CapitaLand's new vision in a shifting landscape

“She stayed on to sell other merchandise for our shopping mall at Hongkou in Shanghai. She has quite a strong following,” he adds.

Christy Chung’s special appearance is part of CapitaLand’s fourth annual shopping festival, which featured more than 60 live streams in 2020 as part of the group’s offline and online shopping extravaganza initiatives.

CapitaLand needs no introduction. On Jan 4, a ranking of the world’s largest real estate investment managers by IPE Real Assets placed CapitaLand in 10th place with assets under management (AUM) of EUR87.1 billion ($141 billion). CapitaLand is also the largest in Asia and twice as large as the next local developer. In comparison, Mapletree Investments is in the 38th slot with AUM of EUR38.3 billion, while ARA Asset Management is lower at the 41st spot with EUR36.1 billion in AUM.

CapitaLand’s portfolio comprises $133.3 billion in assets. Geographically (on a 100% basis), China accounts for 42% of assets, Singapore at 33% with 15% and 10% from developed and emerging markets respectively.

An urban renewal project

More importantly, during the July online shopping extravaganza, the Hong Kong actress helped shine a light on Datansha, a 3.5 sq km island located in the western part of downtown Guangzhou, in close proximity to Liwan district, which the Chinese government plans to make it the fastest-growing in the province. It is the largest island along the Pearl River section.

Of a total 6.04 million sq m planned gross floor area (GFA) under the urban renewal project, 0.72 million sq m has been set aside for resettlement, 1.56 million sq m for village collective commercial development and 1.97 million sq m for saleable components.

“We’re doing substantially residential development in Datansha. The buildable area of the three villages is 1.5 million sq m of which 1 million sq m is zoned residential, 400,000 sq m for commercial, and there will be some industry on the island. The whole master plan is done by us but not all the development is by us although it’s still substantial land banking,” Loh explains.

The first project in Village 1 is a residential development that has been completed, with three out of six blocks handed over to their new owners. All six blocks are substantially sold and will be fully handed to owners this year.

“In Village 1, we’re working on the second project and land is being cleared for the third project. Village 1 has 500,000 sq m of GFA and we are finishing the development of the first 100,000 sq m in Plot 1 named La Riva. We have 40,000 sq m to develop in Plot 2 and 200,000 sq m in Plot 3,” Loh recounts. And this does not include Plots 4 and 5 for Village 1.

Meanwhile, Village 2 has almost 800,000 sq m of buildable GFA. “From 2021, there will be land handed over to us. We start paying for the land when [the local government] hands it over to us. There is not a lot of capital being locked up,” Loh explains.

Unlike land acquired from tender processes, upfront capital is not required for the land in urban renewal projects. “Initially, we spent some effort and money to do master planning with the city government. It’s a different kind of process relative to land acquired from a tender process without encumbrances. Datansha is going to be a long-term project,” Loh says.

To succeed, the urban renewal project in Datansha will be anchored by education and healthcare facilities, surrounded by residential developments. The Datansha general hospital — First Affiliated Hospital of Guangzhou Medical University — is expected to be completed and operational by June. An initial 15-storey block was completed in October 2020.

“The hospital is anchored by famous virus expert Zhong Nanshan. He is China’s equivalent of Dr Fauci,” says Loh, referring to the US government’s top doctor on infectious diseases.

“I hope the hospital can make full use of the centre to attract more projects and talent and make a greater contribution towards the treatment of chronic respiratory diseases, and the prevention and control of major respiratory infectious diseases,” Zhong said during the opening ceremony of the 15-storey block last October. Zhong will have at his disposal a research centre focusing on clinical treatment, talent cultivation, and scientific innovation of respiratory diseases.

“Even though Datansha is near the centre of Guangzhou, in the master plan for the island we’ve catered for supporting industry in terms of education and health to be in that location. And there will be ancillary medical facilities to support the hospital, much like at Novena and Outram in Singapore,” Loh explains.

