Oct 12, 2021

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A RUNDOWN of Temasek Holdings' stakes in the property stable here may raise questions, from time to time, if any consolidation is due.

 

To answer this question, let' s take a look at what they currently hold.

 

The state investor owns all of Mapletree Investments, which focuses on real estate development, investment, capital and property management. Mapletree has assets under management (AUM) of S$66.3 billion as at Mar 31, 2021.

 

Property giant CapitaLand Limited (CLL) recently completed its corporate restructuring which split the development and investment businesses. Temasek owns all of the privately-held development business under CapitaLand Development (CLD). It has a deemed interest of around 52 per cent in the listed vehicle CapitaLand Investment (CLI). With real estate AUM of S$119 billion as at Jun 30, 2021, CLI focuses on investment management platforms and lodging.

 

Temasek has a direct and deemed interest totalling around 21 per cent in listed conglomerate Keppel Corporation. Two of Keppel' s four key business segments - urban development and asset management - are largely property focused.

 

Urban development and asset management were Keppel' s top profit contributors in the first half of 2021, posting net profit of S$279 million and S$117 million respectively.

 

In urban development, Keppel develops homes, offices, commercial and integrated developments as well as being a master developer of smart and sustainable cities.

 

Keppel Capital carries out the asset management business of the group and has AUM of around S$37 billion as at end-2020.

 

The AUM could grow to S$47 billion, should Keppel succeed in buying the non-media business of Singapore Press Holdings, which publishes The Business Times.

 

Similarly so

 

What that factual rundown shows is that Mapletree, CapitaLand entities and Keppel, deploy business strategies with many similarities and often focus on the same property asset classes and geographies.

 

CLD and Keppel are active in property development in Singapore, China and Vietnam. For the first six months of 2021, CLL reported sales of 2,625 units in China with a total sales value of 8.0 billion yuan (S$1.7 billion) in residential trading while Keppel posted sales of 1,367 units in China with a total sales value of 6.6 billion yuan from residential projects in Shanghai, Wuxi and Nanjing.

 

CLL made total investments in new economy assets such as logistics properties and data centres of over S$3 billion in the year-to-date Aug 12.

 

Mapletree deployed S$2.3 billion into the logistics and data centre sectors in the financial year ended Mar 31, 2021.

 

In recent months, Mapletree bought two portfolios of logistics assets in the United States, comprising 141 assets for a total investment value of around US$3 billion (S$4 billion).

 

Mapletree, CLI and Keppel are actively growing their real estate fund management businesses, through listed real estate investment trusts (Reits) or private funds. Six of the seven Reits that are members of the benchmark Straits Times Index have one of the trio as a sponsor and owner of the manager.

 

CLI' s Ascendas Reit and Mapletree Industrial Trust have fairly similar mandates. There are overlaps in the areas of focus of CapitaLand Integrated Commercial Trust, Mapletree Commercial Trust and Keppel Reit.

 

Given business focus areas and strategies overlap, should there be consolidation? Across many businesses, groups merge to increase scale, reduce competition, enhance coverage of specific segments or geographies, and save costs.

 

It may make little sense for Temasek-linked groups to compete for a development site in China, a portfolio of data centres in the US, and real estate investment mandates from institutions.

 

Messy affair

 

But consolidation among Temasek' s property entities can be complex and messy given that Temasek' s stakes in Mapletree, CLD, CLI, and Keppel vary and there are private and public vehicles to deal with.

 

But the bigger question is whether a behemoth created from a merger of Mapletree, CLD, CLI and Keppel' s property business is worth having.

 

Perhaps leaving each of Mapletree, CapitaLand entities and Keppel to run independently and collaborate or compete on specific opportunities makes better sense.

 

On a standalone basis, each of these property businesses may already be of sufficient scale to be competitive.

 

Mapletree achieved return on equity (ROE) of 10.6 per cent for the financial year ended Mar 31, 2021. Its five-year average ROE, excluding the last financial year, was 12.9 per cent.

 

As is, the various Temasek-linked property businesses enjoy access to a diverse range of funding sources and competitive rates of financing.

 

Perhaps there is no competitive pressure to spur any merger among the Temasek-linked property groups.

 

This is unlike in the global offshore and marine engineering and energy sectors, which are feeling the effects of a major transition away from oil globally.

 

Here, Temasek-linked Sembcorp Marine has inked a memorandum of understanding with Keppel to explore the potential combination of it with Keppel Offshore & Marine.

 

The property development business is not one where one or two players account for the bulk of projects in any major market. Ownership of investment properties is also fairly fragmented.

 

A landlord can better service space users by offering potential tenants a large portfolio of properties to choose from. However, specific buildings can leverage unique selling points from location, design or specifications to draw tenants.

 

Pit against one another

 

Private real estate fund investors may be happy to diversify risks by parcelling out monies to be managed by different groups. Institutional and retail investors of Reits may value having choice from trusts competing within a particular asset segment as this may drive better performance.

 

Indeed, it may be optimal for Temasek to have several credible entities within its stable operating in the property space.

 

Amid plenty of capital searching for good deals, having more entities hunting around, staffed by teams with hungry people, can help in securing prized deals.

 

Competition within the Temasek stable can also spur the creation of superior property developments and continuous building improvements, which will in turn yield better financial returns.

 

If Mapletree, CapitaLand entities and Keppel can each produce good returns from their property ventures, Temasek has no need to upset the apple cart.

 

What works best can be competition alongside sharing of best practices. If Keppel can make good returns from senior living, CapitaLand entities or Mapletree can adopt some of Keppel' s practices in building a presence in senior living.

 

CLI has made a strong trading debut with investors trading this real estate investment manager at a substantial premium to its end-2020 pro forma book value. Perhaps the market' s embracing of CLI will lead to the real estate investment management businesses of Mapletree and Keppel listing on the local bourse.

 

Consolidation can save some costs from having fewer board directors and eliminating some senior management roles. But such cost savings are small when measured against the ticket sizes of property acquisitions and development projects that are often in the hundreds of Singapore dollar millions or more each.

 

Let the intra-stable competition among Mapletree, CapitaLand entities and Keppel do its work to produce superior returns.