SimeProp changes the game

A catalyst for change has to start somewhere. For Sime Darby Property Bhd (SimeProp), it was borne out of necessity.

When Datuk Seri Azmir Merican took over the helm of SimeProp as its group managing director, it was in the throes of the Covid-19 pandemic, and he knew the form book of the property business had to be re-written.

As a person getting his feet wet in the business but in charge of the largest property developer in the country in terms of land bank, Azmir got his team to sell online – a novel but necessary way to move product given the limitations at the time.

Ticking a checklist of what to do, he made it a methodical process, a carefully planned task to ensure that almost nothing was left to chance.

Fast forward to today, SimeProp is reaping the rewards of its change. Evolving from a developer of townships, SimeProp is executing its Shift 25 strategy, where just selling homes is not going to cut it.

Azmir says he is meticulous about processes.

“Because I’m not from the industry, I need to understand the processes involved. How long does it take to do something, what are the cycle times, the problems and choke points. We strive to streamline that.”

“Getting our offerings right is a process, it involves a lot of discipline. It must be proven in numbers,” he says. And the numbers are translating to the bottom line.

In the first half of its financial year 2024 (1H24) the company’s bottom line more than doubled to RM285.5mil.

“We are very much focused on Malaysia, we see great prospects and we are committed to investing more in Malaysia. At the same time, we are expanding beyond Malaysia,” he says.

As for the Battersea Power Station (BPS) development, Azmir says the heavy lifting is done.

“BPS is a quality development, so we do not see a need to reduce prices aggressively. The UK has its market cycles and we expect rates to normalise there, which will lead to buyers investing in properties. We are looking at it long term to ensure we are profitable,” says Azmir.

Despite the drag from BPS, SimeProp’s ebullient financials – where its profit after tax and minority interest (patami) grew by 117% in 1H24 – has seen the company up its launch target for financial year 2024 (FY24) to RM3.9bil, while also increasing its sales target for the year to RM3.5bil from RM3bil.

Those high sales numbers are also a result of great demand from customers for SimeProp’s products.

As of Aug 11, its take-up rates across all products was 77%, the highest being in the residential landed area with 85%.

High-rise residential units, a new focus of SimeProp, are seeing take-up rates of 67%. Its industrial property has a take-up rate of 55% and its commercial 96%.

As it banked on selling industrial properties on a scale much larger than in the past through a focused diversification strategy, in 1H24, industrial products emerged as the top sales contri- butor at 35% with a contribution of RM749.9mil.

Reaching those lofty numbers were through design, as Azmir saw that the property business could welcome new growth pillars. This meant moving the group from its comfort zone of landed residential property development into a bigger share of high-rise residential, industrial development and now, data centres (DCs).

The reasoning for having a larger recurring income is simple.

“The pivot to recurring income is important, land is finite, we cannot manufacture more land,” Azmir says. “You can’t run away from DCs, given the direction of tech, artificial intelligence (AI) and digitalisation.

“The way we look at DCs is very different from other parties, we are here to build value with the DCs in our existing townships,” Azmir says, adding that the company is not keen on selling land to build DCs.

And it is that DC business which will become the lynchpin for its recurring income pillar.

SimeProp has bagged a RM2bil deal to build and lease a hyperscale DC for Google, which is being built at SimeProp’s Elmina Business Park.

It is a 20-year lease agreement with Google with the option to renew for two additional five-year terms.

“Right now, our recurring income business is 5%, we want to grow it to 30% by 2030,” says Azmir.

Growing the recurring income business will mean taking on more debt on its balance sheet to complete those cashflow generating projects. Azmir feels SimeProp is in a comfortable zone to do just that with its net gearing ratio at 22.3%.

SimeProp has also ventured into fund management, having closed a billion ringgit industrial development fund, a rarity for a property company.

The fund, structured as a private equity fund, aims to develop large-scale industrial and logistics real estate in Malaysia, focusing on logistics facilities that meet green building standards.

Its investors are mainly made up of Malaysian-based institutional funds, which is part of SimeProp’s Shift25 strategy unveiled in 2021. The aim is for SimeProp to generate recurring income streams such as fund management and development services fees.

“The whole idea here is for SimeProp to pivot ourselves from a pure play property deve- loper to a real estate company,” Azmir tells StarBiz 7.

That strategy will see SimeProp focus on three engines of growth – their core property development, securing recurring income and banking on “experimental ventures.”

Property development still takes up the bulk of resources, comprising 70% of its headcount. Azmir says the focus is to improve efficiency and raise profit margins by enhancing speed and quality of products.

However, hitting the target to bring its recurring income to 30% is tough, given that the property development business is growing faster than its other segments.

While this is a good problem to have, Azmir stresses the need to prioritise recurring income now, especially as land is finite and the business is launching properties on 700 acres a year with a land bank of 13,100 acres of remaining developable land bank as of June 30, 2024.

He notes that mature property companies globally rely on recurring income from assets like DCs, shopping malls and rental properties.

As for its “experimental ventures”, Azmir says he is also referring to areas such as building affordable homes in an effective way.

“Affordable housing is something we need to look at because there is demand.

“For a long time, large developers like us have found it difficult to make affordable housing. The main challenge is getting the formula right.

“We cannot build affordable homes in the same way we build our RM600,000 homes. It has to be different. There are companies who have done really well here.”

Investors are in agreement that SimeProp is headed in the right direction as property analysts have been bullish on the stock since 2022.

A check on Bloomberg data shows that at the end of 2021, only 40% of analysts had a “buy” on the stock. But by June 2023, more than 90% of analysts covering SimeProp had a “buy” on the stock.

While most property stocks have had a good run-up this year, SimeProp’s stellar 116% rise had beaten them all.