If 2023 was the year of acquisitions for City Developments Ltd (CDL), 2024 is likely to be the year of divestments as the property and hospitality giant looks to lock in gains made over the years.
During CDL’s results briefing on Feb 28, group CEO Sherman Kwek announced a target to divest $1 billion worth of assets this year. “Many of our existing assets sit on our books at a low carrying cost. Therefore, I think we have a lot of ways to unlock, value and monetise,” he says.
In FY2023 ended Dec 31, 2023, CDL made $2.4 billion worth of acquisitions and investments across six countries, including the acquisitions of St Katharine Docks in central London in the UK, the Champions Way government land sales site in Singapore, as well as the private rented sector projects in Tokyo and Osaka in Japan.
The healthy appetite stems from CDL’s view there are many “price dislocations” it could take advantage of. According to Kwek, some of these sellers were really in a hurry to dispose of these assets.
The acquisitions lifted CDL’s revalued net asset value (RNAV) by 1.4% y-o-y to $17.21 per share as of Dec 31, 2023. Including the revaluation surpluses from the hotel portfolio, CDL’s RNAV would have stood at $19.46 instead.wei
However, with most of the acquisitions funded by debt, CDL’s gearing rose by 10 percentage points y-o-y to 61%. Kwek is careful not to let this go beyond 70%. “That’s not to say that we’re going to get there as well,” he says. “I think it just depends on how fast we get our capital recycling in. But I’m hopeful that it will stay within 60% to 65% for the time being.”
Due to the higher interest rate environment, CDL’s net finance costs for FY2023 increased to $393.6 million from FY2022’s $193.1 million. Kwek maintains the acquisitions were made at an opportune time. St Katharine Docks, for one, was bought at a yield of over 7%.
“But the key, I think, for us going forward is to ensure that we manage the capital recycling and accelerate it … [it is also] obviously up to our CFO [Yiong] Yim Ming to ensure that we start to refinance as well at lower rates,” he adds.
That said, Kwek did not elaborate as to which assets were up for divesting. “We do have a firm list, I just don’t want to share [it] for now. But hopefully, as the months go by, you’ll see things materialise. Hopefully, it won't be weighted to the back end of the year. I mean, I want to see this constantly evolve throughout the year.”
See also: Frasers Property: Narrowing the discount
‘Ridiculously’ low share price
Despite posting a higher NAV in FY2023, CDL shares are trading at a five-year low. After the results were announced on the morning of Feb 28, CDL shares dropped 3.02% to close at $5.78, down by more than a quarter in the past 12 months.
Kwek admits the share price’s performance leaves “quite a bit to be desired” and that he is keen to close the gap with its RNAV from the “ridiculously” low level.
With its sprawling portfolio of assets, CDL has plenty of room to suitably package what, when and how it divests, be it into listed REITs or private funds, he says. In addition to divesting its non-core assets, CDL may even explore selling part of its stakes in core assets and put them into a fund-like structure that the group will manage.
However, one core asset will not be up for sale, fully or even partially: CDL’s flagship building Republic Plaza at its prime Raffles Place spot. This is the company’s headquarters and is something CDL is “really proud” of.
Plenty of other assets, including those held in strategic joint ventures, exist. For example, South Beach Tower is held jointly by CDL and Malaysia-listed IOI Properties, which is mulling over a REIT, given its growing portfolio of investment properties.
“So things like that will be considered and they are already in the pipeline. I’m already in discussions with investors. So again, throughout this year, we will be able to unveil more things,” says Kwek, without referring to any asset in particular.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Buybacks under consideration
One way companies signal that their stock is undervalued is to do buybacks. CDL has mulled over this possibility “many times” and has earmarked a “fairly sizeable quantum” to do so but has held off thus far, even though the share price at current levels has become “even more attractive”, says Kwek. Other property players such as CapitaLand Investment have in recent months made some buybacks.
