OUTSIDER LEANS
Australian financier helps to steer a Singaporean family business empire in transition.
Grant Kelley has spent the last two years diversifying Singapore-based City Developments Ltd (CDL), the core listed company of the Kwek family’s Hong Leong Group. The 51-year-old Australian executive has been using his background in fund management and as a business consultant to return CDL, a property and hotel group, to a sustainable growth trajectory.
The outlook has been gloomy for some time, however. Demand for housing in Singapore softened over the last three years after the government moved to curb speculative buying. Hotels and tourism, meanwhile, have been hurt by economic uncertainty in key markets, including the United States and Europe.
CDL had a lacklustre first quarter, reporting a net profit of S$105.3 million, down 14.4% year-on-year. However, net profit improved in the second quarter to S$133.8 million (US$99 million), up marginally from a year earlier. And revenue increased by 32.4% to S$1.1 billion, underpinned by revenue and profit recognition from Lush Acres, a fully sold executive condominium.
“We are long-term bullish,” Kelley told the Nikkei Asian Review.
WIDER OVERSEAS FOCUS
Always jovial and friendly, the chief executive is upbeat about the potential of a carefully considered overseas expansion plan and a new fund management business.
Overseas, CDL is focusing on Australia, China, Japan, the UK and the US. Kelley expects property developments overseas to turn profitable in the second half of this year. “In time,” he said, “the overseas contribution to EBITDA (earnings before interest, taxes, depreciation and amortisation) will be significantly higher.”
Kelley became chief executive of CDL in January 2014 after 25 years in private equity funds and management consulting in Asia, Europe and the US. An Adelaide native, he has a master’s degree in international relations from the London School of Economics, and an MBA from Harvard Business School.
He is known in the Asian property and financial communities for some big deals. As the Asia head of the US fund Colony Capital, he led the acquisition in 2004 of Fukuoka Hawks Town, a Japanese resort and commercial complex, and the purchase of the renowned Raffles Hotel in Singapore in 2005.
Kelley is not a proponent of the “crash and burn” approach favoured by some of his peers in private equity, who chop and change management. Instead, he advocates a long-term, deep commitment to nurture the business.
“I draw more from my earlier career as a management consultant,” he said. “Ultimately, you have to win over hearts and minds, you have to reengineer processes — you must make a company more productive.”
Kelley was picked as an outsider to run the family business by Kwek Leng Beng, 75, the executive chairman of CDL and a second generation member of the Hong Leong Group. The group was founded by Leng Beng’s father, Kwek Hong Png. Seeking a better life, the family patriarch quit his home in Fujian, China, in 1928 aboard a cargo vessel bound for Singapore. The younger Kwek proved his business acumen as the managing director of CDL from 1974, and became executive chairman in 1995 after the father’s death.
The business began in 1941 as a chandler supplying ropes and nautical supplies. Property investment was added in the 1950s and 1960s, and a land bank amassed ahead of the city-state’s massive economic development. As property prices rose, Hong Leong prospered and expanded.
The conglomerate has since moved into property development, hotels, finance, manufacturing and building materials. It has a parallel presence in Malaysia, where the group including Hong Leong Financial Group is run by Kwek’s cousin Quek Leng Chan as a separate conglomerate from Singapore.
CDL became the core publicly traded entity of Hong Leong Group in Singapore after the property developer was acquired in 1972. It has since made a major contribution to the Singapore skyline, with 36,000 residential units to date. It is also a major landlord with 370,000 square metres of rental space.
With a history dating back to the pre-independence era, and a respected family name, the company has a prestigious place on the Singapore business scene. It trails state-owned rival CapitaLand in terms of market capitalisation by close to 40%, and is still recovering from the damage done by the financial crisis of 2008. CapitaLand was established in 2000 through a merger, and launched expansion in China and the region earlier, establishing itself as the largest developer in Southeast Asia.
CDL moved more slowly on property development outside Singapore despite a long-established global presence in the hotel business. Investors and the Kweks have both known that this had to change.
The preparation for succession from the second generation to the third generation is ongoing. Kwek Leng Joo, Leng Beng’s younger brother who died of a heart attack in November 2015, had stepped down from managing director role in January 2014, when Kelly was appointed. Leng Beng’s son and Leng Joo’s son took up senior management positions in April 2014. Leng Beng’s plan is to create a hybrid using family management and outside business expertise.
