CapitaLand may have made the bulk of its earnings for last year and the first quarter of this year from Singapore - reversing an earlier trend of earning mostly overseas - but the group plans to stick with its strategy of emphasising overseas business.

CapitaLand Group president and chief executive Liew Mun Leong told BT: ‘Our strategic thinking is that Singapore is still a small market. You are talking about (developer sales) of 10,000 to 11,000 private homes a year. To me, that is very small for a large real estate company.

‘We are the smallest country in South-east Asia, but we have the largest real estate company in terms of market capitalisation in Asia ex-Japan and Hong Kong. How do we do it? Because we export real estate.’ Mr Liew argues that the bigger share of earnings from Singapore lately has more to do with the rise in property prices here. ‘But in actual volume, it’s still very small.‘

Last year, the group sold 954 homes in Singapore worth a total $1.23 billion, but in China it sold 1,722 homes for $522.5 million. In Australia, the group, through listed subsidiary Australand, sold 2,355 residential land lots, houses and apartments last year for a total $1.19 billion.

‘Our strategy to go overseas has intensified as in the long term, the market is outside (Singapore). The (local) market cannot sustain for too long. Because the Singapore market, no matter what, it’s only 10,000 to 11,000 units. How much can you grow to? 15,000 units? Nothing compared to China.’

For the financial year ended December 2006, Singapore accounted for 51.2 per cent of group earnings before interest and tax (ebit) of $1.82 billion, up from a 20.9 per cent share of group ebit of $860.3 million in 2005. In Q1, Singapore’s share increased further to 83.5 per cent of group ebit, which was $819.5 million.

Besides wanting to overcome the limited Singapore market, another reason for CapitaLand to continue venturing overseas is to diversify its risk profile. The latter issue has gained importance with the implementation of Financial Reporting Standard 40 (FRS 40) - Investment Property from the start of this year.

FRS 40 requires fair value gains and losses on investment properties to be included in the profit and loss account. This will create greater volatility in the P&L account.

While things are rosy now in the Singapore property market, the hit will come when the market falters, and reductions in valuations of investment properties will dent the bottom lines of Singapore-listed property groups.

‘If the property clock in Singapore is down, maybe China is up, maybe Australia is up. That is the whole (rationale) of investing overseas, that I spread my risk geographically.‘

Even when it is down in (the whole of) Asia, now that I am going to oil-rich countries - like Abu Dhabi, Russia - I’ve got balance. That’s the whole approach of our strategy. And that’s (also part of) the whole argument why we should invest outside Singapore.’

The volatility in earnings arising from FRS 40 would be amplified for a property company that is only in Singapore. ‘But we are large and we are distributed. If you put everything in one country and the thing goes down, you sink,’ Mr Liew said.

However, the implementation of FRS 40 also means that the ‘concept of operational profit as separate from valuation gains should no longer exist because that is part of your accounting process’, Mr Liew said.

For CapitaLand, that would mean it may no longer have to endure remarks from its detractors that its bottom line has been fat because of gains from selling sizeable assets, whether to external parties, as in the divestment of Temasek Tower and subsidiary Raffles Holdings’ entire hotel business, or to property trusts within the group, as happened for the sale of the Raffles City retail, office and hotel complex.

With FRS 40, ‘whether I sell Temasek Tower or don’t sell Temasek Tower, I am going to make the profit or loss based on the (value of the property) going (up or) down. Because of FRS 40, you have to recognise that as performance.’

Source: The Business Times, 18 May 2007