Focus on New Economy assets

Indeed, CapitaLand’s China experience with Datansha is proving useful as its strategy pivots towards the so-called New Economy. Although CapitaLand had long made use of digitalisation to reach its customers in both its retail and lodging businesses, in terms of assets, the group was heavily-weighted towards retail, integrated developments in the CBD, and office and lodging sectors until 2019.

About a year before Covid-19 hit, CapitaLand acquired Ascendas-Singbridge (ASB), which brought along with it business and tech parks in various countries. These included Ascendas REIT, an industrial REIT with assets in Singapore, the UK, Australia as well as the US since early last year; Ascendas India Trust, which focuses on tech parks and logistics assets in the subcontinent; as well as business, science and tech parks in China.

On Nov 16, 2020, CapitaLand announced it plans to redeploy part of its capital from asset recycling to New Economy assets, growing its exposure to this sector in China to $5 billion over the next few years, from the current $1.5 billion. Investments will include business parks, logistics facilities and data centres where tenants typically hail from New Economy sectors that enjoy robust fundamentals and a supportive regulatory environment. This target is in line with CapitaLand’s strategy to ride China’s economic transformation focusing on technology, services and domestic consumption.

“We will be pivoting more to New Economy type of assets but not forgetting our strength in commercial real estate. We would like to enlarge the percentage of New Economy assets. This is in line with changing demand and the landscape going forward,” Loh says.

As he sees it, business parks create employment. What better way to enhance business parks than with residential developments nearby, and supporting amenities such as shops and schools for a liveable environment.

“About six to seven years ago, there was a change in mindset in urban planning. Previously, we would have a lot of interest from the government when they looked into big scale developments. Now they are more welcoming of business parks because it creates employment,” Loh says.

What about China’s mega ghost towns, which were highlighted by the western media, with their empty skyscrapers and empty expressways? Loh says the issue is more of a mismatch between residential and employment.

“When we start a new area for residential, there should be facilities for employment. The essential thinking behind it is if you want to create an area for people to live, you need to create employment. China is so vast that people may have to travel a few hours to get to work. So, how about securing land for a project to support working and living in the same area?” Loh suggests.

As part of CapitaLand’s active recycling strategy, CapitaLand Retail China Trust (CRCT) has been designated the group’s dedicated REIT platform for non-lodging assets in China. Over time, CRCT plans a target portfolio mix of 40% in integrated developments, 30% in retail, and 30% in New Economy assets.

“Every year, we recycle quite a bit of capital. We will continue to recycle as most properties become mature. This has been our business model all along: Build, mature, recycle. If a third party offers an attractive price, we sell. If the REITs can take it, we will sell to our REITs. These are independent decisions. The transaction must be something positive for the REITs as well,” Loh explains.

The capital from recycling will then be deployed into New Economy assets. “The newer projects swing to business parks and logistics parks. If we see a bigger project within a business park, we can build a data centre and logistics park in line with planning and thinking in terms of employment and residential coming in line,” Loh says.

Post-Covid recovery in residential sales

China is fast recovering from the Covid-19 pandemic and the economic slump it experienced in 1H2020. According to Maoyan Entertainment and Chinese social media giant Weibo, roughly 94.8% of all movie theatres in China had already reopened for business by the end of 2020. By December, the Chinese film market had recovered to a level of 90% y-o-y, with monthly box office tally hitting 92%, compared to the same period in 2019.

Similarly, residential sales have rebounded in China. In a recent update, DBS Group Research says, “Recovery momentum in the physical market extended into 3Q2020 alongside developers’ further resumption in project launches and generally favourable mortgage rate environments. We expect residential sales growth, ending 2020 with a positive 5–10% growth in sales value.”

For the year to Nov 30, 2020, DBS estimates that sales and average selling prices (ASP) translated into a 10% rise in residential sales, alongside a 2% and 7% increment in residential GFA and ASP, respectively.

