By Khairul Khalid
Why is Sime Darby, Malaysia’s biggest property developer, selling land to smaller developers? KiniBiz examines its recent RM240 million Elmina land sale to E&O and argues that shareholders would be better served if Sime Darby keeps and develops the land itself.
_____________________________________________________________________
Recently, the country’s biggest conglomerate Sime Darby sold 135 acres of its township development City of Elmina to another developer Eastern & Oriental (E&O) for RM240 million.
The landbank carved out by Sime Darby is in Sungai Buloh, Selangor and is part of the 5,000 acre Elmina township development along the Guthrie Corridor Expressway northwest of Kuala Lumpur.
Overall, Sime Darby has a total landbank of approximately 20,000 acres for property development.
Sime Darby is also a major shareholder in E&O with a 22% stake in the niche developer. Both companies had signed a memorandum of agreement for the sale and purchase of the Elmina land last September 2013.
This would be E&O’s first tie-up with Sime Darby as its major shareholder. It has roped in other developers for various other projects, for example its land in Ara Damansara.
City of Elmina is a township being promoted for its dedication to a healthy lifestyle. It features a 70 kilometre cycling track, a 42 kilometre jogging track and a wellness cluster of retail shops, facilities and amenities.
Although many analysts have been positive about the deal, upon closer scrutiny there are a few things that raise questions.
What rationale for land disposal?
In its official statement for the land sale to E&O, Sime Darby explains that it is relying on E&O’s reputation and expertise in specialised developments.
“We’re pleased to have sealed this deal with a reputable partner like E&O which has the expertise and capabilities to create a niche development with a distinctive wellness characteristic that will enhance the City of Elmina, This will undoubtedly enable Sime Darby Property to enhance the value of our landbank, while we build sustainable communities,” said Wahab Maskan, group chief operating officer of Sime Darby Berhad and managing director of Sime Darby Property.
Although E&O’s credentials are not in question, what expertise does E&O have that Sime Darby can’t match, or even surpass?
It is not readily apparent because Sime Darby hasn’t really delved into details. There are vague references to E&O’s expertise in “niche development”, “lifestyle” and “wellness”.
E&O will be developing a “lifestyle residential and wellness centre”, in line with the overall concept of the City of Elmina and similar to its wellness project in Iskandar Malaysia.
Sime Darby’s diverse portfolio of property developments includes large townships such as Subang Jaya, upmarket residential development in areas such as Bukit Tunku as well as overseas developments in Singapore and Australia.
Therefore, it is not clear what E&O brings to the table that adds value to Sime Darby’s project. Sime Darby’s wealth and depth of experience in the property sector in local and foreign markets negates the need to tie-up with smaller developers.
Only tie-ups with developers similar or bigger in stature would make sense, unless the small developer specialises in something that Sime Darby has absolutely no experience doing or if the scale of the development justifies a joint venture (JV).
Some of Sime Darby’s joint ventures has been with developers in its league — for instance its partnership with UEM Sunrise to develop the RM1.6 billion Radia in Bukit Jelutong.
However, there are industry observers who say that there is nothing unusual about Sime Darby’s land disposal to E&O.
“Although Sime Darby is huge, financially strong and experienced, l don’t see any harm in its proposed tie-up with another developer like E&O. The later has a different niche market, skill set and expertise that would benefit both parties. To me it is a win-win situation for both parties,” said James Tan, associate director of Raine & Horne.
Nevertheless, others are a bit skeptical.
“One of the reasons that a developer would sell land to others is because they want a township development to be executed and completed faster with multiple resources. A good example is PKNS’ (Perbadanan Kemajuan Negeri Selangor) development of Kota Damansara. But this is not the case with Sime Darby,” said See Kok Loong, director of property advisers Metro Homes.
See explains that there are pros and cons in the case of big developers tying up with smaller developers, such as the case of Sime Darby and E&O.
“Sime Darby working with boutique developers such as E&O could work if it adds value to the project. Boutique developers usually look into certain niche markets and big developers of mass townships usually go for volume, large GDV (gross development value) and turnover,” said See.
Better margins if Sime Darby keeps land
See Kok Loong
The Metro Homes director adds that one of the disadvantages for big developers tying up with niche developers is foregoing higher profit margins.
“Usually niche projects provide higher margins. By working and selling land to smaller developers, Sime Darby is letting other developers build what they are more than capable of doing themselves,” said See.
Given the fact that Sime Darby is foregoing potentially higher profits, could there be other underlying reasons for Sime Darby’s land sale to E&O? K.H. Sim, chairman and group CEO of developers Allstones Group Asia says that one possible factor is land prices.
“Sime Darby has a longer track record than most developers in Malaysia. Selling a portion of the Elmina township could be to set a benchmark in terms of land prices there, to establish a value for the whole township. In addition to that, Sime Darby is providing future GDV to E&O, thus enhancing its potential share prices, given that Sime Darby is also a major shareholder in E&O too. Buying land at reasonable prices in the Klang Valley has been tough for many listed property companies,” said Sim.
One of the terms of the deal between Sime Darby and E&O is that if the niche developer’s GDV in the Elmina project exceeds RM1.54 billion, Sime Darby would have a 20% profit sharing based on the surplus GDV.
“We believe E&O should have no problem in enhancing the GDV of the project as link houses in Elmina East are already fetching RM800,000 per unit while industrial land has fetched RM100 per square feet (psf),” said a CIMB analyst report.
Selling land below market value
Click to enlarge
With the Elmina project already picking up steam and units fetching good prices, it would seem more puzzling that Sime Darby has decided to parcel out a tract of prized township land to another developer when it could add more shareholder value if it develops the land itself.
E&O also seems to have received the better end of the deal in the land sale. Although the land acquisition is expected to be completed only in 59 months or by the second quarter of 2019 due to various approvals and infrastructure work, the 135-acre Elmina land acquired by E&O at approximately RM41 psf is quite generous, considering the potential value.
“We value the 135 acres at RM60 per square feet (psf) instead of the cost of only RM40.78 psf,” said CIMB.
On top of selling land to E&O at seemingly below market value, Sime Darby has also been very generous with terms of payment. Instead of capitalising immediately on the land sale with a lump sump payment, Sime Darby has opted to give E&O the privilege of paying in stages.
“The payment for the land will be staggered, with RM24 million paid on signing of the SPA (sale and purchase agreement), RM173.5 million potentially two years later and RM42.3 million in 12 equal installments over 36 months,” said CIMB.
This stretched out payment scheme, even taking into consideration of the approvals and construction work, only gives the impression that there are behind the scenes factors at play in the cozy terms of the land sale. Despite all the platitudes by both parties for the RM240 million deal, the reasons given by Sime Darby have not been entirely convincing.
Sime Darby has not responded to KiniBiz’s inquiries for the story.
Tomorrow: Sime Darby’s alternatives to land sale
You must be logged in to post a comment.