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Saturday, October 1, 2011

What makes a good developer?

In 2007, state fund Permodalan Nasional Bhd took over property developer Petaling Garden Bhd.

Prior to this, PNB also made a bid and succeeded with Island & Peninsular Bhd group (I&P). In 2005, it made a bid to take Pelangi Bhd, another property firm, private.

The I&P group is today a combination of all three groups and has a landbank of over 5,000 acres in the Klang Valley and Johor.

The group, wholly owned by PNB, is known for the successful developments of projects such as Bukit Damansara, Bandar Kinrara, Alam Damai, Alam Impian, Alam Sari, Temasya Glenmarie and Bandar Baru Seri Petaling in the Klang Valley as well as Taman Pelangi and Taman Perling in Johor. For this year, it plans to launch developments exceeding RM2bil.

The group's managing director Datuk Jamaludin Osman says the property developer is on track for another year of strong financial performance, after achieving sales of more than RM1bil last year.

Also in 2007, PNB, through Synergy Drive Bhd merged Golden Hope Plantations Bhd, Kumpulan Guthrie Bhd and Sime Darby Bhd group of companies. Although all three were predominantly plantation companies, they had large landbank and were also involved in property development. The strategy was to take out the property segment of these companies and put them in a separate folder. The merger subsequently resulted in a re-listing using the Sime Darby name.

Today, I&P group has more than 5,000 acres while Sime Darby, after the mega-merger, has a massive and undeveloped landbank of 37,000 acres, as well as 126,000 acres in Sime Darby Vision Valley. When it took over Eastern & Oriental Bhd, it added 1,500 acres more.

The question is, has size created value? Says an analyst: “I&P is hardly a force to be reckoned with. We haven't seen any stellar results from them.”

Says a second analyst: “Because I&P is a private company, we can't easily see its financial results, which makes it hard to judgeits performance. So far, it doesn't look likeit is game-changing. But if you look at its properties, it seems to be selling like hot cakes, especially the ones in Kinrara. If you look at it that way, it appears to be doing well.”

A valuer says that while both I&P and Sime Darby Property Bhd have the land and are selling houses, “what have they done for the property sector?”

He says despite the size and market capitalisation, a close scrutiny of the numbers will reveal that the margins may not be that attractive.

Taking a broader view, a property consultant says Malaysia is a free market and the institutionalising of property companies will affect the strength and character of the market.

“If we consider the forefront property companies, it is the older entrepreneur-led ones that have shown the most innovation, product differentiation and are the most popular. These property companies have led the way.

“In 2008, after the financial crisis sparked off by the fall of Lehman Brothers, SP Setia was the first developer to come out with a different response. It worked with the banks and introduced the 5/95 scheme which kicked off in the first quarter of 2009.

“Good or bad, not all of us will like the scheme. But that led the way out for other developers and eventually the banking sector. Both these sectors are crucial in any economy,” says the valuer.

The company's “live, learn, work, play” tagline also advanced forms of properties into the market. Another company that has emerged strong is the Mah Sing group.

“In terms of energy, these entrepreneur-driven companies are different. Institutional giants have difficulties keeping their cost down and their margins up. The strength of the market is at the end of the day a free market.

“Competition is key to success for any market. When entrepreneurs compete with each other, the greatest good can be brought into the market. Institutional developers will not compete head on with each other and this is detrimental to the market.

“Also, too many institutional developers also lead to de facto monopolies,” he says, referring to the takeover by Sime Darby group of lifestyle housing developer E&O group a month ago, and UEM group's takeover of Sunrise Bhd, which is known for its condominium branding in Mont'Kiara. PNB owns Sime Darby group while UEM belongs to government-linked Khazanah Holdings Bhd.

Although PNB has issued a statement that it has confidence in the existing management team at SP Setia and that the company will continue to be listed, many question the way it went about it.

PNB president and group chief executive Tan Sri Hamad Kama Piah Che Othman said in a statement: “The offer is in line with PNB's long term strategy of enhancing its investments in the property sector. We are confident in the prospects of the sector in Malaysia which has strong fundamentals and potential for future growth.

“Having a strategic holding in SP Setia would further strengthen our portfolio, which already has a strong presence in banking, plantation and automotive sectors, amongst others.”

PNB is a fund manager, says a consultant. Its duty is to seek companies of value and hopefully the companies it invests in will continue to create value over the long term.

The duty and responsibility of a company, whether PNB has a stake or not, is to create shareholder value and safeguard the interest of shareholders, including the minority interest.

“There is a clear division of duties and responsibilities between a fund manager and a property developer and it does not bode well to muddy the lines which separate the two distinct entities. There is also the fiduciary duty to protect minority interests,” he says.

Various case scenarios have been brought up. If PNB agrees to up the price and gets its 51% stake, will Liew stay? Will his management team remain intact?

From the various recorded history, he is an entreprenuer. Liew will want to call the shots. The company is known for its speed of execution and innovative decisions. Will the environment which has led to the company's success remain? Somebody will have to smooth the ruffled feathers.

Another scenario PNB teams up with the Employees' Provident Fund and Kumpulan Wang Persaraan and the whole thing comes to a close with some shareholders cashing out, enabling PNB to have its 51% stake. But this could be construed as Government-linked agencies ganging up against entrepreneurial-led businesses which could leave a blemish on Corporate Malaysia.

The intended takeover could also throw up another scenario - will there be another suitor? But which other deep pocket would be bold enough to go against the country's largest asset manager?

By The Star (by Thean Lee Cheng)