In its 3QFY2020 business updates, CapitaLand announced that residential sales value in China for the nine months to Sept 30, 2020, increased 28% y-o-y to RMB10.9 billion ($2.2 billion). Over 1,900 units were sold in 3QFY2020, 40% higher than 2QFY2020 and the third consecutive quarter of improvement. Handovers by value rose 1.7% y-o-y for the nine months to Sept 30, 2020, and more units expected to be handed over in the last quarter of 2020.

“For our projects’ residential sales in China, the take-up rates are very good. A few projects that we launched were sold out in a few days,” Loh says referring to developments in Chengdu, Xian, Guangzhou, Shanghai and Beijing.

Transformational pivots

Of course, China — seemingly the land of opportunity — is not without its pitfalls. Singapore’s second-largest homegrown property company, City Developments, has seen three directors, two of who are independent, step down from the board because of the developer’s investment into Sincere Property Group, a troubled Chinese developer.

So, how did CapitaLand make a reasonable success of China? CapitaLand’s expansive China footprint is the result of 25 years of hard work, vision and some luck. The vision and luck part came in the form of the acquisition of Orient Overseas Developments (OODL) for US$2.2 billion in 2010.

Back in 2000, when CapitaLand was formed from the merger of Pidemco Land and DBS Land, it inherited what is now Raffles City Shanghai, in the heart of Shanghai. But at that time, it was more like a hole in the ground.

From the success of developing Raffles City Shanghai, CapitaLand deftly partnered with state-owned investment company SZITIC to build shopping malls anchored by Walmart, in mainly second-tier cities using proceeds from the sale of its hotels in Raffles Holdings, including that of Raffles Hotel to Colony Capital in 2005.

Subsequently, SZITIC, which was renamed SZITIC Commercial Property Company (SCPG), was acquired by Blackstone in 2013. Blackstone sold SCPG to Vanke in 2018. CapitaLand then divested the 20 malls it had developed in partnership with SCPG to Vanke and a unit of HOPU Investment Management for $660 million and a net gain of $75 million. While the net gain appears modest, CapitaLand revalues its properties based on their annual cash flow.

In November 2019, CapitaLand completed the sale of three malls, CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin and CapitaMall Yuhuating in Changsha, to CRCT for RMB2.96 billion.

The pivotal point for CapitaLand was probably the OODL acquisition which was completed in 2010. In the OODL portfolio, out of a GFA of 1.48 million sq m, about 87% is in Greater Shanghai, including Kunshan, while the remaining 13% is in Tianjin.

Residential was the largest component of around 56% of GFA, followed by office with 19%, serviced residences and hotel at 17% and retail at 8%.

A Hilton Doubletree branded hotel in Kunshan was divested early. The site in Changning was placed in a joint venture fund and has since been developed into Raffles City Changning. Part of the site was a convent that was attended by Eileen Chang, author of Lust, Caution which was made into an R(A)-rated movie.

“We [CapitaLand China] borrowed quite heavily from HQ to buy OODL. Within one year, I was meant to return quite a bit of money. We sold off Doubletree. We sold Changning into the fund. Within one year, we managed to recycle some assets and launched the residential development. Our CFO was quite happy we returned the money we borrowed,” Loh recalls.

Raffles City Changning is now a mixture of old and new. “We kept the classrooms, the dorm and the chapel. The Changning project allowed us to keep some of the historical buildings and this enabled the project to be something different with two new buildings enveloping the historical buildings,” Loh describes.

The jewel in the proverbial crown of the OODL portfolio is the Luwan site, located in the heart of Shanghai’s famed French Concession. The Luwan site is now The Paragon. “The Paragon, which we kept till today, is now selling at RMB150,000 psm. The land cost was only RMB20,000 and the breakeven is around RMB40,000–RMB50,00 psm,” Loh estimates. To date, CapitaLand has kept Tower 6 for rent after selling Towers 1 to 5.

