Singapore’s CapitaLand aquires stake in Surbana to boost China business

Singapore’s CapitaLand, the largest property group in South East Asia, has acquired a 40 per cent stake in Surbana Corp, the former building and development unit of the country’s Housing and Development Board.

CapitaLand announced yesterday that it brought the stake from Temasek Holdings for S$360 million (US$288.2 million) The Business Times reported. With the purchase, CapitaLand hopes to accelerate the growth of its low-cost, or ‘value’, housing business by leveraging on Surbana’s expertise, especially when it comes to large scale mass market residential developments.

The developer has in the past focused more on mid to high-end housing in China but last year, it launched a new business unit to grow its low-cost residential business in China and Vietnam. Combined with Surbana’s townships, CapitaLand now has a total residential pipeline of more than 64,000 units in China. Surbana has sold almost 12,000 units in China to date and has deals to help build more than 41,000 more.

CapitaLand chief executive Liew Mun Leong told the media and analysts during a briefing that policy risk in China’s residential sector is the ‘driving force’ for the company’s push into the low-cost, affordable housing market.

“The policy pressures became a catalyst for us to move forward,” said Mr Liew. “We don’t want to be seen as building just high-end or mid to high-end (homes). Surbana’s townships are located mainly in Tier 2 cities, where we see tremendous growth opportunities and potential supported by rapid urbanisation and rising level of income.”

Surbana also has a consultancy business, which will provide a new source of fee income for CapitaLand. Surbana reported net profit of S$60 million (US$48 million) for the financial year ended March 2010, the bulk of which came from its consultancy unit. The firm’s consultancy services will also be utilised for projects undertaken by CapitaLand across various sectors and markets in future.

Surbana was formed in 2003 through the corporatisation of the building and development division of the Housing and Development Board (HDB). It currently has stakes in four township development projects in China, in Shenyang, Xi’an, Chengdu and Wuxi with a total gross floor area of about 6 million sq m. The assets comprise mainly residential properties, together with some retail properties and general amenities.

The acquisition will be funded from CapitaLand’s internal source of funds and available cash. The transaction price was arrived at on a willing-buyer willing-seller basis, the companies said.

With its new stake in Surbana, CapitaLand’s assets in China will increase marginally to about 37 per cent of the group’s total assets from 36 per cent, based on the group’s total assets as at end 2010. CapitaLand, which also owns shopping malls and commercial assets in China, aims to have about 45 per cent of its total assets in the mainland over the longer term.

Analysts were generally positive on the transaction, and noted that the deal demonstrates that CapitaLand is taking a more active stance on capital deployment.

‘We believe CapitaLand’s investment in Surbana, while relatively small, is highly synergistic; it deepens its presence in a segment which is aligned with government policy and creates additional source of fee income,’ said Deutsche Bank analysts Gregory Lui and Elaine Khoo.

There are synergies for the groups to work together and the deal is positive for CapitaLand, said Merrill Lynch. But at this stage, the deal is more strategic than financial in nature, the bank’s analysts Melinda Baxter and Xin Yan Low said.