It all turns sour for Capitaland

Liquid Real Estate, Euromoney magazine, December 2008

It was all going so well. A little over a year ago, CapitaLand was announcing its first half results for 2007: S$1.5 billion profit after tax and minority interests, five times higher than the previous year, with an eightfold year-on-year growth in Singapore EBIT as luxury development sales hit a record S$5500 per square foot. Just seven years after its formation from DBS Land and Pidemco Land, its real estate and hospitality empire had spread to 120 cities in more than 20 countries. Investors loved it, and investors in its five real estate investment trusts (REITs) particularly so: CapitaMall Trust was by then up almost 400% since listing, and CapitaCommercial Trust, Singapore’s first commercial REIT, by over 200%.

It doesn’t look much like that anymore. Between November 1 last year and October 28 this, the stock fell 71%. The REITs are looking even worse. Ascott REIT, a trust launched in the serviced residence sector, was trading at over $2 a share in July 2007 but plunged to 40 cents in October 2008; even after a modest rally it was down 73% from its highs at the time of writing. All emerging markets and property stocks have been punished in the last year, but this is extreme by any standards.

But is there anything really wrong with CapitaLand or is it just being oversold? A look at its earnings numbers makes the market reaction seem puzzling. When CapitaLand announced its third quarter results on October 31, it was able to boast $1.18 billion in profit after tax and minority interests for the year to date – a significant drop on the previous year when S$2.08 billion had been amassed by this stage, but significant income nevertheless.

Instead, the problem isn’t really the earnings, nor is it just about the outlook for property in CapitaLand’s most key markets (Singapore, China and Australia). It’s really about a much more toxic attitude towards the whole model that CapitaLand represents.

For years, CapitaLand has won praise for its model and its efficiency. Throughout this decade it has frequently been named Singapore’s best managed company by leading magazines. It made itself a player in every stage of the property supply chain: an investor, a developer, an operator, a manager, active in everything from retail to office, residential and hospitality. Crucially, it bolted on property fund management and real estate financial services as a key part of the business. By September 30 this year it had S$24.8 billion of assets under management: thinking of CapitaLand as just a property developer, and not a financial services group as well, is to miss the point.

In some respects CapitaLand came to resemble the Macquarie model of acquiring assets, putting them into separate trusts, listing some of them (five REITs in CapitaLand’s case, more than any other Asian developer) and keeping others private (of which CapitaLand has 17). Also like Macquarie, it believed in partnership with local experts in unfamiliar markets: in CapitaLand’s case Arcapita in Bahrain, for example.

And it worked like a dream for years, with plentiful liquidity, affordable debt and rising asset prices. In Singapore it rode the growing sense of optimism that the City State was becoming more and more of a player on the world stage, whether in financial services (it is now the leading regional centre for private banking and forex trading, among other things), luxury living or the marquee events like Formula One. It got into China and Vietnam well ahead of those places booming and it did it right: it can justly claim, for example, to be the premier shopping mall developer and operator in the whole of China.

But now everything that worked on CapitaLand’s favour on the way up is heading against it. Singapore and China are two of the markets with the greatest headwinds in their property markets; the liquidity has gone and debt, if accessible at all, is more expensive; and nobody likes either leverage or financial services anymore. On top of that, there appears to be alarm among investors who feel they can’t quite get a grasp on a complex business which combines property with finance and is exposed to a host of separate satellites. Which is, once again, something it shares with Macquarie.