Lendlease spreads its bets across key global cities

/ The Edge Property |

December 2, 2016 10:22 AM SGT

After assuming the role of Lendlease CEO for Asia in May, Tony Lombardo moved to Singapore. His home for now is in the prime District 9 neighbourhood of Cairnhill, a short distance from 313 @ Somerset — incidentally, a shopping mall developed by Lendlease. Linked underground to the Somerset MRT station, the mall has seen strong footfall since it opened in December 2009, says Lombardo, adding, “I visit 313 quite frequently”.

He visits Kuala Lumpur just as frequently — at least every fortnight — as Lendlease prepares to get its development project in Malaysia’s new financial district, Tun Razak Exchange (TRX), up and running.

Lendlease’s TRX Lifestyle Quarter is an RM8 billion (approximately A$2.8 billion) mixed-use scheme that will sit on a 17-acre site. It is anchored by a shopping mall with over 500 stores called The Exchange and also comprises a luxury hotel and TRX Residences with 1,800 units spread across six towers.

While it may be surpassed by the $3.2 billion Paya Lebar Quarter in Singapore in terms of dollar value, The Lifestyle Quarter is certainly larger in terms of the scale of the project, says Lombardo. Lifestyle Quarter and Paya Lebar Quarter are the largest urban regeneration schemes under taken by Lendlease in Asia to date.

View of Somerset Road (from left): Pan Pacific Serviced Suites, Lendlease’s 313 @ Somerset, Orchard Gateway and Orchard Central

‘The No 1 shopping centre’

The location of The Exchange is ideal as there will be a tunnel from the highway leading directly to the mall, bypassing Jalan Tun Razak, which tends to get congested. A new MRT station will be integrated with The Exchange and is expected to be operational within the next 12 months.

Lendlease is targeting for The Exchange to be “the No 1 shopping centre”, rivalling two other shopping malls in the area, Suria KLCC Shopping Centre at the Kuala Lumpur City Centre and Pavilion KL in Bukit Bintang.

As a testament to its location, The Exchange at the Lifestyle Quarter was 26% pre-leased in terms of floor area even before construction had begun, Lombardo says. The shopping mall is estimated to have a gross floor area of 2.2 million sq ft.

Over the past week, Lombardo, together with about 130 leadership staff from across Lendlease’s offices in Asia, met in KL for a conference. “We try to meet face-to-face every quarter. This time, we’re meeting in KL,” he adds.

Lendlease is readying the site for the construction of The Exchange next year. The Australian Stock Exchange-listed property giant with a market capitalisation of nearly A$8 billion ($8.5 billion) is by far the biggest investor- developer of a development site at TRX.

“I’ve watched the site for the last 18 months, and I’ve seen it progress quite significantly,” says Lombardo. The weakening ringgit is not a concern as the group has not sunk in a lot of capital just yet as construction works have yet to begin. In fact, the weaker ringgit could also translate to a lower construction cost for the group,” he adds.

Lendlease’s RM8 billion TRX Lifestyle Quarter project, which will contain a 2.2 million sq ft shopping mall with more than 500 shops, six residential towers at TRX Residences and a luxury hotel

Source: Lendlease

JV with Malaysia’s Ministry of Finance

The Australian property group has remained confident about the project despite its 40% joint-venture partner being 1MDB Real Estate, the real estate arm of 1Malaysia Development Bhd (1MDB). Lendlease and 1MDB Real Estate sealed their JV and signed the sale and purchase agreement in March last year, witnessed by Malaysian Prime Minister Najib Tun Razak.

1MDB Real Estate has since been renamed TRX City, and in May this year, has become a separate entity and wholly-owned subsidiary of the Ministry of Finance.

TRX Lifestyle Quarter is therefore a 60:40 JV between Lendlease and the Malaysian Ministry of Finance, with the former taking the lead in the project. Lendlease is definitely going ahead with the project, says Lombardo. “When we secured the site two years back, there were nine other bidders. We think it’s one of the best regeneration projects in our portfolio.”

