Bigger is better for CapitaLand

CapitaLand's announcement that it would be acquiring Temasek subsidiary Ascendas-Singbridge (ASB) appears to be a positive development for the Singapore-listed developer and Temasek.

In a briefing with analysts and the media, CapitaLand's chief executive officer, Mr Lee Chee Koon, said the deal, which was negotiated over half a year, marks an important milestone for CapitaLand and its transformational journey.

A lot of effort was taken by management to justify the purchase of ASB, a business space solutions provider with $23.6 billion assets under management (AUM). The deal was sealed over the weekend and a goodwill premium of $800 million paid.

For CapitaLand, the deal makes sense.

ASB will add an interesting dimension to CapitaLand's portfolio of residential and shopping malls. More than 80 per cent of ASB's AUM is in business space, and more than half of its AUM in sectors exposed to new economy such as business parks, logistics and data centres.

The diverse portfolio will give CapitaLand the flexibility to deploy capital according to property cycles.

CapitaLand's exposure will reach beyond Singapore and China, into new growth markets in Europe, the US and India, a promising market which CapitaLand had trouble unlocking before.

Last, but most importantly, the union will create the largest real estate investment manager in Asia, with $116.5 billion AUM, propelling CapitaLand to the world's ninth biggest, after Brookfield, PGIM, Blackstone, Hines, MetLife, TH Real Estate/Nuveen, CBRE Global Investors and UBS AM.

This positions CapitaLand strongly to compete in the fund management space.

As to why Temasek is a willing seller, one can only speculate, but it is not difficult to understand the motivation.

The sale gives Temasek an opportunity to monetise its investment in ASB, which was formed in 2015, when Temasek and JTC Corporation merged four of their operating subsidiaries, including Ascendas and Singbridge Group.

Temasek will be receiving $3 billion in cash and new CapitaLand shares worth another $3 billion.

But more than just monetising its investment, Temasek's ownership of an enlarged CapitaLand will increase from 40.8 per cent to about 51 per cent upon the close of the transaction.

With ASB under CapitaLand, perhaps things can now move faster.

An enlarged CapitaLand boasting of bigger scale and deeper expertise should be able to handle many large-scale and complex urban development projects, and compete with global players when opportunities arise.

CapitaLand itself was created from earlier moves to create a company big enough to compete in the global market.

This is the next phase of creating another, even bigger, giant, to stay globally competitive.

CapitaLand was formed in the early 2000s by a merger of wholly government owned Pidemco Land and listed government-linked company DBS Land.

Size has always been its major selling point. With AUM totalling $92.8 billion as at Sept 30, 2018, CapitaLand is by far the biggest property player not only in Singapore but also in South-east Asia, developing many landmark buildings in the region.

An enlarged CapitaLand will have even more muscle when renegotiating financial terms at a time when interest rates are poised to rise further, among other economies of scale.

FORMIDABLE PLAYER

While the news may bode well for both CapitaLand and Temasek, a key question that surely must be on top of most Singapore developers' minds is: "Where does this leave us?"

CapitaLand is already a formidable player in the domestic market, given its foothold in residential and retail space.

Now it will be imposing in the industrial space too.

Other questions waiting for answers include the fate of the overlapping real estate investment trusts (Reits) owned by CapitaLand and ASB.

What is the plan for mid-sized Reits like CapitaLand Retail China Trust?

What about Ascendas Hospitality Trust and Ascott Reit, which are both exposed to the hospitality sector?

Are there plans to merge the two further down the road as the group looks to synergise operations and reap intended returns?

Market watchers will also be waiting to see who will lead the combined entity.

As one analyst noted, the new CapitaLand has become "a nightmare to model" and key to its success, as is always the case with deals of such size and complexity, is execution.

This article was published in The Business Times yesterday.