that, you have to wonder how badly they need the money," says a fund manager. Earnings from Capital Tower, another property in Singapore, and the injection of four other Chinese properties into one of its own 50% owned private equity funds for $841 million, bolstered the third-quarter results dramatically. They also helped to de-lever the business, which is what every investor wants to see these days. But for someone to sell an iconic property in this environment, surely the situation must be bleak?
