By Khairie Hisyam
A quick turnaround model has defined Mah Sing’s approach to the property sector over the years, unlike many of its peers. But can the model survive the changing conditions of the market today?
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For Mah Sing, Malaysia’s second largest developer by sales value, the market lies in the present. Once it has acquired a land parcel, the developer generally aims to unveil its development project within 12 months.
The reason is to tap into the immediate market demand surrounding the location, said Mah Sing group managing director Leong Hoy Kum.
“In the past, most of the land we acquired were small, pocket-sized parcels, so turnaround was very, very fast,” said Leong to KiniBiz. “But even though now we are looking at big parcels of land, we still adopt the same strategy for the initial phases.”
This quick turnaround business model, which runs against how most property developers would normally hoard land and slowly tap into the growing land bank over time, is a legacy from the company’s early days.
One reason for doing so even with large-scale projects, added Leong, is to ease the company’s cash flow.
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“For example, let’s say we acquired 1,000 acres of land. For the initial phases we launch fast,” said Leong, who had been the driving force behind Mah Sing for over two decades. “So we can then pare down our land costs and as for the remaining land area, that’s where we add value.”
The success of this approach is evident. Over the past five full financial years, Mah Sing’s revenue had grown by nearly threefold, as had its net profits.
For the financial year ended Dec 31 2013 (FY13), Mah Sing posted RM2 billion in revenue, translating into RM371.5 million in pre-tax profits and RM280.6 million in net profits. In comparison, the developer’s revenue in FY09 was RM701.5 million, which translated into RM144.2 million in pre-tax profits and RM94.3 million in net profits.
This results in a compounded annual growth rate (CAGR) of 23.4% over the five-year period in terms of revenue. In terms of net profits, the CAGR over the same period comes to 24.4%.
Not slowing down
Going forward Leong has no intentions of changing the way Mah Sing operates in this respect, given that the developer had done well with the approach.
“Our quick turnaround strategy is still going to continue despite the size of the land —whether big or small,” said Leong.
In the face of the property market slowing down, however, is Mah Sing’s business model still viable? While developers have complained of sales suffering this year after the cooling measures introduced in Budget 2014 last year, property market insiders have also noted that loans rejection is also on the rise, especially for the lower income groups.
When asked if he foresees a scenario in which the developer may have to shift its strategy and slow down a notch, Leong does not think so. At the end of the day, it comes down to knowing what the market wants and offering exactly that, he added.
“I think it’s about the market’s needs — very simple,” said Leong to KiniBiz, noting that it is a matter of knowing what any particular target segment wants and can afford to buy. “I think we are still doing well in that sense.
Leong points to one of Mah Sing’s recent launches, the integrated residential and commercial development Lakeville Residence in Kepong, worth RM1.5 billion in total gross development value (GDV). With built-up from 978 square feet per serviced apartment units upwards and prices starting from RM561,800, the launch saw a strong 85% take-up rate in August.
“We priced it right, about RM500 to RM600 per square foot. Of course it is not as easy as before and you may tend to have some dropouts,” said Leong. “But once you are able to catch the right crowd, the right group, that they are still eligible to borrow, I think you should still be alright.”
Land buy hiccups
Going with a quick turnaround business model means an aggressive landbanking drive is a must. Last year alone Mah Sing announced six land acquisition deals worth RM9.72 billion in GDV collectively that cost RM855.6 million in total.
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As for this year, the developer had announced three land deals so far, totalling RM1.34 billion. These three land acquisitions are expected to have a total GDV of nearly RM20 billion.
However some of Mah Sing’s recent land acquisitions had seen surprising hiccups given its status as among the bigger boys of the Malaysian property scene.
In November 2013, Mah Sing’s proposed buy of a 1,352-acre township land in Pasir Gudang, Johor Bahru for RM411.16 million hit a snag when it was found that there was a caveat on the land and that the seller was involved in a winding-up petition in the Johor Bahru court.
The deal was later pushed through after the price was revised down to RM401.16 million in exchange for an accelerated payment of RM6 million to the seller to help resolve the latter’s commitments. This acquisition was completed early last month.
On Aug 11 this year, Mah Sing inked a deal worth RM359.5 million to buy a 1,400-acre freehold land parcel in Seremban but two weeks later announced the discovery of a caveat lodged on Aug 8. The developer subsequently announced it is mulling its options pending clarification from the vendor.
“The hiccups are issues on the part of the landowners,” said Leong. “And sometimes these caveats are of no issue, sometimes they are just nuisance caveats.”
Leong adds that Mah Sing conducts thorough due diligence checks on its land acquisition targets. Should the due diligence team see potential hurdles, the developer would still proceed if it feels the hurdles can be overcome.
“There is no reason that you cannot remove caveats,” said Leong. “It’s not like a death sentence.”
‘No such thing as no demand’
Looking at the market today, Leong feels that the property cycle is at a stage where more and more people are looking for affordable homes to buy. The key to riding the ever-shifting cycle is to adapt, he said, by recognising where the cycle is and adjusting product offerings accordingly.
“There is no such thing as no demand,” said Leong, who feels the property cycle can last from 10 to 12 years, maybe longer. “If you know how to price it, how to offer the right type of product for different parts of the property cycle, I think you’ll survive.”
Times may be hard for many aspiring homebuyers as well as property investors in terms of obtaining financing, but the desire to buy remains, added Leong, especially among the younger generation who are now starting their own families and need space that cannot be provided by their parents.
“You can’t tell me that these people will never buy a house,” said Leong. “To form their new households, these people have to buy a house somehow because their parents can no longer accommodate a new family.”
The way to tap into this need, said Leong, is to recognise how much funds the targeted buyer group can raise in terms of buying property. And different locations attract different crowds in terms of buyer profile, he added.
“You must offer the right products to the segment such that this group of people can still raise funds to buy,” said Leong. “That’s why a good developer must be able to identify the needs and then cater to the needs…I think that’s important.”
This relates back to the company’s philosophy of offering the right products at the right prices to fit the location and market, which had worked well for Mah Sing so far. “So far, so good,” remarked Leong to KiniBiz, smiling.
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