Ailing firms find new lease of life in real estate

31-12-2018 | Space Recce

Ailing firms find new lease of life in real estate

WHEN the going gets tough, many companies turn to property as a possible panacea - with several of them unveiling plans in recent months to diversify into the sector.

These include A-Smart Holdings, MS Holdings and Katrina Group, which have separately announced intentions to acquire land or own real estate - veering away from their core businesses of printing, crane rental, and food and beverage respectively.

Yet the road to successful real estate investment is a bumpy one, and these companies may want to take a leaf from those that have been on that journey before.

Timing, location of the property and management capabilities are some of the key ingredients when venturing into real estate, according to GSH Corporation, Thakral Corporation and IPC Corporation, which have shifted to real estate from their original core businesses.

Once the largest homegrown personal computer maker, IPC had gone from PCs to property. The company transformed itself into a real estate player after its original business soured nearly 20 years ago.

Bernard Ngiam, executive director at IPC said: "In hindsight, the chance and timing were right but we were conservative as we entered into real estate all by ourselves. There is no absolute right or wrong, good or bad, in the decision of diversifying into the property sector. It all depends on strategies and sectors to focus on, as well as understanding the risks involved. In property investment, timing is key."

IPC's maiden project was a residential-commercial mixed development in Zhuhai, China. It drew on the experience from that project and ventured into the US and Japan in 2009.

It acquired nine hotels in Japan. But in 2015, the company decided to focus on asset-light hospitality management instead, and divested all these hotels. It distributed the proceeds to shareholders at S$1.60 a share.

Mr Ngiam said: "This demonstrated our ability to successfully invest in and divest properties while generating high returns on investment for our shareholders."

IPC's financials have been erratic. Its losses for the quarter ended September widened to S$2.6 million from S$1.1 million a year ago.

The losses were mainly due to the sale at a S$1.5 million loss of a stake in a land for development and weaker sales at its Zhuhai hotel, it said.

Its losses for 2017 and 2016 were S$4.8 million and S$11.5 million respectively. But it posted a profit of S$21.9 million in 2015 and S$28.6 million in 2014.

Former consumer electronics distributor Thakral now counts on property to be a key income steam.

Thakral chief executive officer Inderbethal Singh Thakral (Mr Bethal) said: "We are a small player. Our own experience tells us that real estate is a cyclical business and that ideal location and timing are of primary importance in this business."

Thakral had been making losses in its core business of consumer electronics distribution a decade ago. It then mooted the idea of going into property to stem the red ink.

However, its major shareholder then, Hong Leong Asia (HLA) was dead against the proposal. Thakral went ahead, nonetheless, to expand its exposure to the real estate segment.

Mr Bethal said: "The strong contributions from our real estate investments offer clear-cut proof that the board has taken the right strategic move."

The investment division posted S$20.4 million or up over 20 per cent in segmental profit for the nine months this year.

By contrast, the lifestyle division, which Thakral has focused on after reducing its exposure to the consumer electronics sector, has been struggling to turn a profit in recent years. It incurred a S$1.7 million loss for this year's first nine months.

JEL Corporation, now known as GSH, had abandoned its original key revenue generator altogether and repositioned itself as a pure property player.

To the firms that want to tap the property market, GSH CEO Gilbert Ee advised that the board, management and shareholders "have to consider carefully, taking into account its collective experience and management capabilities, as well as the resources that it has to take on (given) the high capital nature of the real estate business".

GSH, previously a consumer products distributor, was placed on the watch list in 2010, after three consecutive years of losses. It saw the light at the end of the tunnel when white knight Sam Goi came to its rescue in 2012.

Mr Goi, who has had substantial experience in developing properties in China, led GSH's venture into real estate - kicking off with the acquisition of Sutera Harbour Resort in Sabah, Malaysia in 2014.

By end-2014, GSH had divested its entire trading and distribution business, and become a pure property player. In its 2015 annual report, the company said it was "gratified that the strategy to diversify into property development and hospitality businesses had put it on the road of profitability, and thanked the shareholders for their support of this major strategic shift in business".

However, there were speed bumps in the transformation for the new kid on the block. For instance, the overall occupancy of its Sabah hotels took a hit when Malaysia Airlines Flight MH370 mysteriously disappeared and a spate of kidnappings happened in east Malaysia, resulting in lower Chinese tourist arrivals in 2014.

The company generated S$58.4 million profit in 2014 - the first year after it invested in property - and S$16.4 million in 2015, but made a loss of S$3.6 million due to lower sales in 2016. In 2017, profit rose to S$87.5 million on disposal gains from the sale of an investment that owns GSH Plaza.

CBRE's head of research for Singapore and South-east Asia Desmond Sim said investing in real estate requires due diligence and market knowledge. On why Singapore companies seem to have a penchant for real estate business, Mr Sim reckoned that "it's a very Asian thing", because land is limited. He added that real estate is a value proposition of growth and could provide companies with a strong recurring income.

But those that jump onto the bandwagon will have to expect keen competition from the established and bigger players in the sector.

New entrants with limited capital will usually start off with small projects or kickoff with joint ventures such as piggybacking on mid-cap developers which would welcome the capital injection, Mr Sim has observed.

Associate professor Sing Tien Foo from the National University of Singapore's department of real estate noted that new property players are more susceptible to market cycles given that they are less established.

Furthermore, having suffered losses in earlier businesses, these players may not have the financial muscle to compete with the incumbents and therefore could only carve out "very small market shares", be niche players or tap the emerging markets like Vietnam where land is still relatively cheap.

"Their turnover is very quick, so that they can sell the project, so that they don't need high financial requirement, and the holding period is very short," Prof Sing said.

Credit to Business Times published on 24 December 2018


Contact Space Recce for more market news and available Commercial Property in Singapore.




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