Published December 2, 2008

Property groups find asset sales tough going


A SERIES of aborted divestments by Singapore property groups lately highlights the challenges of relying on asset sales in the current environment.

Last weekend's edition of BT featured two stories on the same page, on Singapore's two biggest listed property groups - CapitaLand and City Developments Ltd (CDL). Both are in the same boat, with their respective planned divestments of overseas assets not completed.

CDL's London-listed hotel subsidiary Millennium & Copthorne Hotels announced that the agreement for the disposal of Millennium Seoul Hilton hotel to Korean group Kangho AMC Co had been terminated as the buyer was unable to finalise its financing arrangements amid the global financial turmoil.

CapitaLand's 30 per cent-owned associate Inverfin Sdn Bhd, which owns Menara Citibank tower in KL, reported that the sale-and-purchase agreement for the sale of the office tower had been terminated as the buyer, IOI Corporation Bhd, did not pay the balance purchase price on the completion date.

There have also been instances of transactions of Singapore buildings not being completed. Ho Bee announced last month that its proposed $30 million sale of Frontech Centre, an industrial building in Bukit Merah, had fallen through. The buyer is understood to have been US fund group Angelo Gordon. BT also reported last month that Australian property fund manager Blaxland did not go ahead with completing its planned acquisitions of eSys Technologies' building in Changi North and SH Cogent Logistics' warehouse building in Penjuru Close in Jurong.

The pullouts reflect the difficult conditions for property investment sales, caused by several factors. Firstly, funding is tight. But even potential buyers with financial muscle may get cold feet or decide it simply makes more sense to walk away from their purchase now and forfeit the deposit, as sliding property values will present more attractive investment propositions in due time. There may also be other issues at play, such as exchange rate fluctuations. For instance, from a potential buyer's perspective, the Aussie dollar's 21 per cent depreciation against the Singapore dollar in the past three months would make purchasing Singapore properties less attractive.

Putting things in perspective, a seasoned property consultant said: 'The current climate makes asset sales difficult, whether you're selling an apartment or a shopping centre.'

Property groups will have difficulty selling assets even to their sponsored real estate investment trusts (Reits). With the stockmarket slide, Reits are trading at very high yields, which makes it difficult for them to make yield-accretive acquisitions. And the current tight funding environment affects Reits as well; their priority these days is refinancing existing debt instead of sourcing new debt for further acquisitions.

The situation is likely to continue for at least the new few quarters; that will have implications for Singapore's property groups. Heavyweight CapitaLand has booked handsome profits from divesting assets in the past few years. In the past two years, the group has divested some $9 billion of assets - an exercise that has generated well over $1 billion in profits.

The group still has other assets that it could potentially divest, such as its industrial property portfolio here and even some of the office blocks held by its sponsored Reit CapitaCommercial Trust.

Prior to the global financial crash, CapitaLand would have had a high chance of success if it had continued on its path of asset disposals. Now, buyers are scarce and even those that are around would demand distressed sale prices (as cushion against further declines in property values after their purchase).

The trying financial climate will affect asset divestment strategies of even a heavyweight like CapitaLand. But at least it has stronger financial muscle to weather this storm even if it can't make major divestments in the near future.

Smaller players are not in the same boat. Some companies burdened with heavy debt and which had been hoping to unload some of their properties to improve their balance sheets will be caught if they can't sell their assets.

Hopefully, the malaise in the property investment sales market will not drag on too long.