The Edge Top Property Developers Awards 2009: Weathering the storm

When the recent financial crisis sent the property market reeling, Eastern & Oriental Bhd did not panic. It had learnt its lesson well during the 1997/98 Asian financial crisis. This time round, says managing director Datuk Terry Tham, the developer just restrategised to keep the company afloat. And judging from the positive response to its recent launches, investor confidence in the company has certainly returned.

The amount of sunlight that streams into the high-ceilinged, modern lobby of Eastern & Oriental Bhd (E&O), situated in Menara Milenium in Damansara Heights, takes our breath away. 

Equally impressive is Datuk Terry Tham, the group’s managing director, who tells City & Country about the company’s performance throughout the year. The conversation very quickly turns to how the group has weathered the global economic woes brought about by the US subprime crisis.

“With the subprime crisis, failure of Lehman Brothers and the stock market crash worldwide, Malaysia, like other parts of Asia, initially thought it could decouple from the US and Europe but that optimism was dashed,” Tham laments.

Malaysia was not spared from the global credit crunch as a severe confidence crisis sent world stock markets plunging. In many parts of the globe, people lost their jobs overnight and even corporate giants were brought to their knees. As for the Malaysian property sector, buying stopped and investors adopted a wait-and-see stance.

In response to a rapidly falling market, Tham and his team took a hard look at their balance sheet and strategies were quickly revised to weather the storm.

There was no time to lose because E&O’s accumulation of landbank in the preceding years had put the group in a net borrowing position.

Tham elaborates: “Although our bankers remained supportive, it was impossible for anyone to foresee how protracted or severe the crisis would be. Hence, we felt the safest route was to raise cash, thereby improving our gearing ratio and in doing so, giving confidence to our bankers, shareholders and stakeholders.”

A two-pronged approach was adopted to raise liquidity: dispose of non-core assets and go back to the shareholders with an attractive but reasonable scheme.

The non-core assets that were sold were development land with a long gestation period. One of the projects that was jettisoned was a joint venture (JV) with Selangor Properties Bhd on Wisma Damansara in Damansara Heights, which was entered into in 2005. The two companies had formed a strategic partnership via JV company Puncak Madu Sdn Bhd (PMSB) to acquire and develop several parcels of land totalling 10.34 acres in Jalan Semantan into a mixed development. The purchase consideration was RM231.7 million. E&O exited the JV arrangement this year by selling its stake in PMSB to Selangor Properties at the same value it had paid for the land bought via PMSB.

There was also the selling of a 0.4-acre lot on Jalan Mayang, off Jalan Yap Kwan Seng, and close to the junction facing the Australian High Commission. This was sold for RM15 million to a private company.

One other disposal was the bumiputera units at Dua Residency, which were placed on the market after the company received a waiver from the authorities. The majority of these have been sold.

Furthermore, a one-for-two rights issue via which the company hopes to raise RM200 million is expected to be completed before the end of this year.

Indeed, confidence in E&O has returned if the response to its recently unveiled St Mary Residences development in Kuala Lumpur is any indication.

“We started our launch of St Mary in June. Everyone was waiting to see how we would fare,” says Tham. “We started with Tower C of 169 serviced apartment units. To our surprise, 80% was taken up within three weeks and we were able to achieve RM1,000 psf on average.”

St Mary Residences is a luxury development situated between The Weld shopping complex and Menara Hap Seng in KL’s Golden Triangle and will feature three 28-storey serviced apartment towers with 657 units and a 3-storey parking lot for 719 cars. This 4.04-acre freehold project is a 50:50 JV with Lion Group and has a gross development value (GDV) of RM1 billion.

Interestingly, it was not just St Mary Residences that were warmly received. Over in Penang, the market reacted positively to E&O’s latest and higher-end launch in the ongoing development of Seri Tanjung Pinang, a 980-acre project on reclaimed land. Based on a multi-island and headland concept, Seri Tanjung Pinang is split into two phases.

Phase 1, covering 240 acres, is the headland and is attached to Penang island. Already 197 acres of Phase 1 have been developed or under construction. The remaining 43 acres will be developed in the next three to five years with a GDV of RM2 billion.