Luwan district was merged into Huangpu and the entire district is now known as the Huangpu district. The Huangpu River cuts across Shanghai with the famous Bund on the Puxi side. Renaming Luwan does not detract from its romantic association with the French Concession and is a popular residential area for the wealthy and expatriates.

After divesting the 20 SZITIC malls in 2018, CapitaLand has increased the focus on its five city clusters. These are Beijing/Tianjin, Shanghai/Hangzhou/Suzhou/Ningbo, Guangzhou/ Shenzhen, Chengdu/Chongqing/Xi’an, and Wuhan, the epicentre of the Covid-19 outbreak. At any rate, this central Chinese city heralded in the New Year in style with crowds outdoors and indoors enjoying the night and firework displays. In contrast, Times Square in New York started 2021 with a sombre, pareddown ball drop.

The Greater Bay Area (GBA) — a central government-led initiative for nine cities in Guangdong province including Guangzhou, Hong Kong and Macau to attain developed market status ahead of the rest of China — took on added significance following CapitaLand’s merger with ASB as the latter owns China-Singapore Guangzhou Knowledge City, increasing CapitaLand’s presence in the GBA.

What’s next?

“We certainly hope we can come across such an opportunity [like OODL] and the current situation may allow us to see similar opportunities. We will only consider an OODL that is in the New Economy sector. From the look of the opportunities, I don’t rule out buying a sizeable portfolio in some of the opportunities we are looking at,” Loh reveals.

On Dec 23, 2020, CapitaLand announced it had conducted close to 350 sessions of live stream sales in China through its Star Live Studio during the year. It is likely Loh will appear on more Star Live Studio extravaganzas this year, with or without Chung, the Hong Kong actress.

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Three Red Lines

What are the three red lines that City Developments referred to in an Oct 2020 announcement? They are ratios that most developers including the likes of CDL and CapitaLand have adhered to for years. The three red lines in a nutshell are: a 70% ceiling on liabilities to assets, excluding advance sales proceeds of projects; a 100% cap on net debt to equity; and a cash to short-term borrowing ratio of at least one.

“The well-discussed “Three Red Lines” laid out three key balance sheet ratios as proxies for developers’ indebtedness and as basis for regulators to set deleveraging goals for developers to meet by Jun 2023, with progress reviews to be conducted on a monthly basis,” explains DBS Group Research in an Oct 2020 report. “We believe the central government’s stance to control the sector’s credit risk is clear, and deleveraging will likely become the core agenda for developers going forward. Under this backdrop, we believe developers will likely 1) accelerate presales and cash collection, and 2) scale back on land acquisitions and generally maintain lighter landbanks.”

The central government is likely to continue its policy of maintaining a stable physical property market and to refrain from using the sector as a short-term stimulus for the economy, DBS reckons. “Buyers’ liquidity has been decent as reflected in the continuous decline in first- and second-home mortgage rates, but local regulators kick-started another round of policy tightening since July in selective overheated cities that have posted strong residential average selling price (ASP) growth,” the report says.

A ‘differentiated’ approach on housing policies at the local level is likely to continue, with cities that continue to be greeted with enthusiastic buyer responses and projected 10% or higher y-o-y growth in residential average selling prices experiencing a higher chance of stricter measures being implemented, the DBS report indicates.

Deleveraging of the China property sector has been a frequently discussed policy agenda by the central government over the past few years, and regulators are reportedly prepared to launch further measures in light of rising liquidity within the system since the start of 2020.

In Nov last year, China Evergrande was reported to have sold assets to raise cash. In a strategic review of Sincere Property Group, Deloitte & Touche Advisory Services, appointed by CDL, has identified projects to be divested to improve liquidity.

Late last year, Bloomberg reported that cash reserves of China’s 50 largest-listed home builders were just enough to cover short-term debt as of June 30, 2020. Cash to short-term debt is one of the ratios under the Three Red Lines. That metric fell below 0.5 (compared to one required by the red line) for eight companies, the most in four years, signaling greater risk, according to Bloomberg data.