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Singapore Property | Why fund management makes sense for Wing Tai now


By Lynette

Mar 3, 20165:50 AM

IN 2007, Wing Tai Holdings led a multinational consortium that included Germany's SEB Immobilien-Investment, Forum Partners of the US, and Israel's Eilam Group to create a US$1 billion real estate development and investment platform in China. But that venture came to nought with no investments made, possibly botched by an earthquake in the country and the Global Financial Crisis.

Nine years on, Wing Tai is making another attempt at fund management, this time setting up its own fund management unit WT Fund Management Pte Ltd, helmed by investment veteran Chua Choy Soon who has nearly 20 years of experience with SEB Asset Management and GIC. It said last month that the fund will co-invest in Asia Pacific with institutional investors.

While the group remains reticent about details of the fund and its targeted asset under management (AUM), one would expect its AUM to run into billions of dollars spanning various assets, including commercial real estate.

It is unsurprising that more developers are looking at fund management as they devise new ways of making money, while their traditional business of buying land, building and selling is hanging by a thread.

For Wing Tai, it is not only faced with weaker development sales, but also headwinds in its retail business that have led to the closing of some outlets. Its appetite for more development sites could be dampened too by elevated land prices here and looming penalties for unsold residential units beyond a stipulated period. And in this quandary, Wing Tai is not alone.

Heightened development risks

Under the Residential Property Act, a developer issued with a qualifying certificate when it buys private land for development needs to finish building a residential project within five years of buying the site and selling all units within two years of completion. Otherwise, it has to pay an extension charge pro-rated based on the proportion of unsold units.

Since late 2011, developers here also have to develop any residential site they buy, and sell all units in the new project within five years to qualify for remission of additional buyer's stamp duty (ABSD).

Otherwise, an ABSD of 10 per cent on land cost with interest becomes payable; a higher 15 per cent ABSD applies to sites bought from Jan 12, 2013 onwards.

The Real Estate Developers' Association of Singapore (Redas) has estimated that some 700 unsold units across 13 developments may start to hit extension charges under QC rules this year, and about 33 private condominium projects may be impacted by the ABSD remission claw-back in 2017 and 2018.

For Wing Tai, it is racing against time to dispose the remaining 38 units at Le Nouvel Ardmore by the second quarter of this year or end up with an extension charge of about S$14.2 million for the first year of extension under QC rules. At Nouvel 18, also in district 10, not a single unit has been sold; Wing Tai and its joint venture partner City Developments Ltd (CDL) would have to cough out S$38.2 million for the first-year extension if all 156 units remain unsold by the fourth quarter of this year.

A heftier penalty awaits Wing Tai and its project partner at The Crest in Prince Charles Crescent: The 10 per cent ABSD with interest becomes payable if there are any unsold units by September 2017. Based on the land cost of S$516.3 million, Wing Tai and Metro Holdings are facing a potential S$65.9 million of ABSD remission clawback with interest.

Such punitive charges have added fuel to the speculation that Wing Tai may use the fund to scoop up these unsold units. But given the 15 per cent ABSD on residential purchases by non-individuals, it may only make sense for Wing Tai to do so for The Crest, depending on how many unsold units are left by September 2017.

Promising fund returns

The investment mandate of WT Fund Management should be much broader, having brought in investment veteran Mr Chua as managing director. He had spent 12 years in SEB Asset Management in Frankfurt and then Singapore where he was managing director, and eight years in GIC mainly in Frankfurt and London.

Besides offering stable management fees with recurring investment income, such a real estate fund management platform allows third-party capital to be raised, thus lightening the balance sheet, diversifying risks and raising economies of scale.

And the potential returns look promising. Core funds typically yield an internal rate of return of 10-15 per cent, while an opportunistic fund that takes on higher-risk assets may generate a return of 15-25 per cent depending on the nature of the assets and their locations, says PwC's real estate and hospitality tax leader Teo Wee Hwee. Another possible benefit, albeit a secondary one, is that qualifying income from funds is taxed at 10 per cent instead of the prevailing corporate tax rate of 17 per cent if the conditions on minimum investment professional headcount and AUM are met.

A handful of property companies here like CapitaLand, Keppel Land and Mapletree Investments already have unlisted funds to fund development projects or asset acquisitions. CDL went down the untrodden path of using Profit Participation Securities (PPS) to monetise its assets, which have been conservatively valued at cost on its books.

But CDL's method may not be feasible for Wing Tai, given its smaller portfolio of directly held investment properties comprising a few low-rise commercial buildings in Singapore, shop offices in Malaysia and one low-rise commercial building in China.

Of course, there are always risks to achieving anticipated fund returns as gateway cities become more pricey. But Wing Tai may be circumspect about ploughing its waning cash hoard (which dived 46 per cent to S$594 million in 2015) into new development projects or retail operations, as it faces a double whammy from its two core businesses.

Meanwhile, there is no lack of interest from global funds, institutions and family offices to raise their capital allocation to real estate in their search for yield. As the fashionable saying goes, one of the best ways of doing business is probably to do it with investments from others.

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