They may also privatise their development businesses while keeping their investment, lodging segments listed

 

MINORITY shareholders appear to be the immediate winners from CapitaLand' s restructuring exercise as the implied consideration for each share based on current share capital is S$4.102.

 

This represents a 24 per cent premium to the property group' s last closing price of S$3.31 on Friday.

 

Looking ahead, how much of a winner the deal is for CapitaLand' s shareholders, who will become shareholders of CapitaLand Investment Management (CLIM), hinges on the financial and share price performance of CLIM.

 

Close to 70 per cent of the implied consideration or S$2.823 per share, which is CLIM' s net asset value (NAV), is ascribed to CLIM.

 

Could CLIM suffer the fate of property groups in Singapore and Hong Kong by trading at substantial discounts to net asset value?

 

CapitaLand itself was trading at over 20 per cent discount to NAV.

 

There is hope though for CLIM which is positioned as a real estate investment manager (REIM). Listed REIMs in Australia such as Goodman Group and Lendlease Group trade at premiums to book value.

 

CLIM with stakes in six listed real estate investment trusts (Reits) and business trusts plus more than 20 private funds may enjoy better valuation metrics than CapitaLand in the listed space.

 

At the same time, CLIM can still lean on the development business capabilities of CapitaLand, which will be privatised, to provide a pipeline of assets to acquire and operate.

 

CLA Real Estate Holdings (CLA), an indirect wholly-owned subsidiary of Temasek, which is 52 per cent owner of CapitaLand, will continue to hold 52 per cent of CLIM under the restructuring as well as all the remaining real estate development-related business and assets under CapitaLand with a pro forma net asset value of about S$6.1 billion.

 

Investors may initially struggle to value CLIM on the Singapore market given the dearth of REIM peers. Perhaps a listing by ARA Asset Management will give CLIM company.

 

Temasek itself may choose to share the fund management and investment business of its wholly-owned Mapletree Investments with institutional and retail investors via a listing on the Singapore Exchange.

 

Investors may also have some concerns over the lodging business of CLIM, which accounts for 24 per cent of CLIM' s S$115 billion of assets under management.

 

CapitaLand' s lodging business saw earnings before interest and tax plunge 86 per cent year-on-year in 2020. How quickly and fully the serviced residence business recovers will be keenly watched by investors.

 

Lee Chee Koon assumed the helm of CapitaLand in September 2018. Under his leadership, CapitaLand strengthened its portfolio in new economy sectors such as business parks, logistics and industrial properties and scaled up in India via its S$11 billion acquisition of Ascendas-Singbridge in 2019.

 

The restructuring that will result in the formation of CLIM is another bold move under Mr Lee' s watch that will hopefully secure better valuation in the public market and position Asia' s largest REIM to scale up even quicker.

 

CLIM will be free from the capital intensive business of development where gestation periods can be long and fierce competition to secure land be it in Singapore or China which squeezes margins.

 

CapitaLand was an innovator with the listing of Singapore' s first Reit in 2002.

 

Could the group' s restructuring lead others to follow suit?

 

Property developers such as Keppel Land, SC Global and Wheelock Properties (Singapore) have left the Singapore bourse and been privatised.

 

CapitaLand' s restructuring is further proof of the inefficiency of having a property development business listed.

 

Peer City Developments may be tempted to follow suit and split its development and investment business once it has settled ongoing problems with its investment in Sincere Property Group.

 

Other listed property groups such as UOL Group, Frasers Property and GuocoLand trade at much heftier discounts to book value compared to CapitaLand. They may be wise to monitor how CLIM trades post listing.

 

These groups could emulate CapitaLand by privatising their development businesses while keeping their investment and lodging segments listed.

 

As for CLIM, the soon to be new kid among large cap Singapore groups, the challenge is to ensure its real estate offerings are relevant in a post-pandemic world, and scale up.

 

Getting the operations right should then translate to improved return on equity and ability to pay higher dividends, which in turn should lead to share price appreciating.