Infrastructure works are underway at TRX, with the new MRT station, said to be the biggest in KL, expected to open in the next 12 months. Construction works have begun at the 92-storey Signature Tower, slated to be the third tallest in Malaysia, after the 88- storey Petronas Twin Towers and the 118-storey Merdeka PNB118. Signature Tower is being developed by Indonesian commercial property developer Mulia Group, which claims to have secured three international banks as tenants in the tower.

“Foreign players like Mulia Group and Lendlease are getting their projects off the ground and ensuring that TRX will materialise,” says a KL-based property consultant who declined to be named.

Lombardo: When we secured the [TRX Lifestyle Quarter] site two years back, there were nine other bidders. We think it’s one of the best regeneration projects in our portfolio.

Riding the cycle

Payment for the Lifestyle Quarter development site is also staggered, unlike in Singapore, where the successful bidder in a government land tender has to pay the entire amount upfront, says Lombardo. For instance, Lendlease paid $1.67 billion upfront for the 4ha land parcel at Paya Lebar Quarter when it won the site last year. It has since formed a JV with Abu Dhabi Investment Authority, which has a 70% stake in the project.

Construction at Paya Lebar Quarter is underway. When completed in 2018, the project will have seven buildings: Three will be Grade-A office towers with a total of 900,000 sq ft in net lettable area, and another three will be residential towers with 429 units called Park Place Residences. The seventh building will be a shopping mall with over 340,000 sq ft of retail space. Park Place Residences is scheduled to be launched in 1H2017.

Lendlease is more circumspect when it comes to the launch of TRX Residences. Lombardo reckons it will be “12 to 18 months away”, depending on the depth of the market and the timing. Its priority is to start construction of the mall, scheduled for completion in early 2020. “We could be in a boom cycle when it completes,” he says.

The $3.2 billion Paya Lebar Quarter is the biggest urban regeneration project in Asia for Lendlease in terms of dollar value

Lombardo recalls how Lendlease had won the tender for the 313 @ Somerset site in Singapore in 2006 with a bid of $617 million. Despite the subsequent global financial crisis, the group went ahead with construction of the mall, which was completed on time and was fully leased when it opened in December 2009.

Lendlease continues to own a 25% stake in 313 @ Somerset, with the remaining 75% held by Lendlease Asian Retail Investment Fund (ARIF), which it co-invests and manages. In its 2016 annual report, the group reported profit after tax of A$370.7 million, down 9% y-o-y. The lower earnings were in part owing to a write-down in value of Lendlease’s stake in 313 @ Somerset because of the softer retail market on Orchard Road.

The retail sector is going to be tough in the short- to medium-term as Singapore enters a period of low economic growth.

Lombardo says Lendlease is thinking of strategies to drive people to the mall through interesting experiences and investment in technology. He also intends to work with the other shopping mall owners in Somerset and engage the government “to explore ways to activate the area as a whole”.

In Jurong Gateway, poised as Singapore’s second CBD, the group bid for and won a development site in 2010. It has since been developed into Jem, a mixed-use project with an 818,064 sq ft shopping mall and an office block. Both the mall and office block were fully leased ahead of completion in mid-2013.

Lendlease held a 25% stake in Jem, which it sold for $227 million in January 2013 to Lendlease Jem Partners Fund, an investment vehicle backed by a group of global institutional investors. Lendlease is the investment manager of the fund and continues to manage the property as well. The remaining 75% stake is owned by ARIF, where Lendlease is both a co-investor and manager.

Future of the high-speed rail

Lendlease is confident about prospects in Jurong, especially with the terminus of the planned Singapore-Kuala Lumpur high-speed rail to be located on the site of the former Jurong Country Club, near Jem. Likewise, in KL, Lendlease’s TRX Lifestyle Quarter will benefit from its proximity to Bandar Malaysia, where the HSR will have a terminus.

