Why frenemies can work together in property projects

The reason probably lies with the capital-intensive nature of property development and investment here

Feb 01, 2022



PARTNERSHIPS proliferate in the property space here. Over the past 12 months, several partnerships won land tenders, such as the tie-up of City Developments (CDL) and MCL Land, a consortium comprising a Qingjian Realty and Octava Pte Ltd joint venture, and Santarli Realty, and a tie-up comprising entities of Hong Leong Group Singapore and GuocoLand.

Perhaps it is easy for parties with common shareholders to come together to jointly develop sites or own investment properties.

Some sponsors of real estate investment trusts (Reits) partner their Reits. GuocoLand partners its major shareholder, Guoco Group, while UOL partners its subsidiary Singapore Land Group. The Ng family's privately-held Far East Organization (FEO) partners Hong Kong-listed Sino Land, in which the Ng family are major shareholders.

The FEO-Sino Land tie-up secured the commercial and residential site at Jalan Anak Bukit, with its bid of around S$1.028 billion, last year.

Two Kuok Group entities, namely Allgreen Properties and Kerry Properties, formed a joint venture to develop Pasir Ris 8, which saw a highly successful sales launch of its homes in 2021.

There are tie-ups formed where one partner is particularly strong in a certain market.

Last year, Yanlord Land Group and Ho Bee Land announced a 51:49 partnership to jointly develop a 53,200 square metre site located in Tianjin, China, into a high-end residential development with ancillary community retail space and educational facilities. Between the partners, Yanlord has a more China-centric business and extensive property development track record in China.

Leading Japanese groups such as Sekisui House, Mitsubishi Estate and Mitsui Fudosan have teamed up with local giants FEO, CapitaLand and CDL respectively in projects here.

There are also tie-ups formed to undertake projects here by unrelated parties with extensive track records in developing sites on their own. Examples include CDL partnering MCL Land and CDL partnering CapitaLand.

Why do property groups who are competitors form partnerships? Why not keep all the profits to one self or have full control over a property thereby saving the hassle of dealing with a partner?

There are parties that prevailed at land tenders by bidding on their own. GuocoLand won the Lentor Central site designated for private housing development with commercial space at first storey in 2021, while CDL secured the private housing development site at Jalan Tembusu this year. Also, many groups solely own prime commercial buildings in Singapore.

Market dynamics

Still, the property business is one where competitors collaborating on specific projects makes sense.

Home buyers may like certain developers. But a project's location, pricing, and concept as well as the size and layout of a specific unit may matter even more.

In the leasing of space, factors such as location, building specifications, characteristics of a unit and tenancy terms may matter more than the reputation and network of the landlord.

In government land sales here, the process is transparent and no single party enjoys any inside track. Much of project development work here is outsourced by developers to parties such as architects, contractors, interior designers and sales agents.

Certainly, each property player needs to know the market to correctly bid for land and position a project. But in property development and investment, there is little intellectual property, unlike with patented drugs, or value attached to branding of the developer, unlike with consumer products.

Often, special purpose vehicles are used to hold a development site or an investment property. Money earned and spent on a particular asset can be easily tracked. With residential development projects, the special purpose vehicle can be wound up fairly quickly post a project's completion, subject to satisfying regulatory requirements.

The reason for frenemies to work together probably lies with the capital-intensive nature of property development and investment here.

Projects with a gross development cost of a billion Singapore dollars or more each are not uncommon. Given the ticket size per project, parties may be happy to diversify risk by spreading their fire power across more projects rather than concentrating resources on just 1 or 2 projects.

But partnerships can go awry at times.

Perennial Real Estate Holdings and Pontiac Land Group's affiliate Chesham Properties secured the landmark Capitol site here in 2010, along with a third party that later left the joint venture.

The relationship between Perennial and Pontiac soured as disagreements cropped up and the project stalled amid a feud between the partners. Perennial went to court to seek the winding-up of the project's associated companies, but it lost the case.

Eventually, Perennial became the sole owner of the Capitol Singapore project in 2018, by buying out Chesham following a settlement agreement.

In 2019, CDL unveiled its strategic investment into Sincere Property Group, which CDL termed a transformational move to accelerate growth in China.

Amid Sincere facing significant liquidity challenges, CDL booked a S$1.78 billion impairment for losses attributable to Sincere for the year ended Dec 31, 2020, effectively writing down 93 per cent of its total investment in Sincere. CDL did not have majority control of board decisions at Sincere.

In 2021, CDL exited its investment in Sincere for a consideration of US$1.

The way forward

While buying into an existing business can allow for quicker scaling up, such investments may be much trickier to get right than forming a joint venture to buy an investment property or a piece of land.

Property players constantly look to diversify risks and optimise use of capital. Going forward, expect groups to continue simultaneously competing intensely with one another on specific developments, while collaborating hopefully harmoniously on other projects.

Iron issues out upfront, put in place a suitable structure and have mutual trust and respect. With the right product and market conditions, frenemies can prosper by working together in the property world.