Singapore Companies
Published November 11, 2006

Small operators take on big real estate developers

Food market operators, pulp mills, motel chain go into property

(SINGAPORE) When motel operators get into the business of selling luxury homes, property must be hot.

Indeed, Singapore's real estate market is so attractive, firms in sectors spanning food market operators, pulp mills and motels are entering a sector long dominated by giant developers CapitaLand and City Developments (CityDev).

While companies such as budget hotel chain and property developer Fragrance Group and pulp mill United Fiber System are small fry next to such Goliaths, the lure of making a quick profit by building and selling homes is proving irresistible.

'It's a sign the high-end residential market is hot. Everyone is piling in,' said David Lum, an analyst at Daiwa.

Singapore real estate prices, which lagged the Hong Kong property market recovery for years, began to pick up after July 2005 when the government eased rules on property financing and purchases by foreign investors.

The planned building of two casinos and a new business and financial district have added to the cheer, and while an index of private sector property prices is still 30 per cent below its 1996 peak, some new properties are now fetching prices last seen before the 1997-98 Asian financial crisis.

Heeton Land, which started out in 1976 running fresh food markets, and builder Koh Brothers are among the firms now developing luxury homes in prime locations, competing with better-known names such as SC Global Developments and Wing Tai Holdings.

Engineering company BBR Holdings said last month it would generate 40 per cent of its sales from property development in the next five years, up threefold from its current level.

These new developers are tiny. Most have a stock market value below $200 million, compared with major real estate players such as CapitaLand, valued at nearly $16 billion, and CityDev, worth $10.5 billion.

Analysts say these new developers face intense competition, given that in Singapore more than 80 per cent of the 4.4 million people live in public housing.

In terms of land resources, the new entrants may be at a disadvantage compared with the more established players which have had years to build up their land banks.

CityDev, the second biggest developer in South-east Asia after CapitaLand, has about 9.1 million sq ft of gross floor area in Singapore - or about 15 times that available to builder Sim Lian Group.

While their small size means they tend to be ignored by fund managers, a few have attracted other investors who are willing to provide financing in return for a share of the profits.

In September, construction firm Chip Eng Seng Corp teamed up with Chicago-based hedge fund Citadel Investment Group to develop a residential project in Grange Road.

Without such funding, some of the smaller developers cannot acquire land unless they borrow, which analysts said could make them vulnerable to any sharp downturn in housing demand.

Construction firm Koh Brothers, which has a market value of $80 million, has spent $69.6 million so far this year buying land for residential development with the help of bank loans.

'It's a mixed bag, really. Some companies are better positioned while others appear to be just jumping on the bandwagon,' said OCBC analyst Winston Liew.

Those players with building and engineering experience are better positioned to compete, analysts said.

For example, Sim Lian, set up in 1976, has the expertise to keep construction costs low, allowing it to earn healthy profit margins, said BNP Paribas analyst Kok Kenji.

'Since they are in construction themselves, they can sidestep the tender process, which can take two to three months, and quicken the turnaround from land acquisition to project launch,' he said.

Sim Lian's shares have surged 124 per cent in the past three months, fuelled by investor optimism over its plans to generate 70 per cent of its revenue from property development within five years, up from the current 56 per cent.

Sim Lian shares trade on a forecast price-to earnings (PE) ratio of 11 times, compared with 36 for CityDev.

Indeed, the average 50 per cent gain chalked up by property shares in the last year has been outpaced by some of these engineers-turned-developers - BBR shares have surged 117 per cent while Koh Brothers shares have risen 65 per cent. - Reuters