The public spat between CDL’s Kwek Leng Beng and his son Sherman is perhaps a dispute over how property firms could deliver value to shareholders
For most of Feb 26, the court papers filed by City Developments’ (CDL) executive chairman Kwek Leng Beng — seeking legal advice to set things right, including replacing group CEO Sherman Kwek with nephew Kwek Eik Sheng — held Singapore’s investing community in thrall. Was the father-son spat about two board seats or billions of unproductive property in the UK?
The trigger for such a drastic move was Leng Beng’s unhappiness that Sherman bypassed the nomination committee to change the board composition, thus “making significant changes to board committees impacting CDL’s governance”. The chairman sought the dismissal of Sherman for circumventing good governance and consolidating power through the irregular appointment of two new directors.
“It seems fairly clear the appointment of these two new independent directors did not go through the nominating committee,” observes corporate governance doyen Mak Yuen Teen.
Some market watchers are wondering why couldn’t Leng Beng just have waited till the AGM in April and put forward a resolution to remove Sherman, vote against the appointment of the independent directors, and then vote in new directors and a new CEO? Doesn’t going to court require more time, effort and money?
Or is corporate governance tangential to the spat that appears to have been resolved a so-called “win” for the executive chairman?
See also: Hongkong Land appoints chief executive for Westbund Central
In most companies, the chairman (executive or otherwise) and CEO should be aligned with shareholders and stakeholders to increase shareholder value and total shareholder returns. Yet, at CDL, the executive chairman is at odds with the CEO. Both are significant shareholders of the company.
No longer buy and hold
Clearly, a generational shift is taking place in Asia in the way that real estate is being owned and used to generate cash flow. The asset-huggers of yesteryear are increasingly giving way to what Jeff Perlman, CEO of Warburg Pincus, refers to as the financialisation of real estate, a trend that is decades-old in the US, Australia and other developed markets, and only now making its way to Asia.
See also: Hong Leong Investment Holdings comes under scrutiny by investors (update)
In Singapore, as far back as 2002, CapitaLand 1.0 started with securitisation through the IPO of CapitaLand Mall Trust, now CapitaLand Integrated Commercial Trust . CapitaLand 3.0, aka CapitaLand Investment (CLI), has almost transformed into a smallish Blackstone. Temasek, which held a controlling stake in CapitaLand, supported this transformation.
Throughout the 2000s, 2010s and 2020s, the financialisation continued. Mapletree Investments is another example. Keppel has transformed from a conglomerate into an alternatives manager. CapitaLand 3.0 is listed as CapitaLand Investment, a real estate investment manager. Its exposure to different sectors is through its private funds, listed REITs, its stakes in its private funds and listed REITs, fees from its private funds and listed REITs, and its stakes and contributions for its remaining properties that are on its balance sheet.
In addition to fees from its private funds and REITs, CLI has two other sources of fees, from its commercial management (formerly property management) which is its largest source of fee income, and lodging management.
Lee Chee Koon, group CEO of CLI, made a couple of points about cohesion before the Q&A session during CLI’s results briefing on Feb 27. “A lot depends on the team’s make-up. We have the teams in place: the commercial management team, the funds team. We continue to make sure that we have a good pipeline of talents to be able to help the different vehicles that we have built on, and the private funds. We spend a lot of time thinking about products, meeting LPs (limited partners, and CLI’s co-investors). We should have more interesting activities and outcomes this year.”
In the 21st century, real estate is no longer kept on the books of tycoons and real estate magnates, but used as assets to generate cash flow. This is why investment property is valued using discounted cash flow (DCF) models, where the discount rate reflects risk-free rates and risk premiums in a certain market.
Real estate can be harnessed and put to work to provide cash flow and returns over and above the cost of capital of its investors. Real estate can take different forms — as it forms the underlying assets in private equity funds, partnerships, REITs or just a listed company. For CLI, real estate can be invested in, nurtured, stabilised and recycled with the capital moving on to the next asset.
Unproductive UK investments of more than $2 billion
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
The contrast drawn between CapitaLand 3.0 and CDL is about the efficient use of capital, and this could be the root cause of differences between generations.
CDL announced the divestment of Ransomes Wharf for around $115.3 million and the transaction was completed in January. It was acquired in 2017 for the equivalent $103.2 million.
Ransomes Wharf is one of several properties that CDL had acquired in the UK from 2013 onwards. The first was a carpark in Pavilion Road, Knightsbridge for $159.6 million (when GBP was equivalent to more than $2). In 2014, CDL acquired Stage Breweries Mortlake for $334.96 million, and a site in Teddington, Richmond-upon-Thames for $180.2 million, followed by Ransomes Wharf in 2017.
CDL also acquired an office building in Shoreditch for $73.5 million. In 2018, CDL acquired 25 Broad Street for $687 million, and an office property in Aldgate for $328 million. These two properties were meant to be seed properties for a commercial REIT that has not materialised.
