Sherman Kwek’s first 10 months as group CEO of City Developments Ltd (CDL) has been full of ups and downs, “akin to a roller-coaster ride”. He adds: “You never know what’s around each corner and just when you think the ride is smooth, there is a sharp curve or stomach-twisting loop when you least expect it!”
This was despite the mental preparation since August last year when it was announced that he would be taking over as CEO from Jan 1, 2018. He had even come up with a roadmap to hit the ground running.
Kwek: Change is something that people are very resistant to and many would rather stay in their comfort zone (Credit: CDL)
On Oct 3, CDL won in the Top Developer category at the EdgeProp Singapore Excellence Awards 2018. As a third-generation chief of a sprawling real estate business with an illustrious history spanning more than 55 years and a market capitalisation of close to $9 billion, the 42-year-old Kwek is determined to prove himself.
“We cannot rest on our laurels,” he says. “A lot needs to be done, especially in this day and age of disruption and innovation. We must constantly strengthen, transform and even re- invent ourselves to stay relevant.”
At the start of his tenure in January, Kwek declared to the entire organisation his manifesto: “A journey of renewal and transformation.” He even crafted a three-pronged strategy with the acronym GET: Growth, Enhancement and Transformation.
CDL’s Singapore corporate office has 392 staff today, according to the company’s 2018 integrated sustainability report. “As a company becomes bigger in size, there are bound to be some growing pains,” Kwek admits. “These three elements — good teamwork, execution and innovation — start to really suffer. Consistent with human nature, change is something that people are very resistant to and many would rather stay in their comfort zone, hence stifling the innovation that is urgently required in the face of such rapid evolution and disruption.”
Artist's impression of the upcoming commercial and residential project site at Sengkang Central that CDL and CapitaLand had won in August this year (Credit: CapitaLand)
Kwek intends to grow the group’s existing property development and asset management businesses. “We were almost out of landbank last year and I made it my priority to strategically replenish our landbank, especially in our domestic market,” he says.
Last year, CDL acquired two land parcels for $1.28 billion: A site on Tampines Avenue 10 was purchased in a government land ten- der in April; and Amber Park in an en bloc deal in October.
This year, four sites were purchased in government land tenders for a total of $1.97 billion. The first two sites — on Handy Road and West Coast Vale — were acquired at end-January. An executive condominium (EC) site on Sumang Walk in Punggol was purchased in February and a mixed-use commercial and residential site at Sengkang Central was jointly purchased with CapitaLand in August.
According to Kwek, the sites will provide a pipeline of around 3,300 units for the next few years. The figure excludes the 861-unit The Tapestry at Tampines, which has already been launched. However, it includes the 190 units at South Beach Residences, which was soft- launched last month; and Boulevard 88, a mixed- use development with 154 residential units and 204 hotel rooms that has yet to be launched.
“For the Singapore residential market, we tried to be strategic in our land acquisitions and put in place a diversified landbank that caters for all segments of the market, including ECs and mass-market, mid-tier and high- end offerings,” says Kwek.
The sites are also spread across different regions — from the East to Central and the West. “We have been very selective and see great potential in our sites, which have excel- lent locational attributes,” notes Kwek. For instance, the Sengkang Central site that CDL and CapitaLand jointly acquired is adjacent to the Buangkok MRT station.
CDL acquired Aldgate House, an office building with 210,000 sq ft of net lettable area in London for $328.5 million last month (Credit: CDL)
CDL embarked on an overseas diversification strategy in 2010, starting with China, followed by the UK in 2013, Japan a year later and Australia in 2015. “We will continue to boost our presence in these markets and look at new markets with strong potential,” says Kwek.
Beyond the hotels under its subsidiary Millennium & Copthorne, CDL has also accelerated its acquisition of properties with recurring income.
In China, CDL acquired a 32,000 sq m (344,400 sq ft) office project — now called Hong Leong Plaza — in Shanghai’s Huangqiao district for RMB890 million in February 2017. This year, CDL acquired another prime office building in the Yaojiang International complex in Shanghai for RMB148 million ($29.6 million). In Suzhou, it opened the Hong Leong City Centre mall in June 2018.
In the UK, CDL acquired Aldgate House, an office building with 210,000 sq ft of net lettable area in London for $328.5 million last month. In 2016, CDL had purchased the prime freehold, 28,0000 sq ft Development House office building in Shoreditch. The site has obtained planning approval for redevelopment into a nine-storey building of over 72,000 sq ft in NLA. A third office acquisition in London is underway.
“In the past, we had been too dependent on our development income, which is prone to big fluctuations,” Kwek explains. “It’s time to really build up our recurring income now.”
