Malaysian developers to gain from pound uptrend


  • Economy Premium
  • Saturday, 14 Dec 2019

SINCE the 2016 Brexit vote, the United Kingdom (UK) has experienced enough upheavals. The pound has plummeted, the market has been fatigued by uncertainty, and outflows from the UK have been continuous. Now that the Conservative party led by British Prime Minister Boris Johnson has secured a sweeping victory in the UK parliament, perhaps some of that political uncertainty will dissipate, leading to a re-rating of its assets and equities.

Not surprisingly, the pound shot up as Johnson secured a solid majority in the UK elections Friday.

The pound was last up 2.3% to US$1.346 at noon Friday, its highest level since May 2018. It also rose 1.9% against the euro.

The pound has been rising steadily in recent weeks as traders bet on a Johnson win. With Johnson remaining as prime minister, he can take the country out of the European Union by Jan 31, thus removing some of the Brexit uncertainty that has hung over businesses and the economy for more than three years.

Malaysian corporates with assets in the UK will benefit from this In particular, Malaysian property developers with developments in the UK can expect their assets to see an increase in value following the strengthening of the pound.

Malaysian developers with exposure to the UK include Sime Darby Bhd, SP Setia Bhd, ECO WORLD DEVELOPMENT GROUP Bhd, EASTERN & ORIENTAL BHD (E&O), FGV Holdings Bhd and MUI Holdings Bhd.

Not everyone is confident that the pound will continue rising though. Amundi Asset Management senior economist Tristan Perrier says the pound’s rally will be limited even with Johnson’s majority win and should he find a way to pass the withdrawal bill by Jan 31.

“That’s because the clock is ticking on a trade agreement in a transition period that runs out at the end of 2020. Any longer-term economic and Brexit uncertainty can increase the chance of a Bank of England rate cut next year, which would weigh on the currency and prop up gilts,” said Perrier.

Amundi head of equities Kasper Elmgreen said that at present, the UK market is trading at a discount to the EU and global markets.

He is positive on the more UK-focused domestic names: house builders, consumer discretionary stocks and financial companies.Below are some of the Malaysian beneficiaries from a rising pound:

Felda

Felda appears to be a solid beneficiary because of its prime properties in the UK. With the pound strengthening, Felda will be able to fetch a better selling price in ringgit terms.

Details of Felda’s properties were revealed in a White Paper that was made public earlier this year.

Some of its notable properties include Felda’s subsidiary Felda Investment Corp Sdn Bhd’s (FIC) purchase of a four-star hotel in Kensington, London, in December 2014 for £60mil (RM321mil), which was about three times the actual price of the property.

Then FIC, through FIC UK Properties Sdn Bhd (FUPSB), purchased the four-star Grand Plaza Serviced Apartments for £98mil (RM524mil) on July 31, 2013.

To date, Felda foots RM19.82mil in losses a year to operate the Grand Plaza Serviced Apartments.

Thirdly in September 2014, the FIC board purchased the 450-room Dexion 1 and 802-room Dexion 2 properties in Wembley, London, for £24mil, which were renamed as Felda House and Grand Felda House respectively. They were to be turned into student hostels.

This was on top of a further £48.5mil and £85.26mil in development cost for Felda House and Grand Felda House respectively.

Owners of the Battersea project

The Battersea Power Station project, with a gross development value of £9bil, is the biggest property deal in the UK.

The project is owned by Sime Darby Property Bhd and SP Setia Bhd, each with a 40%, and the Employees Provident Fund, which has the balance of 20%.

It project is on 17ha in Nine Elms, London, and will have more than 4,000 new homes over several phases until 2028.

It is expected to gain momentum in its transformation as one of the most vibrant property projects in the world, with the next phases ready to be rolled out soon.

Battersea Power Station Development Company (BPSDC), the company managing the project, is confident that Phases 2 and 3 will be completed within the next two years with interest in the project rapidly growing.

Phase 1, which is Circus West Village, received an encouraging response after it opened in 2017, with the site now housing some 1,000 residents and attracting about 40,000 visitors for events such as the London Seafood Festival.

According to data from 2018 fourth quarter, Phase 1 homeowners saw an average 3.4% rental growth in Battersea compared with a 1.9% growth rate on average in other London’s prime areas.

The project, will also be connected to London’s Underground tube when a new station on the Northern line is open in 2021.

Eco World

Eco World International Bhd (EWI), in which the listed Eco World Development Bhd holds a 30% stake, has a huge exposure in the UK.

For its financial year ended Oct 31, 2019 (FY19), EWI returned to the black with a net profit of RM187mil, as compared to a net loss of RM11.23mil in FY18. EWI recorded RM1.12bil sales in FY19.

EWI recorded higher recognition of revenue and profit by its joint-venture projects in the United Kingdom, following completion and commencement of handover of open market sales units, as well as revenue and profit recognition of its built-to-rent (BtR) sales.

While the sales rate of EWI’s higher-end products in London is still being affected by the ongoing Brexit-related uncertainties, the mid-market products developed with joint-venture partner Willmott Dixon are doing well.

According to EWI president and CEO Datuk Teow Leong Seng, EWI has seen a 67% increase in its open market sales in FY19.

He said house prices in London over the past few months have firmed up and volumes have increased significantly.

The sales rate of the group’s higher-end products in London are still being affected by the ongoing Brexit-related uncertainties.

However, Teow said there are signs that this segment of the market may have bottomed as the house price index of Inner London rose 2.6% in September 2019 from the trough in March 2019.

“Apart from the recovery we are seeing at the upper end of the London property market, our midmainstream products continued to deliver strong performance, as evidenced by the 67% rise in sales of products priced from GBP500 psf to GBP800 psf in FY2019.

Based on the improving market outlook, EWI is maintaining its combined 2-year sales target of RM6bil earlier announced for FY2019 and FY2020

E&O

The UK is one of E&O’s four growth engines, besides Greater Klang Valley, Penang and Iskandar Malaysia.

E&O Bhd ventured into the UK in 2012 when it acquired Princes House in Central London with an estimated GDV of GBP60mil.

E&O’s international foray into real estate investment and development is focused within prime locations in London, including Princes House along Kingsway, ESCA House in Bayswater, and a commercial property in Hammersmith.

MUI

Another beneficiary is MALAYAN UNITED INDUSTRIES BHD (MUI) which is looking to sell the Corus Hotel Hyde Park in London, United Kingdom.

The group announced in May that its indirect unit, Corus Hotels Limited (CHL) had appointed international investment bank N.M. Rothschild & Sons Ltd (Rothschild), as its financial adviser on the sale.

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