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Monday, September 26, 2011

GLCs vs private developers?

UEM Land Bhd's acquisition of Sunrise Bhd, which developed Mont'Kiara in Kuala Lumpur, created the country's largest property development company by market capitalisation.

PETALING JAYA: When Sime Darby Bhd acquired a 30% stake in Penang-based Eastern & Oriental Bhd, it was just the latest in a series of acquisitions led by government-linked companies (GLCs) in private sector property developers.

Late last year, government-owned UEM Land Bhd acquired Sunrise Bhd to create the largest property development company in Malaysia by market capitalisation.

Last year too, Malaysian Resources Corp Bhd (MRCB) and IJM Land Bhd proposed a merger which would have created the country’s second largest property player with a market capitalisation of over RM7 billion and a landbank of over 9,000 acres (3,600ha), but the deal fell through. Analysts and market observers speculated that it was because neither could decide who would lead the merged entity.

In addition, most of the private property developers now have a major government-related shareholder, usually a fund.

For instance, S P Setia Bhd’s two largest shareholders are Skim Amanah Saham Bumiputera (20.1%) and the Employees Provident Fund (15%), while its CEO Tan Sri Liew Kee Sin owns a 12% stake, according to its latest annual report.

In the case of Mah Sing Group Bhd, managing director Tan Sri Leong Hoy Kum holds a 35.2% stake while various government-related funds such as Koperasi Permodalan Felda Malaysia Bhd, Permodalan Nasional Bhd, the EPF, Kumpulan Wang Persaraan and Valuecap Sdn Bhd collectively own a 20.8% stake, according to its latest annual report.

“What we notice is that the government or GLCs are buying into private sector companies. We can’t help but wonder if this is the crowding out effect and if the government is looking to become a dominant player in the property sector,” said an analyst.

In Hong Kong or Singapore, the government’s role in property development is clear cut: to ensure the steady release of land to avoid either overbuilding or excessive speculation and to ensure the availability of affordable housing for the population.

“Over here, the government is mainly buying into developers that operate mainly in the high end of the market. In other words, not the ones that build affordable residences,” he said.

On the other hand, there is almost an equal urgency to privatise parcels of government land in strategic areas. In 2009, the government decided to swap a 62.5-acre piece of prime land in Mont’Kiara for a RM628 million trade and convention centre by the Naza Group.

It is also privatising the 495-acre plot of land on which the Sungai Besi air base is sited, the proposed 75-acre Kuala Lumpur International Financial District project near Jalan Tun Razak and the 3,300-acre Rubber Research Institute land in Sungai Buloh.

In fact, part of the rationale for the MRCB-IJM Land merger was to give the merged entity an edge in developing the EPF-led development of the Sungai Buloh project.

So, as the government releases more of its land to the private sector, it seems — ironically — to be taking a bite out of the companies that would most benefit from these projects.

A market observer said there may be another reason for the government’s increasing interest in the property sector. “They may be acting as the buyer of last resort. If you talk to developers, some of them think that Malaysia is already fully supplied with homes. Many families have multiple homes and have bought for the next generation. In addition, our household debt to GDP is relatively high at about 75%, so the propensity to borrow is limited. Thus, some developers may be cashing out,” he said.

The increases in housing prices have generally lagged GDP growth since the end of the 1997-98 Asian financial crisis, but over the last two years there has been a surge in prices, which is generally regarded as making up for the lag in prices for the last decade.

“Housing prices went up by an average of just over 3% annually while GDP growth in the same period was about 5% to 6% a year. The increases in housing prices usually track GDP growth, so there was obviously a lag. But it may be because housing supply increased substantially in that time.

“In the last two years, however, there was a large jump in prices so it was more of a ‘catching up’ than the start of a bubble. After this one-off re-rating though, it is unclear if prices will continue rising and the housing developers may be cashing out,” the analyst added.

This suggests the government could be functioning as a buyer of last resort, especially since there has been little foreign merger and acquisition interest in listed Malaysian property developers.

Still, it could just boil down to attractive valuations. After all, the majority of Malaysian property stocks have generally — and long — been undervalued and most trade well below their revised net asset value, and some even below their historical book value.

Thus, some of the acquisitions are seen as advantageous to the GLCs. One such example analysts cite is UEM Land’s purchase of Sunrise, which was priced at single price-to-digit multiples, and came with strong branding, a large pool of unbilled sales and a pipeline of ready-to-launch projects that will support UEM Land’s near-term earnings.

Other analysts disagree with the notion of GLCs being buyers of last resort. UOB Kay Hian Research head Vincent Khoo dismissed the perception. “Every company is looking for growth opportunities and the property sector, which has been booming for the past few years, would be their target.”

But why only the high-end developers? “You don’t maximise your profit by selling cheap houses,” said Khoo.

MIDF analyst Sean Liong agreed. “All these funds have a mandate to get certain returns. That’s it. I don’t think there is any hidden agenda. And I don’t think the GLCs have an unfair advantage when it comes to bidding for the privatised land.”

Affin Investment Bank property analyst Isaac Chow was more succinct. “If it’s a business move, it’s a business move. It’s just a matter of investment.”

By The EDGE Malaysia

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