From Kwek’s point of view, the purpose of a buyback is not to push up the share price. “The main rationale for doing it is because investing in your own shares, which are deeply undervalued, is as good an investment as any other,” he says. “This is something we’re still considering, but I can’t say with certainty when or if we will do it.”
That said, CDL paid some $25.8 million in November 2023 to buy back 33.1 million — or around 10% — of its preference shares. The buyback, which was made under the share mandate that was approved by its shareholders in April of the same year, represented 100% of the maximum buyback amount available under the off-market equal access offer, said CDL in a statement dated Nov 27, 2023.
Alright, Jack?
A key reason for CDL’s lower earnings for FY2023 was its UK exposure. In recent months, the UK has seen a greater decline in its property valuations compared to its European peers which are grappling with inflationary pressures and the long-drawn war between Russia and Ukraine. In a Sept 25, 2023, report, BNP Paribas flagged how London office values had corrected faster than its counterparts on the continent. In a JPMorgan report in September 2023, office buildings in London’s financial district look set to lose a fifth of their value until March this year.
However, BNP Paribas remains positive on the UK property market. Fergus Keane, BNP Paribas Real Estate’s head of central London investment markets, notes that London office prices were at that time offering a “very rare entry point” for investors “for either repriced core product or those with the means to spend capex to reposition assets into the core market”.
CDL’s executive chairman Kwek Leng Beng shares the same confidence in the UK. Even in this “upside down” world, London remains an attractive international location for people from the US, Europe and Singapore. “I believe it’s not difficult to do business in the UK because it has a lot of potential. Where the UK is concerned, I believe we should be present there and be more active,” says Leng Beng, who trained as a lawyer in London.
CEO Kwek adds that even after Brexit, the UK has continued to play a “very significant” role in business and finance and cannot be segregated or left out. He believes demand for offices in the country will start to stabilise and strengthen over time.
CDL has stepped up its investments in the UK. Besides offices, it owns purpose-built student accommodations, which are still seeing positive metrics with strong rents and high occupancies. Most recently, CDL spent $148.6 million to acquire a new private rented sector asset in central London called the Yardhouse.
CDL also sees further growth opportunities from this asset class in Japan and Australia, driven by growing trends including high housing prices and labour mobility. This means more people would prefer to rent instead of taking out mortgages.
“The UK has a strong favourable business environment with a sizeable population. There is again movement between cities, whether it’s London, Leeds or Birmingham, so I continue to be quite bullish on the UK outlook,” says Kwek. “But having said that, I think the focus this year will be on capital recycling.”
Singapore still special
At home, the residential market is feeling some signs of cooling off. That said, CDL remains on the lookout to acquire more land or take on new development projects. For example, Kwek agrees that the Jurong Lake District, touted to be Singapore’s second central business district is going to be a “very promising precinct that’s going to be full of future potential” and is therefore something of interest. “If the right project comes up and the metrics are good, we could potentially either tender for the land or do a private acquisition or collective sale. But the numbers just have to work out,” he says.
On luxury projects, which may potentially be affected by the government’s latest round of property cooling measures in April 2023 where the additional buyer’s stamp duty was raised to 60% for foreign buyers, he notes that there will still be a “fair amount of buyers” for a luxury project if it is “done well enough”.
Referring to one of CDL’s projects, the 28-storey, 154-unit freehold luxury development Boulevard 88, Kwek says there is still a large proportion of Singaporean buyers. However, he acknowledges that foreign buyers do make up a sizeable proportion of the buying base for luxury projects, so CDL will be “cautious”, although this doesn’t mean it won’t ever do another luxury project again.
CDL will also continue to take part in land tenders and make their bid in a “disciplined” manner with its margins and estimates in mind. “We want to accelerate our fund management but this doesn’t mean that it’s going to be at the expense of our development side,” says Kwek, adding that the company remains keen on its development business in China, Australia and the UK where margins are still “very healthy”.
