Plenty of potential in residential

Published May 10, 2007

Plenty of potential in residential

CityDev chairman plans to keep some units in new residential projects

By KALPANA RASHIWALA

KWEK Leng Beng is so confident about the ongoing property bull market that he's considering retaining a portion in some new residential developments for rental income and capital appreciation.

'We'll do this selectively and it will help us even out earnings fluctuations from our core property development/trading business,' says Mr Kwek, who is executive chairman of Hong Leong Group and its listed property unit City Developments.

This new business model is no different from keeping office buildings for rental income, he explains in a recent interview with BT.

'Residential also has a lot of potential. Let's say, I had two towers in a residential project. I could sell one, and keep the other - and maybe sell later when prices are higher, keep for rental income, or even go for an en bloc sale one day, when I will be entitled to a windfall,' he said.

The issue in today's hot property market is that 'the selling price of your current project becomes the break-even cost for your next project' because of the ever-increasing cost of buying replacement land. 'You might as well not sell your residential development,' Mr Kwek argues.

He says that retaining a portion of units in residential developments makes sense also because residential rentals are set to appreciate further on the back of leasing demand created by the influx of foreign talent into Singapore.

He also points out that the number of new homes built on sites sold through collective sales may be smaller than the existing stock that is being pulled down because of the trend of building bigger homes.

Mr Kwek also says that with the Singapore real estate sector booming, he would rather use his resources in a place where he has the best local knowledge and experience.

'I've always believed our strength is here. We are the proxy to the Singapore real estate sector. Why should we go overseas when we can make a lot more money here?'

'Also, for our group's property activities, we want to be a pure real estate company. We don't want to be a half-breed - half real estate, half financial. But things may change one day. Many institutional investors love the model of a financial, real estate company. But I tell investors: if they're looking for yield, they can buy into a Reit. There are people who like my model and are today enjoying a lot of capital gains.'

Mr Kwek also addressed recent concerns about the risks posed to banks that lend to developers which sell homes on deferred payment schemes. As most banks lend developers only up to 70 per cent of land and construction costs for residential projects, developers have to put in at least 30 per cent equity. And assuming they collect around 20 per cent payment from home buyers under the deferred payment scheme, these developers will have a cushion of about 50 per cent that will serve as a buffer to banks' exposure to them in the event of a housing price slide.

Mr Kwek also says that based on his model, if a developer sells half its high-end residential project and assuming that of the units sold, half are sold with normal progress payments and the rest on deferred payment, the sales proceeds collected by the developer should be able to pay for construction and related costs, depending on profit margins.

He also doles out advice for individual property investors, saying those who have sold their homes through en bloc sales should quickly re-invest their windfall in another property, to continue riding on the current buoyant property market.

On the common complaint among owners that sales proceeds from en bloc sales are insufficient to buy a replacement property, he suggests: 'Why don't you use the sales proceeds to fund half of your purchase and borrow the other half? This makes sense because the purchasing power of money becomes smaller over time.'

Another common complaint: 'If I sell, I can only afford a replacement property in an inferior location.'

Mr Kwek's answer: 'This is faulty thinking, because you are exchanging an old property of, say, 20 or 30 years, for a new one. If you want to be in the same location, you have to pay the new price. But do you need the larger older unit or a similarly large new unit where the cost is much higher? A new and smaller unit could be the answer.'

En bloc sellers should make the most of their windfall to re-invest for another windfall that will come about in the years to come, he says.

Another compelling reason to include real estate as part of one's investment portfolio: 'If you look at Forbes' list of the world's richest persons, many of them have their wealth backed by real estate.'