Saturday July 7, 2012

Assessing the RM40bil Battersea project

A Question of Business by P.GUNASEGARAM

WHEN news emerged that a Malaysian consortium led by SP Setia and included partners Sime Darby and the Employees Provident Fund (EPF) was slated to take over the troubled Battersea project on the banks of the Thames in London, it sent a tremor of excitement through property circles.

But it did cause at the same time some ripples of concern among shareholders of the two companies and investors too. They want to know how the project will be financed, how it will be undertaken, and what the inherent risks of the project are given its immense size, its chequered history and the fact that it is in a foreign country where none of the JV partners have particular expertise in property.

It is a major project after all, with the purchase price for the 39-acre site alone from the receivers and managers set at just under RM2bil. The estimated project development cost over the next two years is estimated at just short of RM1bil, to give a total initial outlay of RM3bil.

All eyes: A consortium led by SP Setia has a 15-year development plan for the site of the Battersea Power Station but the scale of the project will probably raise some concerns among shareholders, investors and the property world at large. — EPA

If this is done on a 50-50 ratio between debt and equity, the amount of equity investment in the first two years could be RM1.5bil. SP Setia and Sime Darby, owning 40% each of the JV shareholders, will have to come up with RM600mil each while EPF as a 20% partner needs to come up with RM300mil.

The development will be over 15 years and will have a gross development value of close to RM40bil. If one assumes a profit margin of 20% on the gross development value, then the capital costs to put up the project will be RM32bil or more than RM2bil a year over the next 15 years.

That is a huge recurring investment to make and it will be a particular strain on SP Setia, which is a much smaller company than Sime Daby. Sime Darby would be better placed to make the investment because of its size while the EPF with nearly RM500bil in funds will have no problem at all funding its investments.

Also, moving into such a large overseas project that potentially dwarfs both SP Setia's and Sime Darby's other projects raises the question of whether resources will be stretched too thin and will be at the expense of the existing projects of the two companies both in Malaysia and overseas.

Further concerns about the project is that of the Battersea site, the site of a defunct power station that has become one of the landmarks on the Thames south bank, which has passed through several hands. It ended up in the hands of receivers after the banks called in the loans of the previous investor.

To be fair, that does not necessarily mean that the project is inherently bad but was hampered instead by a lack of funding right now. Indeed, the JV envisages that the current plans will be adhered too, which means building and planning time will not be lengthened more than necessary.

The joint announcement by SP Setia and Sime Darby describe the site as “undoubtedly one of London's most important and central urban regeneration sites”. That may be the case but to make it successful and profitable is another matter altogether.

This is a big, visible acquisition and a trophy project for the consortium. It needs serious work to make the trophy shine, look good and be worth the price paid.

SP Setia and Sime Darby have a good name and reputation. But still one must expect that the deal will be scrutinised and watched very closely, not just by Malaysians but by Londoners and the property world.

They will be looking to see what kind of value the Malaysian consortium can add to the project, how quickly they can obtain all approvals, how well they can execute the construction and building plans and how well they can market the properties.

That in the end will determine how successful they will be. Part of the success plan is to do the right things and show that the right things are being done at every turn and phase to inspire confidence in the project from property investors and thereby inspire confidence in their own shareholders, members and other investors.

That's not an easy task and given the scale of the project, one could even call it gargantuan but not impossible.

>Independent consultant and writer P Gunasegaram (t.p.guna@gmail.com) says that biting off more than you can chew is a choking hazard.

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