Distrii has opened a 62,000 sq ft co-working space in Republic Plaza which is currently undergoing a $70 million asset enhancement exercise (Credit: CDL)
As part of his enhancement strategy, a new asset management structure has been put in place, led by Yvonne Ong, who took on the role of CEO of commercial and head of CDL’s asset management division in June this year.
The group had closed the original 97-apartment Le Grove Serviced Residence. After a $30 million refurbishment, the property opened in mid-July with 173 apartments.
CDL is in the midst of a $70 million asset enhancement exercise for its flagship Republic Plaza office tower that is on track to be completed by 2H2019. It includes revamping the main lobby and lift lobbies, adding restrooms and upgrading the existing ones. The retail space will be enhanced to provide better pedestrian flow and visibility, with new mechanical and electrical installation to facilitate more F&B offerings. Plans are underway to create a new retail cluster at Level 2 of Republic Plaza through conversion of some of the existing car-park spaces.
“The group will continue to review its asset portfolio and find ways to enhance, reposition or redevelop the properties to drive greater value,” says Kwek.
As part of CDL’s transformation, he wants to create a more sustainable business model. Towards that end, new divisions ranging from fund management, venture capital and innovation were set up. An Enterprise Innovation Committee comprising “our youngest and brightest staff” has been created to focus on “finding ways to deliver a superior and unique experience to customers”, he adds.
The crowd at the launch of The Tapestry in March where to date, 530 out of 550 units have been sold (Credit: Property Agent)
While CDL has made some headway in implementing its plans, the property industry was derailed by the unexpected slew of property cooling measures announced on July 5. “The measures disrupted sentiment in the property market while capital markets continue to reel from macroeconomic concerns, including global trade tensions, rising interest rates and currency crises,” observes Kwek.
Many industry players consider the recent cooling measures particularly harsh. “The government’s strong intervention at such an early stage [of] the recovery cycle was very unexpected,” Kwek says. “Prices may have gone up 9.1% over four quarters starting from 2Q2017, but they fell close to 12% over 15 consecutive quarters before the recent rise.
The hike in additional buyer’s stamp duty (ABSD), coupled with the implementation of the total debt servicing ratio (TDSR) framework in 2013, had already taken their toll on the property market from 2H2013 to 1H2017. “The [TDSR] was not an easy pill for the market to swallow and one would have assumed that it was effective in keeping overall house- hold debt in check,” says Kwek.
Leverage, however, continues to be an issue. “Aside from significantly hiking the ABSD, the recent cooling measures also reduced the loan-to-value ratio across the board for all purchasers, including first-time homebuyers,” Kwek observes.
ABSD for developers was increased from 15% to 25% from July. On top of that, developers have to pay 5% ABSD upfront when acquiring land, and that amount is non-remit- table. Yet, the five-year time frame to develop and sell all the units remains.
View from one of the sky terraces at New Futura (Credit: CDL)
In the 12 months leading up to the measures in July, land prices soared to “dizzying heights” and put significant pressure on developers bidding for land, observes Kwek. “In turn, these high land prices translate into escalating housing prices, which are not desirable for [buyers] and pose a significant concern for the government as prices run ahead of economic fundamentals. However, if you trace the problem to its source, part of the issue stems from the ABSD measure, which heavily penalises developers if they do not complete construction and fully sell every single unit within a period of five years from land acquisition.”
While the intention is to prevent developers from hoarding land, Kwek says an unintended consequence is that “all developers are forced through a narrow funnel to build and sell in a short timeframe”.
As a result, developers are prevented from timing their launches. “Even when market sentiment is depressed, they have no choice but to start sales for new projects,” Kwek says. “They end up developing, selling and handing over units within a similar time frame, causing many of them to run out of land at around the same time.”
Kwek observes that developers without land- banks are unlikely to be in business for long. “It is no wonder that developers who are in ur- gent need of land replacement have had to bid ferociously to obtain new land, be it via government land sales or private en bloc treaties.”
Kwek understands the rationale behind the ABSD: to caution developers and buyers as well as moderate land prices by attaching hefty penalties for unsold units. “Unfortunately, the fear of running out of ‘raw materials’, or land, ultimately outweighs the fear of penalties and this causes developers to bid aggressively for land,” he adds. “This can cause land prices to spiral to unsustainable levels, something which developers also do not want to see happen. I am not saying that the five-year ABSD restriction is the only reason for high land prices, but it is certainly a significant contributing factor.”
South Beach Residences saw 10 units sold, including the super penthouse for $26 million (Credit: Samuel Isaac Chua/EdgeProp Singapore)
The recent measures will hit the luxury residential segment the hardest, reckons Kwek. “We saw a slower take-up rate at our South Beach Residences soft launch than would otherwise be the case,” he says. It was reported that South Beach Residences sold about 10 units at private previews last month, including the super penthouse, for $26 million ($3,864 psf).
