Investors tend to have a negative sentiment towards listed property groups, often resulting in their stocks trading below their book value. This could be due to the volatile earnings from property development projects, especially for housing developers in Singapore, where profit margins are low and the risk of cooling measures is high. The returns on investment properties, marked-to-market, are usually unimpressive, and owning low-yielding assets can tie up a considerable amount of capital.
To counteract these challenges, property groups may consider pursuing asset-light strategies by partnering with co-investors to spread equity across more development projects and investment properties, enabling them to earn 100% of the fees from managing these projects and properties. By growing their fee income business, property groups can boost their return on equity (ROE).
However, it's worth noting that while asset-light strategies are beneficial for property groups, there may be valid reasons for non-property groups to own property.
Many companies across various industries have been able to create value for their shareholders by leveraging their property assets. For instance, several condominium projects in Bukit Timah and other areas have been developed on land previously used for production facilities of different businesses.
In recent times, Singapore's leading telecommunications company, Singtel, has partnered with Australia-listed real estate group Lendlease to redevelop its Comcentre headquarters near Somerset MRT station into an office-led development, which has great potential. However, due to the high property prices in Singapore, the net yield on office buildings tends to be low, often falling below debt costs. Additionally, with the increasing interest rates, the cost of equity for investors in listed entities has risen.
In late March, Yangzijiang Shipbuilding, a constituent of the benchmark Straits Times Index, announced its plans to purchase an office building located in the Central Business District (CBD). The 21-storey freehold commercial building, Robinson Point, situated at 39 Robinson Road, has been valued at S$399 million, and comprises retail units on the ground floor, car park bays on levels three to five, and office units on the remaining floors.
The purchase of this property will not have a significant impact on Yangzijiang's book value, but it will negatively affect the company's earnings per share (EPS). According to financial projections for 2022, assuming the purchase occurred on January 1st of that year, the acquisition would reduce Yangzijiang's EPS from 71.25 fen to 70.51 fen.
Considering the somewhat negative financial impact, some may question the rationale behind Yangzijiang's decision to acquire the commercial property. Is it a sound investment strategy for the shipbuilding company?
The group aims to maintain the value of its funds generated from core shipbuilding activities, and it believes that acquiring the property will serve as a hedge against ongoing inflation while providing a stable cash flow that minimizes fluctuations in group returns. Additionally, the company hopes to enjoy capital gains from the appreciation of the property.
Yangzijiang Shipbuilding highlights that the purchase of a building in Singapore's financial district will help to enhance its profile. The company's Executive Chairman and CEO, Ren Letian, plans to appoint a professional real estate manager to oversee the marketing activities and operations of the building. The goal is to position the property as a financial hub and attract institutional investors and family offices as tenants. He emphasizes that this property acquisition is a one-time exercise and that Yangzijiang will continue to focus on its core shipbuilding business.
The group is in a strong cash position, with cash and cash equivalents of 10.8 billion yuan (S$2.1 billion) and total borrowings of 4.6 billion yuan as of end-2022. Therefore, there seems to be little harm in a cash-rich business purchasing a building. In fact, in a high-interest rate environment, cash-rich buyers have an advantage over those who rely heavily on debt financing.
Owning a building can provide a reliable source of recurring income, which can be beneficial to cash flow and profitability during difficult times for a company's core business.
Furthermore, a freehold commercial building in the CBD is an attractive asset due to its scarcity. Taking a long-term view, there may be potential for redevelopment if Robinson Point is combined with neighboring 61 Robinson Road, where GuocoLand has a reversionary interest in the freehold land.
Despite this, companies must carefully assess how they use their capital. Investing in property to obtain a yield in the low single digits may not appeal to equity investors, who are looking for companies that generate high single-digit or more ROE from their core business.
On the other hand, if a listed company is not reinvesting its cash in its core business, it may be better to return the funds to shareholders through a special dividend. In this way, shareholders can decide for themselves how to reinvest the proceeds.
While owning a building can boost a group's image, there may be more cost-effective ways to achieve the same result. For instance, businesses could sponsor sports, arts, or charity events to enhance their branding and engage with the community.
That being said, if Singapore maintains its status as a business hub and an attractive destination for the affluent, owning physical property can generate favorable returns in the long run, even if purchased at a slightly higher than market price or during an unfavorable property cycle.
Having the ability to hold on to a property is crucial for property investors. As long as one can avoid being pressured to sell a property due to cash flow constraints, owning property in Singapore may prove to be a profitable investment in the long run.
However, in the face of widespread disruption, it is important for listed companies to concentrate on their core business. They should ensure that their business maintains a competitive edge and pivot if necessary. By managing their business well and maintaining a responsible balance sheet, diversifying into property ownership as a form of insurance may not be necessary.
Investors are attracted to listed companies based on their growth prospects and competitive advantages in a particular industry. While real estate can be a valuable addition to investment portfolios, investors can achieve diversification across multiple asset classes, such as equities and bonds, without relying on a single company's diversification strategy. Therefore, businesses such as shipbuilders need not take on additional financial investments such as property to provide diversification benefits to their investors.