Phase 2, which spans 740 acres, has islands that are separated from Phase 1. Reclamation work is targeted to start in 2010. Its estimated  GDV is RM10 billion.

Tham says E&O also launched its waterside serviced suites — Suites at Waterside — and 33 units of its Ariza seafront terraced residences — four of which face the sea — in Penang in July. “The suites are all taken up. We launched the last blocks of the Ariza seafront terraces at an average price of RM1.1 million, which is about 50% more than the prices of similar terraces — from RM735,000 — launched in 2005,” he explains. The Ariza seafront terraces are 2½-storey units with a built-up of 3,400 sq ft.

So keen was the interest in the four Ariza seafront units that they had to be balloted on July 11. “We received a total of 150 ballots, with the highest purchase price being RM2.1 million,” says Tham.

How things have changed for E&O. Not long ago, the developer was forced to hold back the launch of St Mary Residences because the market was weak.

What kept E&O steady in the early days of the financial crisis was the lesson learnt from the 1997/98 Asian financial crisis. This time round, Tham says, they did not panic but carefully reviewed strategies to keep the company afloat. “I slept a lot better this time round compared with 1997,” he laughs.
 
A new era
Last year opened a new chapter for the group following a corporate exercise whereby E&O Property Development Bhd became a wholly-owned subsidiary of the E&O Bhd in July 2008. This saw a voluntary delisting of the property arm from the local bourse in August last year. As a larger and single-listed entity, E&O Bhd has been able to pool its resources, strengthen its base and venture into new locations.

E&O Bhd now has three core businesses, with property development as a major contributor to revenue. Hospitality and lifestyle and property investment now play smaller roles but the plan is to grow their contribution while property development continues to be the big brother.

With the return of consumer confidence, the developer plans to put on the market some RM4 billion worth of projects in the next three to four years.

“I believe the panic and the wait-and-see attitude have died off. Buying sentiment is returning,” says Tham. “Of course, prices have gone back to realistic figures. Before the crisis, there was talk of about RM3,000 psf in the KLCC area. This is not good for developers because it will push land prices up. It means developers will be taking more risks. At the time, the construction cost was also frightening. But now everything has been bought back to more realistic levels.”

Cashing in non-core assets and the completion of its rights issue should pare down E&O’s gearing from 0.9 to 0.3. This will become zero if the launch of the condominium block in Seri Tanjung Pinang this November is on schedule. The condo is one of seven blocks in a 21-acre development that has an estimated GDV of RM1.8 billion. Phase 1 consists of four condo blocks with 698 units while Phase 2 has three blocks with 510 units and boasts a nine-acre resort-themed water park with clubhouse facilities for residents only.

Other divisions
The group’s property investment division will focus on its own projects. For instance, there will be recurring income from Seri Tanjung Pinang’s marina retail development, which comprises 217 serviced apartments with built-ups of 850 to 2,753 sq ft and a 1 and 2-bedroom layout. All the suites have been taken up. The retail centre, dubbed Straits Quay, will have about 270,000 sq ft of net lettable area. The developer is in the process of leasing out the retail outlets. Tham says if a good offer comes along, the developer will sell the development but only en bloc.

Tesco will also be operating in Seri Tanjung Pinang. Under an agreement signed with E&O, it will rent a hypermarket built by the developer on a seven-acre site.

The hospitality and lifestyle division will concentrate on the group’s Batu Ferringhi Lone Pine Hotel and the boutique E&O Hotel.

It was reported recently that Penang’s heritage status bestowed by Unesco was under threat from the planned construction of several tall buildings the designs of which are said to go against the heritage guidelines set by the international body. One of the affected projects is a proposed extension to E&O Hotel. The developer had planned to build 28-storey twin towers adjoining the current hotel, but it has since decided to reduce this to just a 15-storey block. It has received the nod to start construction by the end of the year. The extension should be completed by  2011, barring delays, according to the developer.

With the new tower, the famed 101-room E&O Hotel, which has stood the test of time since 1885, will have an additional 139 rooms. 

There is no doubt the market will be hearing more of E&O Bhd.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 776, Oct 12-18, 2009.