In its results review, CDL said the committed occupancy of its UK commercial portfolio softened to 79.5% from 3QFY2024 due to a pre-termination in the office segment.
In 2023, CDL coughed up $636 million for St Katharine Dock, also in London, inspiring an analyst to wonder why Singaporean tycoons are so fond of UK properties. St Katharine Dock’s retail occupancy is at 84.3%.
Adding up the amount that CDL has spent in the UK, excluding recent investments for assets in the private rental segment, and hotels, it is clear that the local developer has spent more than $2 billion (it wrote off $1.9 billion for Sincere Properties) in UK property that has yet to provide it with a return commensurate with its risk.
Divestment plans
In February 2024, CEO Sherman announced plans to divest $1 billion as part of CDL’s efforts to recycle capital and lower gearing, which had shot up to 103% as at end-December 2023. As at Dec 31, 2024, CDL’s gearing is at 117%.
In its FY2024 presentation slides for a briefing that CDL’s management cancelled at the last minute on Feb 26, two assets — Morden Wharf in Greenwich, and Mortlake in Richmond — are classified under “planning in progress”. The Teddington site, which has been renamed Teddington Riverside by CDL, is classified as build-to-sell. A small property in central London, 31&33 Chesham Street, Belgravia is also a build-to-sell property.
Based on its FY2024 debt profile, CDL has $3,644 million of debt in the UK. Its fixed debt as a percentage of total debt is 38% and interest cover is 2.1x.
Contrast this with CLI’s net debt to equity of 0.39x (39%), its interest cover of 3.5x and fixed rate debt of 73%. Andrew Lim, CLI’s chief operating officer, said CLI raised $3.3 billion both from its listed vehicles and its private funds and it was able to report operating cash flow of more than $1 billion.
“On the private side, we brought into the CLI fold 19 new capital partners (LPs), which represents a significant step forward in growing our private equity franchise. These are new investors who have taken a leap of faith with CLI and are agreeing with us in terms of the investment strategies that we are putting out and the products that we are manufacturing,” Lim said on Feb 27.
He adds that CLI’s various teams are focusing on three themes: disruption, demographics and digitalisation. “We believe these themes will survive and persist through whatever uncertainty the next four to five years will bring us. That’s incredibly important, to be able to stand with confidence in front of your LPs and tell them it doesn’t matter what happens in the next two to three years. Invest in the long term, because we have the thought leadership and the execution capability, and the teams on the ground to deliver target returns.”
Sherman has attempted to start a funds management business. CDL had planned a commercial REIT with the two London properties, Aldgate and Broad Street, but timing challenges, along with unfavourable interest rates, scuppered the plans.
Last August, Yiong Yim Ming, group CFO for CDL, said that the UK legacy residential sites acquired some 10 years ago are still waiting for planning permission. The rest of the divestments will be at market value and CDL may have to take impairments from time to time.
Some market-watchers suggest that Leng Beng, who studied law in London, reserves a special place in his heart for UK properties and is confident that he can get better value in the future. At previous results briefings, he spoke fondly of Richmond-upon-Thames. He named one of his developments in Singapore The Glyndebourne, which is also the venue of an opera festival in East Sussex, UK.
Is that the real reason for CDL’s underperformance? The inefficient use of capital? Leng Beng’s fondness for the properties CDL has bought in the past versus Sherman’s wish to be more like CapitaLand?
Who controls CDL?
In their Feb 26 note, JP Morgan analysts Mervin Song and Terence Khi note that some investors have attributed CDL’s poor performance to diverging views and a generational divide between the chairman and Sherman. “CDL’s hotel subsidiary, Millennium & Copthorne, saw a succession of CEOs resign within a short period, which some investors ascribed to the chairman’s micromanagement,” they point out.
“It is unclear whether the extended Kwek family, which controls Hong Leong, CDL’s 48.5% shareholder, supports Sherman, given the ability for Hong Leong to vote for or against board directors.”
Scenarios that might pan out include the resignation of both Leng Beng and Sherman, followed by the appointment of professional managers. In another scenario, there could be “sufficient frustration” within the Kwek family to put CDL up for sale or merge with sister developer GuocoLand , which is controlled by the Malaysia-based Queks, the JP Morgan analysts say.
CDL’s 2023 annual report has Hong Leong Investment Holdings (HLIH) as holding 48.55% of CDL. Based on ACRA filings, HLIH’s major shareholders are Davos Investment Holdings, Kwek Holdings, Kwek Leng Keow, Kwek Leng Peck, Quek Seok Choo and others (see table). As an indication, the address of Kwek Holdings is 16 Raffles Quay, and Davos Investment is 1 Wallich Street, where Guoco Tower is.
In the AGM held in April last year, HLIH voted as a block. It abstained from an interested party transaction resolution, which was not voted through. Hence, any AGM or EGM with a hostile vote for independent directors and CEO could cause issues within the extended Kwek and Quek clan.
