Property developer’s project in Marina Bay set to become signature point of Singapore
THERE are stocks that do defy market sentiment. In times when the outlook of a particular sector is bearish, there will be a small number of standouts that seem to go against the grain.
One such company in the property sector is IOI PROPERTIES GROUP BHD (IOI Prop). The stock, which has seen a bit of a correction of late, has been on a general uptrend for more than a year.
It is the largest property stock in terms of market capitalisation and profitability and its good ride has seen it joining a list of companies waiting to be included into the FTSE Bursa Malaysia KLCI.
One of the reasons for its large profit is the diversity of its business. Projects in China and Singapore stand out in terms of driving earnings which the company says were responsible for both an increase in revenue and operating profit.
That diversity is also a plus when mitigating a slowdown in the real estate business in Malaysia, which the company says is expected to consolidate. It remains positive on the prospects of its property development projects in Xiamen and Singapore.
It was however in Singapore where the company made big news of late. IOI Prop won a tender just over a month ago to buy 2.69 acres of leasehold land at Central Boulevard in the Marina Bay area for S$2.57bil (RM7.77bil).
The purchase raised concerns over the increase in debt the company would need to take on to construct the project but that has been mitigated somewhat by a cash call it made in November where it would sell one new share for every four shares held by its shareholders. The rights issue will raise RM1.52bil and will go towards defraying the cost of purchasing the land.
For IOI Prop, the acquisition was a golden opportunity to expand its business in Singapore.
“The site is a highly-prized land parcel in Singapore with seven bidders comprising both local Singapore and several consortium of foreign international developers vying for the prime land. It has been eight years since a white site has been sold in Marina Bay by URA (Urban Redevelopment Agency). It is all about the location.
“The land parcel is strategically located within two prominent frontages along Central Boulevard and Raffles Quay-Shenton Way in a premier financial and business district.
“Occupying the corner at the junction, the site has a prominent location and is set to become the signature focal point of the city. The development is the group’s maiden office development within the Marina Bay/Shenton way CBD,” says IOI Prop general manager Lee Yean Pin, who is the head of its Singapore business unit.
She says the land parcel that IOI Prop will purchase will become a choice location for major financial institutions and multinational corporations to the Marina Bay financial district that is next to the established Raffles Quay/Shenton Way central business district (CBD).
“With the success of the group’s South Beach development, we are confident that the new development in this highly-desirable location will be an iconic and prime landmark in Central Boulevard, joining the ranks of the prestigious commercial development within Marina Bay and Singapore CBD,” she says.
The Singapore real estate market has been going through a correction after the Government put the brakes on escalating property prices a few years ago. Coupled with a slowdown in the global economy, there is ample office space available to companies on the island.
“The office market, like any other property segment in Singapore, is under pressure from the current global economic meltdown. Prime office rents have declined and an over-supply market is not helping,” says SLP International Property Consultants Pte Ltd executive director David Neubronner.
He points out that IOI Prop has a few projects in Singapore, which are mainly residential developments.
“Sales of IOI residential projects in Singapore are in line with local market sentiments. Mass and city fringe projects like Triling and Cityscape have enjoyed some success while the high-end developments like Seacape and Cape Royale have suffered like all luxury developments in Singapore. This is due to draconian tax structures and borrowings imposed by the local government on foreigners and investors.
“For the record, the unsold residential units may be a blessing in disguise given the rapid appreciation of the Singapore dollar against the ringgit in recent years,” Neubronner says.
But for the office space, he says IOI is capitalising on a window opportunity, not in terms of capital value but in the supply cycle anticipated in the period 2019 to 2021 when the new office block is expected to be completed.
Lee concurs by acknowledging the oversupply in the office market in Singapore but adds the group is taking a long-term view on the potential of riding the expected market recovery and the development’s positive contribution to revenue.
“The Singapore government has managed to transform the economy. Singapore is no longer just a regional financial centre. It has also done well attracting renowned companies to set up large regional HQ like Google and Facebook. The group’s current South Beach Office Tower is enjoying almost full occupancy with multinational tenants including Facebook, Rabobank, Lego amongst other notable international brands,” she says.
“The current supply of completed offices will be tapering off from 2018. With the anticipated completion of the development in 2021, it will be well-positioned to offer a much-desired supply of Prime A office space to new tenants seeking quality prime office and existing CBD tenants looking to move in from the older office spaces in Raffles Place.”
With total development cost of the project expected to be more than S$3bil, with the cost of land constituting around 50%-60% of total cost, IOI Prop will be building a prime grade A office development with retail at the lower floor and basement towards the MRT on the land in Marina Bay.
Analysts think IOI Prop will keep a large number of units from its project as investment income and with the right issue, the gearing level of IOI Prop will drop.
“The gearing level of the group will increase following the purchase of Central Boulevard, which was successfully bidded at S$2.6bil. The group takes cognisance of the increased gearing level and have proactively proposed a 1-for-4 rights issue on Nov 18, 2016 for the purpose of paring down the group borrowings,” says Lee.
The rights issue planned by IOI Prop though has brought about some scrutiny. Analysts have pointed out that the group has embarked on a cash raising call ever since it was re-listed on Bursa and wondered just how long such a strategy can continue.
“The rights issue will bring gearing to a comfortable level but investors are wondering just how much does the group need to continue raising cash for its landbanking,” asks an analyst.