CapitaLand accelerates 'asset light' strategy despite China's economic slowdown
New business model includes tapping Vietnam, rolling out shared offices
MAYUKO TANI, Nikkei staff writer
SINGAPORE -- High up in the brand-new Otemachi Park Building in the heart of Tokyo's office district 150 guests gathered in early June to celebrate the opening of CapitaLand's top-end Ascott Marunouchi Tokyo serviced apartments venture. Standing next to former Singaporean Prime Minister Goh Chok Tong and Junichi Yoshida, CEO of Mitsubishi Estate, which owns the building, CapitaLand chief executive Lim Ming Yan raised an auspicious wooden cup of sake after speaking about the company's aspirations for the Japanese property market.
"We believe that Japan, Tokyo in particular, offers great opportunities for CapitaLand," Lim said, announcing plans to double its assets under management in the country to 5 billion Singapore dollars ($3.6 billion) in the near future, from S$2.5 billion.
Ascott Marunouchi Tokyo is a symbol of the "asset light" model being adopted by CapitaLand to weather the difficult environment caused by the slowdown of China, the largest economy in the region. The company has leased eight floors from Mitsubishi Estate, and will earn revenues from managing the serviced apartments. CapitaLand will enjoy stable recurring income without owning the asset, limiting excessive exposure to volatile property prices.
In February, CapitaLand bought four Japanese properties for 49.7 billion yen ($440 million), including offices and a shopping mall in Tokyo and adjacent areas. Tokyo's prospects as an international business center and a destination for growing numbers of Asian tourists encouraged Lim to take a fresh look at the market. Japan's negative interest rate environment is also believed to be playing a part in the company's diversification as it searches for a new growth model after more than a decade of intense focus on China.
CapitaLand is the largest real estate company in Southeast Asia by market capitalization, which stood at $10.7 billion on June 29, compared to $26 billion for Mitsubishi Estate, the largest player in Japan. The Singapore company was born in 2000 through the merger of two state-linked property firms, Pidemco Land and DBS Land. Temasek Holdings, the Singaporean government's investment company, is the largest shareholder with a stake of close to 40%, and has been a strong backer of the company's international expansion, which has focused on office buildings, residential property, shopping malls, serviced apartments and "integrated developments"-- amalgamating different elements of properties into single projects. By 2016, revenues had reached S$5.2 billion, up 80% from 2000, while total property assets more than doubled to S$44.2 billion.
Singapore, a tiny city-state where land is a precious source of wealth, has produced a number of private real estate moguls, including Ng Teng Fong of Far East Organization and Kwek Leng Beng of City Developments. CapitaLand has different roots. In the 1970s and 1980s, when bulldozers were clearing slums and squatters to create the modern business district, a number of pre-war shophouses were torn down to make way for high-rise buildings.
Pressure from Temasek
To house small businesses displaced by the land acquisition, the government set up "resettlement centers" in China Town and other urban areas. Pidemco was established in 1989 with these centers in its portfolio. Once the redevelopment cycle was over, the state-owned company expanded beyond its crowded home market in search of further growth, propelled by pressure from Temasek for affiliated companies to internationalize their businesses.
For CapitaLand, China is an unrivalled overseas market, accounting for S$19.6 billion (44%) of total assets of S$44.2 billion at the end of 2016, up from 9% in 2001, and exceeding Singapore, which accounted for 36%. At the level of earnings before interest and taxes, China contributed 49%, while Singapore accounted for 35%. The company's China portfolio spans 50 cities, from Shanghai to Shenyang.
Doing business in China was not so promising in the beginning, Lim recounted in an interview with the Nikkei Asian Review in June. In 2000, CapitaLand had small, unprofitable investments made during its pre-merger days. When Lim left for China as the first CEO of the local entity in 2000, his first task was to clean up the mess. His colleagues did not envy his position, he said.
Since the 1990s, Singapore's government has been pushing domestic businesses to expand overseas, imploring them with a tagline: "Go regional." It was up to state-linked companies like CapitaLand to break the ice.
Lim was a rising star. He had studied in the U.K. on a prestigious scholarship from the army and spent 11 years as a soldier -- an established career path that leaders-to-be are put on in Singapore. He was given the crucial task to lead the regionalization of the company.
Although Lim said Temasek Holdings leaves management decisions to the company, there seems to be occasions when Temasek-linked companies are given the role of pioneer. In other words, they explore the direction in which the government has pointed. In 2013, CapitaLand, with Temasek, announced to develop a township in Iskandar Malaysia -- an ambitious, large-scale, government-led development in neighboring Malaysia -- despite uncertainty in demand outlook in the region.
In China, Lim built the business brick by brick, but time was on his side. The Chinese economy was rapidly opening up, following Beijing's accession to the World Trade Organization in 2001. In the run-up to the 2008 Beijing Olympics and the 2010 Shanghai Expo cities were being built-up, and demand for high quality, advanced, eye-catching buildings was high. CapitaLand offered solutions. Its integrated development concept, known as "Raffles City," is a case in point.
Just as the first Raffles City in Singapore created a "city in the city," shifting the downtown center of gravity, CapitaLand built a core part of the commercial center in various cities in China. By the middle of the decade, the board had made a decision to invest serious money in China. The company was the top foreign real estate investor in China, excluding Hong Kong players, in 2007, according to Real Capital Analytics. Despite the aftermath of the global financial crisis, CapitaLand in 2010 spent a whopping $2.2 billion to acquire the China property business of Hong Kong shipping group Orient Overseas (International).