Sherman Kwek, the chairman’s oldest son, built up the group’s investment portfolio in China. He was appointed deputy CEO in April. Sherman has also been heavily involved in Japan, where CDL has developed a luxury condominium on the site of the Seiko founder’s mansion in Tokyo’s upmarket Shirogane district. The third-generation Kwek continues to spend a lot of time overseeing projects in Tokyo.
‘CHANGE AND EVOLVE’
Leng Beng wants Kelley to modernise and toughen CDL. “We need to change and evolve,” he said. At the time of Kelley’s appointment, Leng Beng said the Australian would “bring fresh perspectives to a rapidly changing and competitive business landscape”.
The two men first met in 2005, shortly after the acquisition of Raffles Hotel and its affiliated properties worldwide. Kelley came to view Kwek as something of a mentor, and regularly called in on him “to pay my respects”. The relationship developed, as did mutual trust.
“I have always admired him for his business acumen,” Kelley said. Leng Beng reciprocated by investing in the property investment fund that Kelley founded after he left Colony Capital.
“I rely enormously upon our chairman’s experience, his judgement and his mentorship to help guide investment strategy,” said Kelley. The Australian in turn contributes to the globalisation drive with his honed financial skills. “I benchmark myself by asking if I have brought technical value to the company — that is very much my mission.”
That technical value should provide a new layer of armour in an Asian family-owned company, which typically relies on person-to-person relationships.
CDL has teams in every major overseas market scouting for opportunities. In May, the company acquired an office property in Shoreditch, London’s equivalent to Silicon Valley. It was an “opportunistic” buy, according to Kelley, following a series of residential developments in London.
Kelley is especially bullish on China, even after the economic slowdown. “Sometimes, Western commentators don’t do enough homework on the specifics of the sub-markets in China,” said Kelley. “While it is easy to talk about macro trends, real estate is essentially local.”
In Chine the company is focusing on selected residential developments in the upper-middle to luxury segments in three cities: Shanghai, Chongqing and Suzhou. Shanghai is the international commercial capital. The other two cities benefit from the Chinese government’s efforts to spur domestic consumption. Sales so far are “very, very robust”, according to Kelley.
CDL has already invested about 75% of the S$800 million that it originally set aside for China in 2010. “The market has so outperformed our expectations that I could quite comfortably recommend to the board that we allocate more capital for China,” he said.
He sees a strong possibility that CDL will be acquisitive in China in 2017 and 2018. The company’s overall land bank overseas for residential development more than doubled after Kelley came on board, from 88,000 square metres at the end of 2013 to 200,000 sq m two years later.
Kelley has been more personally invested in working on fund management, however. In 2014, CDL announced two securitisation deals modelled as profit participation securities (PPS). Using this approach, some cash-generating properties were bundled up and securitised to sell to investors. This enables the company to free up capital from property it owns for recycling in new investments, thereby reducing borrowings.
The stock market is anxiously waiting to see these initiatives bear fruit. “Once the income from overseas projects starts to come in later this year, the market will reward [CDL],” said Lock Mun Yee, a property analyst at CIMB Research. “CDL is moving to new markets. There may be a learning curve, but the playing field is getting bigger.”
Since 2014, Kelley has been pushing ahead with a diversification plan dubbed the “5-5-5 strategy.” He aims for S$5 billion in property acquisitions overseas and S$5 billion of funds under management, all within five years. Kelley describes this as “a stretched target to galvanise the team”.
By the end of 2015, the funds under management had reached S$2.6 billion, and S$2.3 billion had been invested overseas. The 5-5-5 target is only a halfway point. Kelley’s role is crucial, given the generational transition continuing in tandem.
In a recent report, Marleen Dieleman, an associate director at the National University of Singapore Business School, described leaders of Asian family-owned businesses as often being “supermen” of sorts — patriarchs who are successful, visionary, often self-made. Generally speaking, they have learned to follow instincts and to “swim against the current”.
“When the business approaches a certain level of maturity, the limitations of such a leadership style become apparent,” said Dieleman, observing that transition to a more complex organisational structure is then needed.
In Europe, Dieleman looked at family companies such as Hermes in France and Merck in Germany, which alternate between outside chief executives and family ones. While continuously grooming younger family members, they appoint chief executives primarily on merit.
“It is only a matter of time before we see this in Southeast Asia as well,” Dieleman said. “To regard outside CEOs as mere seat-warmers may not do justice to the important role they can play.”
In a region built on traditional Chinese-style family business, CDL is blazing a trail with Kelley — and the market is watching closely.
Sometimes, Western commentators don’t do enough homework on the specifics of the sub-markets in China. While it is easy to talk about macro trends, real estate is essentially local”