CDL growth drivers: delivery speed vital

PROPERTY and hotel group City Developments Ltd (CDL) is traditionally viewed as a good proxy for the Singapore residential market. This has been positive for its shares and its reputation because of strong sales volumes and a price run-up for mass-market private homes in the past few years.

But with the government determined to prevent overheating in the housing sector - with new rules governing property loans in addition to a host of cooling measures rolled out in the past few years - and oversupply widely expected to kick in from next year, the company has been looking to alternatives. The $64,000 question is: can CDL adapt and deliver fast enough?

CDL last week announced several new growth platforms to augment its domestic residential property development business, including steps to accelerate its overseas growth engine. Besides stepping up its existing China business (the group has real estate developments in Suzhou, Chongqing and Chengdu), it is looking to engage in residential projects in Central London. Myanmar is another potential overseas market, starting with hotels.

CDL will also seek a more active role when investing in joint ventures with private equity groups.

While looking at new platforms, the group continues to revitalise an important plank of its existing business: hotels. Despite the weaker first-half showing by the group's London-listed subsidiary, Millennium & Copthorne Hotels (M&C), CDL's executive chairman Kwek Leng Beng remains confident of its potential.

M&C will press on with an ongoing £240 million (S$470 million) refurbishment programme to reposition its key assets and stave off the competition when the global economy recovers. CDL has raised its stake in M&C from 55 per cent to 57 per cent. So confident is Mr Kwek of the future of the hotels business that he is open to further increasing this figure to around 75 per cent so that CDL can book a bigger share of M&C's profits.

It is in CDL's core business in Singapore residential property development that the group is feeling the pressure.

Mr Kwek has signalled a change when it comes to buying land, saying the "group would rather err on the side of caution in its land replenishment strategy". Put simply, the group can't keep milking the mass housing market the way it has been doing.

The high-end residential sector too does not offer much respite for CDL. Foreign buying in this segment has not recovered to the levels before the global financial crisis. Put off by a punitive additional buyer's stamp duty (ABSD) rate which currently stands at 15 per cent, many foreign buyers have been giving Singapore's luxury residential sector a miss. Despite sporadic cases of high- priced transactions in recent years, achieved price levels are on the whole below pre-2007/2008 figures, and opportunities to launch high-end projects continue to elude CDL.

Meanwhile, the clock is ticking for some of CDL's luxury residential projects that come under the ambit of Qualifying Certificate rules, which stipulate strict timelines for developers on the completion of a residential project and sale of all its units. The group has until the end of next year to complete Nouvel 18, a joint venture with Wing Tai in the Anderson Road-Ardmore Park area, as well as a condo project on the former Lucky Tower site on Grange Road. By end-2015, CDL will have to complete the condo on the former Futura site on Leonie Hill Road. After these project completion deadlines, the group will have a further two-year period to finish selling all units in each project. (It is not allowed to rent out the unsold units.) It may seek deadline extensions from the authorities but will have to pay hefty charges.

Of course, CDL could just launch these projects at much lower prices than it had planned, to move units - but that would erode goodwill among buyers who paid top dollar for the group's earlier luxury projects such as St Regis Residences Singapore and Cliveden at Grange.

CDL was once famed for its massive historical Singapore land bank in places such as Pasir Ris, Upper Changi, Kitchener Road, Havelock Road and Tomlinson Road. Much of this has been developed in the past decade. The current regulatory environment makes it difficult for any developer to build up a residential land bank in Singapore.

This is the state of the market, which has led the man once dubbed "Kwek Land Bank" to steer the group towards new growth platforms.

Even as its Singapore housing sales start to slow, the group can still count on some support for its bottom line from existing projects from which it has yet to start booking profits, either because these are in the early construction stages or because building works have not begun yet. Examples include Haus@Serangoon Garden, Echelon, Up@Robertson QuayBartley Ridge and D'Nest.

But with a potential storm brewing in the island's residential sector, speed will be the key in steering CDL to new growth platforms.

Source: 14th August 2013 Business Times

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CDL growth drivers: delivery speed vital

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