As competition in Singapore tightened with the entry of foreign rivals, the international drive in China helped CapitaLand to keep its edge. Housing prices in Singapore have dwindled for the past three and half years due to the Singaporean government's attempts to cool the overheated property market, but CapitaLand's revenues grew by 50% from 2013 to 2016, while net profits increased 42%.
As an early starter, CapitaLand books the highest revenue contribution from overseas markets among the top three listed property developers in Singapore (68% in 2016) mostly thanks to its large presence in China. Rivals have followed suit overseas, but "CapitaLand has an edge in China," said Michael Wu, an analyst as Morningstar Asia, a provider of investment research.
Analysts and commentators have sounded frequent alarms about the health of China's economy since 2015, amid growing concerns about debt levels and property prices. But the company has kept faith with China, and its cautious approach, focusing on tier-1 and upper tier-2 cities, has saved it from exposure to significant weakness in the housing market. "We are comfortable," said Lim, his confidence unshaken by further indications of economic slowdown. "In fact we are comfortable [for China's capital allocation] to go up to slightly more than 50% from the current 45%, given the size of the Chinese market," he said in the interview.
However, CapitaLand's share price has been lackluster. It ended June at S$3.50, 48% lower than its peak, which came before the global financial crisis. The Straits Times Index index, meanwhile, has closed to 15% of its precrisis peak. Since the beginning of the year, CapitaLand's share price has improved 16%, but rival City Developments, which is expected to benefit more from the the anticipated recovery in domestic property market, has gained 30%.
The market appears to be awaiting a new catalyst for growth, prompting CapitaLand to pursue new sources of earnings. One of the major thrusts of the new approach is to increase recurring income through the asset light strategy.
CapitaLand is not scaling back in China, but company data shows that it is trying to adjust to the new environment there. Real estate assets under management, the value of properties that CapitaLand manages, increased 2.1% from S$76.8 billion in 2015 to S$78.4 billion in 2016, while the total value of real estate assets decreased by 3.7% from S$45.9 billion to S$44.2 billion.
The total gross floor area of the company's residential assets in China also fell, by 18.7% from 9.6 million sq. meters in 2015 to 7.8 million sq. meters in 2016, indicating that it has been holding back land acquisitions for new housing development. This reflects the company's strategy of shifting to the asset light model.
CapitaLand believes that the asset light model will lead to higher returns on equity and sustainable growth. As a result, the company's investment in China has become less aggressive over the past few years, according to data compiled by Real Capital Analytics. Among foreign investors in the Chinese property market, CapitaLand has retreated to 9th in 2015 and 6th in 2016. "They have not been aggressively buying land because the acquisition cost is high and margin is not great," said Yew Kian Wong, an analyst at CLSA, a Hong Kong brokerage. "They still position China as its core market, but they are being disciplined," said Wu.
"As China's property market becomes more mature, and more competitive -- especially the strong competition from some large domestic Chinese developers -- it is difficult to replicate the exponential growth rate that CapitaLand has experienced in 2000s," said Sing Tien Foo, an associate professor at the Institute of Real Estate Studies, National University of Singapore.
In addition to its shift to an asset light business model, CapitaLand is also tapping emerging markets to sustain growth. One of the key destinations is Vietnam. "I was on top of a building [in Ho Chi Minh City], looking across the river. It reminded me of Pudong, Shanghai, in 2000," Lim recalled of a visit to Vietnam in March.
The company has a sizable residential development business in Vietnam -- more than 9,000 homes in nine large condominium complexes in the pipeline. With burgeoning investment, jobs and infrastructure being created and young people moving into big cities, the ingredients for growth are all present, prompting Lim to consider raising CapitaLand's capital allocation for Vietnam from 3% to up to 10%.
In January, the company made a foray into the Vietnamese office market, acquiring a 0.6 hectare lot in Ho Chi Minh City's central business district to develop plush office buildings for foreign banks and multinational companies. "With the trajectory of Vietnam's urban modernization, we see Ho Chi Minh City as a potential home for a Raffles City, Lim said in March, indicating the company's confidence in the market. If it materializes, it would be the first project with the flagship brand to be developed outside Singapore and China.
Ascott has also forayed into Brazil, signing two franchise agreements in Sao Paolo, in April. The South American country will be the 29th to host the serviced apartment provider.
Besides geographical expansion, CapitaLand is looking at the sharing economy and could, for instance, launch a shared office and accommodation booking platform that would offer flexible terms to people who want to use its properties.
In China, the company has started rolling out shared offices in its shopping malls, in a partnership with UrWork, one of the largest co-working space operators in China, following an agreement in December 2016. In Singapore, the company opened its first shared office in its headquarters building in March to cater to increasing demand for co-working space in the city-state.
As CapitaLand explores its new business model, Ascott has begun to play an increasingly important role, rolling out the new and fast growing "Tujia Somerset" brand in China with its joint-venture partner Tujia.com International. Tujia, China's largest online apartment sharing platform, often described as "China's Airbnb," is expected to be an additional distribution channel for Ascott. Instead of allowing the disruptive force of online sharing to threaten its serviced apartment business, CapitaLand is determined to ride the disruption.
By transforming business models and expanding into new markets, CapitaLand is adapting itself to the international economy's structural upheavals. It will have to continue to transform itself if it is to convince investors -- and if it is to keep providing sustainable returns to Temasek and Singapore.