IOI Corp announced that its wholly-owned IOI Consolidated (Singapore) Pte Ltd, had subscribed 114.8 million shares or 49.9% equity interest in Scottsdale Properties for a cash consideration of S$114.8mil. The other partner in Scottsdale isAscent View Holdings Pte Ltd, wholly-owned by City Developments Ltd with 50.1% stake.
Scottsdale is involved in the development of South Beach property project with sizeable office, hotel, residential and retail components. Scottsdale holds a 66.66% stake in South Beach Consortium (SBC) while IOI Corp holds a 33.33% stake.
The acquisition [of Scottsdale Properties to increase its interests in the South Beach project] will add to the group’s property portfolio in Singapore, which now includes its joint-venture with Singapore’s Ho Bee group for two condo developments in Sentosa Cove and the development of a condo project in Balestier
IOI acquired the stake in SBC from Elad Group for S$173.9mil. It was completed in April 5 2011.Also, IOI Corp and Ascent View might be required to contribute further equity in proportion to their respective shareholdings in Scottsdale (which is estimated to be in the region of S$500mil each) for the purpose of acquiring/redeeming the existing mezzanine notes that were earlier issued by SBC, for working capital requirements and to part finance the construction of South Beach.
In total, IOI will have to cough up S$816.8 million (RM1.96 billion) for its 49.9% stake in the South Beach project that sits on a total land area of 376,925 sq ft which has a leasehold tenure of 99 years. The South Beach project is located between Raffles Hotel and Suntec City and next to the Esplanade MRT Station.
IOI has a net debt of RM1.28 billion (0.12 times net gearing) as at Dec 31, 2010.
As IOI is an established developer like City Development, we have little doubt that the venture into the Singapore property market will be profitable. However, as with its previous venture into property development outside Malaysia , the market does not reward the company in terms of stock price appreciation, as investors invest in IOI not for its property exposure, particularly outside Malaysia .
The group expects to invest up to RM1.96 billion on the project. While the initial outlay of RM276 million is small relative to IOI's net debt of RM1.275 billion, the total investment of RM1.96 billion will result in its net gearing jumping to 20 per cent in the next 12 months. This is assuming that IOI generates RM1 billion in operating cash flow during the period. Otherwise, the company's net gearing will rise to a high of 29 per cent.
Industry observers believed a rise in interest rates was inevitable as the three-month Sibor ( Singapore interbank offered rate) was at a record low. [A rise in rates] will reverse conventional trends for physical prices [of property], through the impact on debt-servicing ability (especially for those with multiple home loans) and lower rental carry.
This acquisition would have an immediate negative earnings effect of 4% to 5% per annum from the interest expense incurred, given that earnings from this property development would not come in until 2015.
Concerned of the impact the Singapore government’s cooling measures would have on the property market in the medium term and therefore IOI’s ability to make a decent return on its investment.
Meanwhile while IOI Corp is busy clearing its name following a sanction by the Roundtable on Sustainable Palm Oil (RSPO) on allegations of land disputes and deforestation charges in Sarawak , environmental NGOs are equally hard at work to gain the support from major palm oil buyers to suspend their purchases from the plantation giant.
One such NGO is San Francisco-based activist group Rainforest Action Network (RAN). RAN is campaigning around the situation given the fact that IOI is a supplier to Cargill, the largest importer of palm oil into the United States .
RAN has demanded Cargill institute basic safeguards on its supply chain to ensure it is not selling palm oil from stolen indigenous land to American consumers. Unilever, the world's second largest consumer group, would review supply agreements with IOI should the latter fail to deliver the requirements by the RSPO.
However, it is currently still business as usual between the two companies.
Another major purchaser, Finland-based renewable diesel producer Neste Oil Corp, meanwhile maintained that it would continue to buy palm oil from IOI as its palm oil procurement comes from sustainable mills with the supply chain fully traceable and documented and not from the conflict area in question. In 2009 and 2010, PT Sinar Mas Agro Resources and Technology (PT Smart), an Indonesian subsidiary of Golden Agri Resources, which in turn is a member of RSPO, suffered the brunt from Greenpeace of clearing peatlands and rainforest in Indonesia which resulted in the lost of a number of major customers.
Unilever, Kraft, and Nestle were among the big companies that abandoned PT Smart, which has since announced a strict forest policy for new plantations. So, will IOI also suffer a similar fate as PT Smart? All will depend on the local plantation giant's rebuttal.
The RSPO has given IOI till May 2 2011 to deliver a proposal to resolve the outstanding issues for breaching “two core membership mandates and obligations” on land conflict and conversion of high conservation forest into oil palm plantations.
Failing to do so, RSPO would consider further sanctions on IOI i.e. suspension of licence on new certified sustainable palm oil including GreenPalm certificates.
At least for now (April 2011), many purchasers of IOI's certified sustainable palm oil are still showing full support for the local plantation giant.
However, a lot would be at stake should IOI be held accountable for the claims on land dispute grievances filed by the indigenous community of Long Teran Kenan in Baram, Sarawak and allies including RAN.
Apart from major disruption or suspension in palm oil purchases from major buyers, the share price of IOI Corp one of the favourite plantation counters on Bursa well monitored by both local and foreign fund managers could be affected as well.
IOI Corp Bhd's acquisition of 49.9% stake in Scottsdale Properties Pte Ltd may provide an opportunity for it to be involved in an iconic downtown development in Singapore but there are also concerns on the subdued outlook of the property market there.
The substantial size and location of the South Beach development, which was close to other landmarks such as Suntec City convention centre and Raffles hotel, would make this project one of the most popular and prominent mixed-use development.
But, this is partially offset by concerns over the group increasing exposure to the property sector that has subdued outlook. There were some concerns about Singapore 's property outlook based on its government cooling measures and moderating home sales.
On Jan 13 2011, the Singapore government imposed tighter borrowing limits and a hefty stamp duty of 16% of the selling price for those who buy and sell within 12 months.
