By Khairul Khalid
Sime Darby’s recent disposal of 135 acres at its City of Elmina development netted the company RM240 million. Was the land sale really in the best interests of Sime Darby’s shareholders, or could they company have benefited much more had it explored other alternatives?
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Apart from the sale price, Sime Darby also stands to benefit in its recent RM240 million land disposal via a 20% profit sharing with the purchasers Eastern & Oriental (E&O) if GDV (gross development value) on the 135 acres exceeds RM1.54 billion.
Analysts say it is highly likely given the strong take-up and current property prices in the Elmina area.
But the bigger question is, given the strong potential of the Elmina landbank, why has Sime Darby chosen to sell land to a smaller developer E&O that has no obvious tangible advantages over Sime Darby?
Curious history of JVs
The Elmina land sale continues Sime Darby’s curious history of engaging in joint ventures and strategic ventures that aren’t all that strategic, from Sime Darby’s perspective as the country’s number one developer.
Other than the E&O partnership, some of Sime Darby’s alliances with other companies include SP Setia in London’s Battersea Power Station project, CapitaMalls Asia in a 50-50 deal to develop a RM500 million shopping mall in Taman Melawati, a RM1 billion commercial project in Bukit Jelutong with Sunrise Berhad and several JVs with Brunsfield Group including projects in Ara Damansara, Kenny Hills and Subang Jaya.
Presumably Sime Darby’s landbank were injected in these deals (except Battersea), leading many to wonder why Sime Darby would part with their landbank when they could profit greater from developing it themselves.
In this recent case, did Sime Darby exhaust all alternatives before arriving to the conclusion that shareholders’ interest would be best served by carving out the Elmina land to E&O?
Keep and develop the land
The foremost alternative to selling the land would have been for Sime Darby to keep and develop the land itself. Despite E&O’s proven credentials in property development, it has no discernible advantages over Sime Darby in terms of its portfolio.
With Sime Darby’s financial and operational muscle, not to mention its vast experience in the industry, it could easily have undertaken development of the 135 acres on its own.
More importantly to shareholders, it would have benefited the company greater with a potential value of RM1.5 billion, or even more, instead of settling for just 20% of surplus GDV.
The total GDV of the City of Elmina is estimated to be approximately RM13 billion. The first series of homes launched in the second quarter of 2013 which consist of 255 units of double-storey link houses, valued at RM188.18 million collectively, were completely sold as soon as it was launched.
New launches of double-storey terrace houses such as the Garinia in City of Elmina and Nahara 1 & 2 in Bandar Bukit Raja garnered an average take-up rate of 89% since their launches between January to March 2014.
Based on the response so far, it looks like Sime Darby has another goldmine in its hands, which makes it even more puzzling why it would want to sell a portion of a hot development to another party.
So was Sime Darby compelled to sell to E&O for other underlying reasons?
Another dimension to the deal is that Sime Darby is a majority shareholder in E&O. Sime Darby had acquired a 30% stake of E&O in 2011 and there were even talks of a takeover subsequently. It stands to reason that any deal that benefiting E&O would also benefit Sime Darby as a shareholder.
An injection of assets, such as landbank, would make sense if there were such a takeover. However, recently Sime Darby has reduced its stake in E&O to 22%. Also, there are no guarantees that E&O’s development will be a success, given that Elmina is a township largely based on a Sime Darby blueprint.
E&O could also decide to flip the land in the future and sell to another party for a profit. It had acquired the land from Sime Darby at favourable prices – approximately RM41 per square feet (psf) against some analysts’ estimates of RM60 psf.
Given that the deal and payment is structured to complete only in 2019, by then the land would probably be worth much more.
All things considered, it would have made much more sense for Sime Darby to have kept and developed the land instead of selling it.
Is a JV necessary?
However, if Sime Darby’s management had strongly believed that it was ill-equipped to undertake the project on its own, a JV would have made sense only if its partners are superior technically or financially.
In most of its previous JVs, it can be said that Sime Darby’s partners were not necessarily superior in any department, calling into question whether Sime Darby had actually gained or lost from ceding its own valuable landbank to other parties
Alternately, Sime Darby could have still kept the land by outsourcing the construction work to other developers. By doing this, Sime Darby would also retain control of the total development instead of relinquishing it wholesale to another company.
When acquiring its stake in E&O in 2011, Sime Darby had announced that collaboration between the two companies would be with the objectives of sharing knowledge and expertise, leveraging each other’s and competencies and exploiting economic opportunities jointly.
It is not exactly clear how these objectives are met in the Elmina sale to E&O, or any of the other Sime Darby Property JVs for that matter.
As the country’s leading property developer, it is imperative for Sime Darby to recruit talent and nurture its own resources where there are deficiencies, instead of taking the easy way out and engaging in JVs with its competitors.
With the resources at its disposal coupled with biggest landbank in Malaysia, Sime Darby has very little excuse not to develop land themselves.
Yesterday: Sime Darby’s Elmina land sale curious.
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