Despite the vast sums required to develop edge cities and super blocks, including investment for the necessary macro infrastructure, large developers seem to have little difficulty in raising the necessary capital. As bank funding for large property projects dried up following the Asian financial crisis, developers learned to become adept at self-funding.
“To a large extent it was easy,” says Gordon Benton, senior executive and urban planner for Lippo Karawaci. “We sold 60% of our properties for hard cash before we built. But we also had to come up with extra funds. A lot of that came due to the Lippo name.”
Funding developments through pre-sales, principally of residential units, remains a favoured tactic of large developers. Ayala Land, which is undertaking a major new business and community development in Canlubang in Laguna, south of Manila, is confident it can self-fund almost the entire project.
“It’ll be a phased, horizontal development,” says Jaime Ysmael, senior vice-president and chief finance officer of Ayala Land. “We’re able to pre-sell lots and condominiums with very little borrowing required.”
Land acquisition cost is also a critical factor in the equation that makes for profitable large-scale developments. Ayala Land bought its 1,700 hectares in Canlubang more than 10 years ago, says Ysmael. SM Investments’ eco-tourism project, Hamilo Coast (see main article), will also benefit from the low cost of the acquired land bank, as Jess Lucas, executive vice-president, real property, at SM Investments, explains. “If you’ve invested in land way back, you have a low average acquisition cost and that helps,” he says. “But not everyone is big enough to do these projects.”
Shui On benefits from having been an early and committed real estate development partner of local Chinese governments, particularly in Shanghai. “In Taipingqiao, we don’t have to pay the government for the land until we start to develop it,” says Vincent Lo, founder, chairman and CEO of Shui On. “Right now, there are so many funds out there, getting money isn’t too difficult.”
These large developers also benefit from the cashflow generated by sizeable retail malls and other operating businesses such as hospitals and hotels. With increasing capital demands for new and ever larger projects, the opportunity to recycle these assets through Reit structures is an appealing opportunity for some.
“We’re putting three of our hospitals and a hotel into a Reit to be listed in Singapore,” says Hendra Sugandi, director of Lippo Karawaci. “It’ll be called First Reit – the first Indonesian Reit and the first healthcare Reit. We’re on an investor roadshow at the moment.”
Hendra sees Reits as a major strategic direction for the group. “In future, Lippo Karawaci will be a combination of traditional town developments as well as developing assets for recurrent revenues – hospitals, malls,” he says. “We want to be a Reit promoter as well as a traditional developer. We’ll recycle the capital [through Reits] and reinvest.”
Ayala Land’s Ysmael admits to being tempted by Reit projects, but has no detailed plans for any yet.
“You can do cross-border Reits in the Philippines now,” he says, “but there’s a lot of additional costs with a cross-border Reit – hedging and so on. It’s an option for us. We’re talking to CapitaMall Trust [a leading Singapore mall Reit] but we don’t have immediate plans yet.”
One firm that is against using Reits for now is Shui On. Vincent Lo believes that given the growth prospects for the China property market, his investors would rather he continues developing than create Reits.
“As it is, I don’t think that Reits are that attractive,” says Lo. “I’m not sure if people would be happy having a small income. They’re more interested in creating more value. Maybe in due course we’ll think about it.”
Asia’s property pioneers are not in need of capital anyhow. SM Investments raised $530 million from its IPO in 2005, while in October this year Shui On raised $873 million from an IPO in Hong Kong. Ayala Land is part of the Ayala Group, a cash-rich Philippine conglomerate. Lippo Karawaci is controlled by the Lippo Group, a major Indonesian conglomerate.
