Sime Darby Property Bhd (SDProp), Malaysia's largest listed property developer by landbank size, aims to achieve a 30 per cent recurring income stream as part of its ongoing efforts to diversify its business and broaden income streams beyond property development.
SDProp aspires to be a sustainable real estate development firm by 2025.
According to Hong Leong Investment Bank Bhd (HLIB Research) analyst Nazira Abdullah, the group's property investment segment has a reasonable take-up rate.
SDProp owns nine investment properties worth RM1.7 billion, with an average occupancy rate of 75 per cent to 80 per cent. It has five office buildings, two retail malls (Melawati Mall and KL East Mall), and a 25 per cent stake in Sime Darby Business Centre, a commercial asset in Singapore.
Retail malls, a relatively new addition to the group's portfolio, are notable assets. The malls were built within SDProp developments to supplement and act as a catalyst for demand for the surrounding residential products.
Melawati Mall, its first retail mall, opened in 2017 as a result of a partnership with CapitaLand Malls Asia.
According to Nazira's research note, the mall's occupancy rate has improved since its opening in July 2017 and is now around 80 per cent (from December 2017: 70 per cent).
The mall has 614,000 square feet of NLA (net lettable area), 200 retail stores, eight retail floors, and 1,900 parking spaces.
According to Nazira, SDProp's first fully-owned retail mall, KL East Mall, located in the group's KL East development, is intended to serve as a catalyst for the overall mixed development, The Ridge.
The four-level mall with 200 retail units has a GFA of 619,000 square feet and an NLA of 384,000 square feet. It will open in the second half of 2020.
Despite the ongoing saturation of the office market supply, SDProp continues to achieve reasonable take-up rates (averaging 90 per cent in FY2020) because its buildings, such as Wisma Zuellig and Wisma MRT, are well located and supported by single anchor tenants.
Wisma Zuellig was built in 1991 in Petaling Jaya's Section 13, which began as an industrial area in the 1960s.
To capitalise on the office's prime location, the building has now opened as ReGen Rehabilitation Hospital, generating a healthy six percent gross property yield income, Nazira said.
SDProp also generates recurring revenue from the concession agreement with Pagoh Education Hub (PEH), identified as a valuable investment by the Board in May 2018.
According to Nazira, SDProp remains bullish on PEH's long-term prospects and its ability to generate recurring revenue for the group.
Meanwhile, SDProp intends to increase its recurring revenue from the industrial segment further.
The group is currently collaborating with Japan's Mitsui & Co. Ltd. and Mitsubishi Estate Co. Ltd. to develop and lease industrial facilities in Bandar Bukit Raja, Klang.
The JV established in 2018 is a 50:50 partnership between SDProp and Mitsui M-Co, with Mitsubishi Estate indirectly participating in the JV through its 40 per cent stake in Mitsui M-Co.
The project consists of built-to-suit industrial facilities for warehousing and logistics, is expected to generate approximately RM530 million in GDV, and will contribute to the group's increased recurring income.
SDProp, according to Nazira, is expanding into industrial and logistics development via a built-to-suit model in addition to the traditional outright sale of a plot of land or completed product.
"SDProp will continue to hasten its JV partnership by releasing more land banks for its built-to-lease (BTL) business, given the strong interest received by industrial and logistics players. Furthermore, it is currently undergoing discussions to expand the BTL model for another parcel of land in Bandar Bukit Raja, measuring an estimated GFA of 1.5 million sq ft.
"Moving forward, SDProp will continue seeking opportunities in developing its industrial land for recurring income, be it by themselves or through experienced JV partners," she said.
SDProp still has 1,297 acres of industrial land available within five of its key flagship township developments.
Aside from the JV with Mitsui, SDProp has entered into a shareholder agreement with LOGOS Property Group to establish a 51:49 JV company in Singapore called Industrial Joint Venture Pte Ltd. The goal is to create a fund management platform focused on developing and investing in assets primarily in the logistics sector, with a target capital commitment of approximately US$200 million (RM850 million) from accredited and institutional investors.
The JV Co will develop and invest in 'build-to-suit and lease or sell' industrial assets, primarily for logistics clients.
"We understand that IRR and yield for the fund are targeted at 15 per cent and six per cent. We are impressed by the strategic move by SDProp to channel its land bank into this growing sector," Nazira said.
Aside from the gain from land disposal, which will be recognised in three phases over three years, the partnership will add to SDProp's existing recurring income stream.
According to Nazira, listing the underlying assets as a REIT could be the fund's future exit strategy.
Meanwhile, as part of the proposed asset monetisation strategy, Nazira believes SDProp could potentially divest its asset in Vietnam under the leisure and hospitality segment.
TPC Kuala Lumpur, Impian Golf and Country Club, Sime Darby Convention Centre, Harvard Golf & Country Club/Harvard Suasana Hotel, Kedah, and Bayuemas Oval, Klang are the current Malaysian properties in the segment.
OSC Sunrise Apartment Vung Tau is the property in Vietnam.
SDProp has sold eight assets deemed non-core because they do not necessarily complement the group's property developments, according to Nazira, since its listing in 2017.
These assets include Darby Park Executive Suites (Singapore), The Orion, Pulau Tikus (Penang), Darby Park Serviced Residences (Australia), Genting View Resort, and Karri Valley (Australia).
Nazira said that HLIB Research expects that the serviced residence in Vietnam will be potentially divested as part of the proposed asset monetisation strategy.