London market resilient
Savills: Malaysian property developers poised to ride out the Brexit storm
KUALA LUMPUR: Malaysian property developers in London are poised to ride out the Brexit storm, given the longer-term dynamics of the market.
London, as a global city, is “unlikely” to dissipate but will evolve with the times as seen in the growth in the South-East London market, according to Savills world research director Yolande Barnes.
While the financial services sector used to lead the way for London in the late 20th Century, she said the digital and creative economy would be bigger than finance, going forward.
Property developer Eco World International Bhd (EWI) as well as the joint-venture (JV) between Permodalan Nasional Bhd (PNB) and the Employees Provident Fund (EPF) have been prominent among Malaysian property investors in London.
Earlier this week, EWI completed its stage one acquisition of six sites. It now holds a 70% equity interest in a JV company which it formed with Willmott Dixon Holdings Ltd’s development arm, Be Living Holdings Ltd.
EWI, this week, said its JV would give it access to the mid-mainstream market with the capability to supply housing priced between £500 per sq ft and £800 per sq ft.
It said the amount was what the average income earner in London was able to afford.
The JV would also give EWI immediate entry into the built-torent sub-sector, which has seen rapid growth due to the substantial increase in the size of the private rental sector.
Savills confirmed that the sector was gaining strength and popularity as expensive house prices were leading the private rental market.
The two factors will increase the breadth, depth and resilience of EWI’s UK business.
EWI was also deliberating six more sites, but that would be under stage two. In addition to the 12 sites, the company has three other projects, namely, London City Island, Embassy Gardens and Wardian in London.
EWI’s total gross development value of the three projects and its first six sites amounted to £2.11bil.
PNB and the EPF hold a considerable amount of real estate, particularly office blocks in Britain although their portfolio includes other sites in Europe.
PNB and the EPF entered into an agreement to purchase commercial assets in the second phase of the London-based Battersea Power Station project for RM8.8bil in January this year. The consortium developing Battersea comprises Sime Darby Property Bhd, SP Setia Bhd and the EPF.
PNB and the EPF will “manage” the actual power station when it is completed, as this does not come under the purview of both SP Setia and Sime Darby, both being developers, a source from SP Setia said earlier this year.
As for Malaysian interest in Britain’s property market, Barnes said there was a need to “look at the big picture” and “on a longer-term basis” instead of a here-and-now and micro-level project basis.
On how Brexit would impact Malaysian interest, she said one has to look at the sector from a big picture perspective.
“Until we know what the impact (of Brexit) is going to have (on the property sector), it is difficult to talk about how it would impact rental yields.
“We actually think depending on the property, location and sector, there is a longer-term upward pressure on rental although at the moment, there is uncertainty.”
As for the residential segment, she said there was a shortfall in housing for a large segment of the population and an oversupply of those in the higher-price segment.
Barnes also delved on the impact of rising interest rates and bond yields on the property sector.
“Real estate is cushioned. I am referring to grade A office buildings in commercial business districts against 10-year government bonds,” said Barnes at Savills’ Breakfast Forum: Navitaging 2018 and beyond here yesterday.
“Real estate has actually priced in future interest rate movements,” she said.
Barnes said there was a need to pay more attention to the income derived from real estate, not so much in terms of the rise in capital value but income derived from it. “The rental side is going to matter more,” she said.
Private rental notwithstanding, three areas would impact real estate – economic changes, demographics/social change and impact from technology. Barnes said single-used buildings would give way to multi-used ones because people, particularly millennials, want to play, work and live in a community that provides them with all these elements.
PETALING JAYA: Eco World International Bhd (EWI) is expected to turn profitable in financial year 2018 after the handover of property units at London City Island and Embassy Gardens, according to CIMB Equities Research.
“The sharp decline in its share price since its initial public offering is unjustified, in our view. We maintain our ‘add’ call and target price of RM1.21, based on revalued net asset value.
“An improving sales performance is the key potential re-rating catalyst. While the new deal may incur additional costs in the near term, we believe it will benefit EWI in the long run,” it said in a report.
However, the research house said the key risks to its “add” call are a weaker pound sterling, disappointing sales and execution risks.
On Monday, EWI announced that it had completed the stage one acquisitions of its joint venture with Be Living Holdings (sister company of Willmott Dixon), following the settlement of the provisional stage 1 consideration of £63.8mil (around RM348.5mil).
Stage one acquisitions include a 70% stake in six sites, which are at various stages of obtaining planning consent, and a 70% stake in Be Living’s development management platform (via DMco).
“We are positive on the completion of stage one acquisitions as the additional six project sites, with an estimated gross development value (GDV) of £1.1bil, will double EWI’s remaining GDV of £1bil from its ongoing UK projects,” it said.
CIMB Research pointed out that five of the six sites (except the Barking Site) have secured planning consent and this would enable the projects to be launched within the next one to two years.
It also said Kensal Rise and Millbrook Park (with about 100 property units respectively) have launched phases that are scheduled to be completed in financial year ending Oct 31, 2018 (FY18).
“Assuming a 100% take-up rate with a pretax profit margin of 20%, these two projects will likely contribute circa £12mil additional earnings in FY18 based on EWI’s 70% stake.
“However, we believe the contributions will be largely offset by the higher overheads in DMco due to the addition of 110 experienced staff,” it added.
EWI also signed definitive agreements for the stage two acquisitions of the joint venture for a consideration of £40.4mil based on a 70% stake (about RM220.6mil).
The purchase consideration will be funded via bank borrowings, other debt instruments and/or internally generated funds.
“The stage two acquisitions will potentially add another six sites with an estimated GDV of £1.5bil to EWI’s portfolio,” it said.