This article first appeared in The Edge Malaysia Weekly on December 6, 2021 - December 12, 2021

CONSCIOUS that it needs to evolve to survive in the long term, Sime Darby Property Bhd (SDP) — the country’s largest developer by land bank — is on a mission to transform itself from a pure-play property developer, focusing on the residential segment, into a real estate development company by end-2025.

The idea behind the move is to diversify its revenue streams so that it is not dependent on the business of building and selling alone to carry it forward, group managing director Datuk Azmir Merican tells The Edge in a recent interview.

SDP, which has an almost 50-year history of building townships and communities, has about 15,000 acres in hand and 20,000 acres in options.

“We need to keep in mind that while we may have the biggest land bank today, this might not be the case tomorrow. As a property developer, we can’t keep developing and selling land, as it is a finite resource,” Azmir says, hence the need for SDP to increasingly broaden its recurring income through new ventures.

“As a property developer, you build and sell. As a real estate development company, we are talking about owning estate and real estate and leasing them out to generate long-term income. That is the fundamental difference.

“When we look at other more mature economies, including Singapore, this is how property [development] companies have evolved. This is the right direction, and we are the first [in Malaysia] to pivot in this direction. I’m sure more will follow.”

The group’s target is to have a 70:30 split between non-recurring income (that is, from property development) and recurring income by 2025. Currently, the ratio stands around 90:10. “We aim to achieve this through a combination of organic and inorganic means,” Azmir says.

SDP’s partnership with Australia-based Logos Property Group in late September was an important first step in broadening recurring income, as it propelled the company into fund management.

SDP entered into a 51:49 joint venture (JV) with Logos’ subsidiary, Logos SE Asia Pte Ltd, to establish a fund management platform that focuses on developing and investing in assets, primarily in the logistics sector. As a start, it is seeking to raise US$200 million (RM850 million) from institutional investors to finance the development of a 177-acre site in SDP’s prime Bandar Bukit Raja township in Klang.

“The partnership will expand our current net lettable area of about five million sq ft, to 13 million sq ft, thus propelling the growth of our investment and asset management (I&AM) business, to complement our property development business. We have been doing I&AM in the past, but it hasn’t been a large part of our business,” Azmir explains. SDP also has a leisure segment.

Analysts note that, apart from gains from the disposal of the land to the JV, SDP stands to get a stream of recurring income through various fees from development, fund management, project management, property management and leasing management services.

“Listing the underlying assets as a REIT (real estate investment trust) could be the exit avenue for the fund in future,” RHB Research said in a recent report.

According to Azmir, the JV is “almost at the halfway mark” on raising the seed fund of US$200 million. “The fund is on track to be launched by end-2021, and we expect new income streams to accrue to SDP from the first quarter of 2022. We are also looking into anchoring the fund, as we believe in the strong growth and returns potential.”

Gains from sale of the Bukit Raja land to the JV will start being reflected in SDP’s books “most probably at the end of 2022”, he adds.

He says the JV ultimately aims for funds under management to reach US$1 billion within a five-year timeframe.

As it stands, SDP has about 2,800 acres of available industrial land for future developments across six major townships, including Elmina Business Park and Serenia City. “The industrial and logistics segment will act as a key catalyst in SDP’s transformation,” Azmir says.

He points out that in Singapore, large property players such as the CapitaLand Group have already gone down the path of growing beyond property development. In September, as part of a group restructuring, its development arm CapitaLand Ltd was delisted from the Singapore Exchange.

“The group took CapitaLand private and listed the investment asset management arm [CapitaLand Investment Ltd] instead because it commands a higher [valuation]. That’s what they did and it is not surprising to me.”

Since its Sept 20 market debut, CapitaLand Investment’s share price had gained 13.9% to close at S$3.36 on Dec 1.

Azmir believes SDP’s ongoing transformation into a real estate development company with diverse revenue streams should excite investors. “If you look at the asset management business, it’s an area that we can grow regionally. As we get better at it, we know we can grow outside of Malaysia — in Asean, for example.”

SDP’s shares have gained 6.8% over a one-year period to 63 sen on Dec 1, giving the company a market capitalisation of RM4.25 billion. It peaked at 76 sen on Oct 15.

Azmir, 50, took SDP’s helm on April 22 last year shortly after the Covid-19 pandemic hit. He does not come from a property background but is well regarded among peers for his work on corporate transformations. Formerly the managing director and CEO of UEM Edgenta Bhd, he spearheaded the company’s ongoing transformation into a technology-based entity that services several key sectors.

