Published December 24, 2008

El-Ad looks to offload South Beach, Futura stakes: sources

Market watchers say group's problems in US property market may be at play


(SINGAPORE) The high-profile South Beach development could see a new shareholder emerging if US-based El-Ad Properties, owned by Israeli billionaire Yitzhak Tshuva, manages to find a buyer for its stake, BT understands.

South Beach: The project has been pitched as a revolutionary New Eco-Quarter in Singapore

El-Ad Properties is said to be looking for buyers for its one-third stake in the South Beach project as well as its half-share in the Futura condo site at Leonie Hill Road. Going by its share of the purchase prices for the two sites, El-Ad's total investment in the assets would be about $707 million.

In the US, El-Ad has a partnership with another Israeli company to develop a US$5 billion mega hotel and casino project in Las Vegas and has announced that it would delay the start of construction for the project to 2010 instead of this year, due to financing difficulties and high construction costs, according to US media reports.

An El-Ad executive declined to comment when contacted by BT.

A property industry player observed: 'I think they are trying to sell their assets here because of their position in the US. A lot of their portfolio has exposure to the US economy and property market. '

For its two Singapore property investments, El-Ad is said to have initially hoped to exit at a profit but was later prepared to sell at cost in view of the global financial meltdown. Now, it could even discuss taking a haircut, industry watchers suggest.

On the surface, El-Ad's entry costs for Futura and South Beach were not out of whack at the time.

The group clinched the 99-year leasehold South Beach site jointly with City Developments Ltd (CDL) and Dubai World unit Istithmar in September last year for $1.69 billion or $1,069 psf per plot ratio (psf ppr). The winning bid was believed to have been around $500 million lower than the highest offer for the tender, which was evaluated on concept and price.

The freehold Futura site - El-Ad's equal partner in this acquistion is also CDL - was bought in Oct 2006 for $287.3 million, or $1,179 psf ppr. This is lower than prices fetched later for nearby sites such as The Grangeford, which was sold for $1,810 psf ppr in 2007.

Finding buyers is not expected to be easy.

'The issue in today's market is not intrinsic value or pricing, but weak property demand and managing cashflows,' an industry observer said.

'Tight funding would also be an issue with most potential investors,' he added.

The South Beach project development has been pitched as a 'revolutionary New Eco-Quarter in Singapore'. Cutting-edge green features in the Foster & Partners-designed scheme include slanting facades for the towers to catch winds and direct air flow to ground-level spaces.

CDL, Istithmar and El-Ad own equal stakes in the South Beach project, which will have hotel, office, residential and retail space and is expected to have a $2.5 billion total development cost. Last month, CDL said that the start of construction has been deferred until construction costs fall to more attractive levels.

Analysts say that typically, partners in a joint venture would have a right of first refusal (ROFR) to buy out fellow partners wishing to exit. 'A common strategy for the exiting party would be to try and get the best offer from the market for its stake and then use this as the basis to offer the first right to existing JV partners,' a property insider said.

For the benefit of potential investors wondering if it would be worth their while performing due diligence to buy El-Ad's stake only to discover later that other shareholders in the consortium will exercise their ROFR, CDL is understood to have indicated that it welcomes new partners. Put simply, CDL will not exercise its ROFR. The group had cash and cash equivalents of $813 million as at Sept 30, 2008.

When contacted, a CDL spokesman said: 'The joint venture is progressing well, with the major project like South Beach being slightly delayed to take advantage of the likelihood of lower construction costs in the near future.

'There is nothing to prevent venture partners in the property sector from looking for opportunities on their own, but one must be careful not to draw the wrong conclusion.'

CDL and El-Ad did their first transaction in 2004 when CDL's hotel arm Millennium & Copthorne Hotels sold its stake in The Plaza in New York to El-Ad in a deal that valued the landmark hotel at US$675 million.