Bandar Malaysia, which will sit on the site of the former Sungai Besi military airbase, was divested by 1MDB. The site was sold to China Railway Group, one of China’s largest stateowned companies, according to an announcement in March this year. China Railway Group will invest US$2 billion ($2.9 billion) to develop Bandar Malaysia, including the HSR terminus.

On Nov 30, Singapore’s Prime Minister Lee Hsien Loong was reported to have said that the two countries have made “very good progress” on a bilateral agreement on the Singapore- KL HSR.

That should provide a measure of confidence amid the growing uncertainty, especially with the plummeting ringgit, which is at a historical low.

Urban regeneration as a strategy

“Property markets go up and down, and currency fluctuations are just part of the property cycle,” says Lombardo. “That’s why we have adopted a long-term investment horizon of 15 to 25 years. At some point of the cycle, the market may be softer, but it always picks up over the long term.

That explains Lendlease’s strategy to venture into urban renewal projects eight years ago, following the global financial crisis. “We had only one urban renewal project at Victoria Harbour in Melbourne in 2008,” says Lombardo, who joined Lendlease Group in July 2007 as global head of strategy, mergers and acquisitions.

As part of the review of Lendlease’s business then, group CEO Steve McCann and his team identified the big trends around the world: urbanisation, investment in infrastructure works, ageing population, growth in the fund management business, and sustainability. “That led to our focus on urban renewal projects in key gateway cities,” says Lombardo.

In less than a decade, the group’s project pipeline grew from one to 12. To date, urban regeneration schemes account for A$37.3 billion of Lendlease’s development pipeline of A$48.8 billion. Lifestyle Quarter and Paya Lebar Quarter make up A$5.9 billion or 12% of its global development portfolio.

Lendlease’s urban regeneration projects are located mainly in major cities. In London, for example, it redeveloped the former Heygate estate, which sits on a 170-acre site in Elephant & Castle. “When they first [opened] the project for bidding, there were 14 other contenders,” says Lombardo. “When the global financial crisis hit, we were the only ones left.”

The Heygate Estate has since been redeveloped into the new Elephant Park with 2,500 new homes, including the 37-storey landmark apartment tower, One The Elephant. The project is a JV with the Southwark Council in London.

“We have become a trusted partner for governments as they can see we have the capability to execute projects from start to finish,” says Lombardo. Lendlease was also involved in the construction of the Athlete’s Village in Stratford for the London Olympics 2012, which led to its residential development projects in the area.

In Australia, urban regeneration schemes include Barangaroo South in Sydney and Brisbane Showgrounds in Brisbane, in addition to Victoria Harbour in Melbourne.

Meanwhile, in the US, Lendlease has two urban renewal projects in Boston and Chicago. The 12-acre site in East Boston is located along the Boston Inner Harbour. Lendlease intends to develop four buildings with 214 apartments and 278 condos and a harbour walk with a floating dock for pedestrians to launch their kayaks. Along the Chicago River, it will transform a former industrial sprawl into a 3,600-unit residential development with a mix of high-rise condos and townhouses. Called Riverline, the new project in Chicago will include a public park and pedestrian river walk.

In Australia, urban regeneration schemes include Barangaroo South in Sydney (pictured), Brisbane Showgrounds in Brisbane and Victoria Harbour in Melbourne

Political uncertainty

Uncertainty continues to linger over the future of London post-Brexit. However, Lendlease has seen a pickup in sales at some of its developments as foreign investors take advantage of the weaker pound sterling.

Rocking global markets and fuelling further uncertainty is US president-elect Donald Trump. “Most of us are just trying to figure out what he’s going to do,” says Lombardo.

Unlike the global financial crisis of eight years ago, investors and developers are now worried about global political uncertainty. “That’s why we have to look at these development projects over a five- to 15-year period,” says Lombardo. “We make sure that we will be able to ride through each stage of the development cycle.”

This article appeared in The Edge Property Pullout, Issue 757 (Dec 5, 2016) of The Edge Singapore.

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