With a background in corporate advisory, Azmir has worked for notable companies such as UEM Group Bhd, CIMB Investment Bank Bhd and PricewaterhouseCoopers.

“I love the buzz of transformations. After a couple of years, you come out and can’t believe what’s been done — it’s a totally different organisation. SDP is primed for this; it has so much potential,” he says.

The Covid-19 pandemic and lockdowns have taken a toll on SDP’s earnings, but Azmir is optimistic that the worst is over.

“I’d like to think so. With over 90% of the population now immunised and many countries, including Malaysia and the UK, accepting that the pandemic is now endemic and part of the new normal, we are optimistic of a recovery in the overall economy and, thereon, the property market from this point onwards,” he says.

SDP slipped into the red in the financial year ended Dec 31, 2020 (FY2020), registering a net loss of RM478.8 million compared with a net profit of RM598.53 million in the previous year.

This year, it made profits in the first two quarters before sinking again into a loss in the third quarter as a result of a lockdown at the time. Nevertheless, its 3QFY2021 net loss narrowed to RM15.8 million from RM359.97 million a year earlier.

SDP was profitable for the nine months to date, making RM64.72 million versus a net loss of RM450.24 million in the year-ago period. Although SDP’s earnings accounted for a mere 34% of analysts’ consensus estimate for the full year, it was considered to be broadly within expectations, as the group is anticipated to have a strong final quarter.

“While the third quarter was a challenging one, we are confident of our ability to end the year meeting our internal profit targets,” Azmir says. He anticipates a pick-up in property transactions ahead of the end of the government’s Home Ownership Campaign (HOC) on Dec 31.

Azmir believes demand for landed properties will remain strong next year, provided the products are what the market wants and offered at the right price.

“With no HOC next year, demand will moderate slightly, especially in the first quarter. But, if we do continue with [economic] recovery, demand will come back in the later quarters of the year. What we see is that houses in the RM500,000-to-RM700,000 range sell quite well,” he says.

Analysts say SDP is likely to exceed its sales target of RM2.4 billion this year, having already secured about 80% of it — or RM1.9 billion — in the first nine months and achieved a strong pipeline of new launches worth RM1.6 billion in the final quarter.

This would take the total value of launches for the year to RM3.9 billion, a 157% jump over last year’s RM1.51 billion. Kenanga Research sees SDP’s total sales coming in at RM2.8 billion for the year.

SDP’s unbilled sales stood at RM2.1 billion as at Sept 30 (up 13.6% quarter on quarter), of which about 66% is expected to be recognised next year.

The group intensified its digital marketing and online campaigns during the lockdowns. “SDP is one — if not the only — property developer among a few that can give its customers a full end-to-end digital and online sales experience,” Azmir says.

He also sees better prospects for the Battersea Power Station (BPS) regeneration project in the UK. SDP has a 40% stake and currently holds chairmanship in the Malaysian consortium that owns BPS. The other shareholders are S P Setia Bhd (40%) and the Employees Provident Fund (20%).

“BPS shows significant promise, with crowds returning to the development for the summer. We’re seeing a lot of work completed. We have people moving into the main power station, and that’s a big thing. Next year, we will have retail openings. More than 40 retailers and food and beverage operators have already signed up. That will shift the momentum to make it really exciting for BPS,” he says.

“[Given the momentum,] we don’t foresee having to make any big impairments for BPS this year. In fact, we foresee that it will be moving the other way, given that we are closer to completing the development.”

In FY2020, given the fragile economy, SDP recognised a write-down of inventories totalling RM181 million and a 40% share, or RM337.1 million, of the impairment recognised by the Battersea group.

Bloomberg data shows that five of the 12 analysts who track SDP’s stock recommend a “buy” whereas an equal number call for a “hold” and two, a “sell”. The average 12-month target price is 74 sen, which suggests further upside from the stock’s closing price of 63 sen last Thursday.

“Against peers, we believe SDP has better earnings visibility, as it owns vast land banks (at low rates) in mature townships, allowing it to focus on landed/industrial products during these challenging times and therefore be less affected by the high-rise oversupply issue,” Kenanga Research says in a Nov 26 report. It has a “market perform” call on SDP, with a target price of 73.5 sen.

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