For New Futura, Kwek says, “We are fortunate to have launched the project in January and are now over 80% sold.” Even after the recent measures came into effect, New Futura has continued to see strong sales, and maintained its average selling price of above $3,500 psf for the second phase. Kwek attributes this to “the ultra-luxurious and unique product that we have created”. The project picked up the Top Development award at the EdgeProp Singapore Excellence Awards on Oct 3.
“The development’s iconic design and free- hold nature likely swayed many buyers into accepting the onerous ABSD implications. However, it is unlikely that we will see this happening across the board for other luxury developments,” Kwek points out.
The mass- to mid-market segments have seen a slowdown in sales volume too since the property cooling measures came into effect. “But high-quality, well-located projects such as The Tapestry will still be able to maintain a steady stream of sales,” says Kwek. “The buyers of these projects tend to be mostly Singapore citizens and permanent residents purchasing their first property, so the majority are unaffected by the ABSD ruling, although some may struggle, owing to the reduced loan quantum.”
According to caveats lodged as at Oct 8, 530 out of 550 units launched in March at the 861- unit The Tapestry had been sold, at an average price of $1,531 psf.
New Futura is more than 80% sold since it was launched in January (Credit: CDL)
CDL is planning to launch Whistler Grand, its new project on the site of West Coast Vale, before year-end. It will have 716 residential units and two shops. Kwek reckons demand for Whistler Grand will be good because of the upcoming Jurong Lake District, which is being positioned as the second CBD. “Most of the other new projects in the West Coast area are almost fully sold,” he says. “Buyers of mass- and mid-market projects are largely first-time homebuyers.”
In early May, CSC Land launched the 520- unit Twin Vew, located just across the street from the upcoming Whistler Grand. So far, 453 units (87%) of the project have been sold, at an average price of $1,382 psf, according to caveats lodged.
On the weekend of Oct 6 and 7, Teddington Riverside was launched in Singapore. The London project occupies the site of the former Teddington Studios, a big UK television studio. CDL had purchased the site in November 2015 for £158 million.
The new development at Teddington Riverside will have 240 units — four blocks of 217 apartments, six townhouses, two duplex apartments and 15 affordable housing units — occupying a 196,022 sq ft site. Prices start from £670,000 ($1.2 million) for a one-bedroom unit, £980,000 for a two-bedroom unit and £1.63 million for a three-bedroom unit.
Teddington Riverside will be launched in UK as well as in road shows in Singapore, Hong Kong and China (Credit: CDL)
“Prior to our launch [of Teddington Riverside] this month, we had received encouraging levels of enquiries,” says Kwek. “Having said that, it’s a very difficult time for the residential market in the UK, which has suffered greatly from the uncertainty surrounding the whole Brexit process.” Aside from the UK and the roadshow in Singapore recently, with Strawberry Star as the marketing agent, CDL intends to hold roadshows in Hong Kong and mainland China as well.
Besides property development, asset management and fund management, CDL intends to invest in start-ups that complement its core real estate and hospitality businesses. Investments so far include a 20% stake in mamahome, a Shanghai-based online residential rental plat- form, and a 24% stake in co-working platform Distrii. In July, CDL invested HK$237.81 mil- lion ($42.1 million) to become a cornerstone investor in the IPO of E-House, a China-based home services provider.
According to Kwek, E-House has an ex- tensive network of more than 17,000 property agents in China. “It can be very beneficial for our residential sales in China, Singapore and other investment destinations,” he says. “On top of that, E-House has a deep and ro- bust database.”
Mamahome has 230,000 apartment listings across 30 cities in China and entered Singapore this year. “It is building up a tremendous rental platform that our own rental properties can also benefit from,” Kwek says.
CDL invested 24% in Distrii last year. Pictured here is Distrii's flagship and largest co-working facility at Suhe Center in Jing'an, Shanghai (Credit: CDL)
On Distrii, he says it has achieved “significant scale” and now has 34 co-working locations in China and one in Republic Plaza in Singapore. The 62,000 sq ft co-working space at Republic Plaza, which opened in mid-May, is now 80%-occupied.
Kwek hopes to turn CDL into a more diversified property group “with greater stability in earnings and wider diversification”. He adds: “Had we just remained in one or two asset classes and focused solely on our domestic market, we would have suffered greatly during the extremely depressed years in Singapore’s residential market from 2014 to 2017. During those difficult years, our results were greatly bolstered by our overseas sales as our diversification efforts bore fruit, especially in China.”
Singapore will, however, remain CDL’s core focus. “After five decades, we are very familiar with the local market and we have contributed much to the skyline here,” he says.