WHAT ARE REAL ESTATE COMPANIES DOING DIFFERENTLY IN TODAY’S CHALLENGING ECONOMIC CONDITIONS?
Property cooling measures, tougher banking rules and slower economic conditions have dampened real estate activity in Singapore. Based on Arcadis Singapore’s 2017 Construction Cost handbook, construction demand in 2016 and 2015 moderated to about SGD26 to SGD27 billion a year as compared to the record high of SGD38.8 billion in 2014.
Real estate companies have been proactive to deal with this new reality. An increasing number of them have sought to preserve sustainable returns through deployment of know-how and capital toward foreign ventures and placing lesser reliance on limited local development and construction opportunities. For example, Keong Hong Holdings Limited, which has been actively expanding overseas in the past few years, now operates an airport and a resort in the Maldives. The group has also recently acquired property in Osaka, Japan to earn rental income. Similarly, Heeton Holdings has ventured overseas and now holds significant assets in the United Kingdom, Thailand and Australia.
According to the Building and Construction Authority’s (BCA) Construction Export Survey 2016, 2015 saw the highest number of Singapore construction and consultancy firms venturing overseas in five years. Thirty-eight contractors (representing a 73-per cent increase from 2014) and 62 consultancy firms (representing a 138-per cent increase from 2014) secured foreign projects.
Many have committed investments overseas in assets or joint ventures as part of their strategy to seek growth. These companies have taken an active interest in collective real estate ventures and business trusts in a bid to generate predictable cash flows. Since the launch of the first Singapore Real Estate Investment Trust (REIT) in 2002, listed REITs have been increasing in numbers, and real estate companies regularly offer viable returns and distributions to the investment community. Except for 2013, REITs in Singapore have consistently outperformed the Straits Times Index for the past nine years.
The industry has also been making strides in adoption of technology. Digitisation, smart building, Green initiatives and big data have changed the ways real estate businesses operate domestically and across borders. BCA launched the Construction Productivity Roadmap in March 2010 and set aside almost SGD800 million for the Construction Productivity and Capability Fund. By the end of 2016, SGD450 million had been committed with more than 9,000 firms benefiting from the fund. These productivity initiatives have yielded results and based on BCA’s estimates, productivity as a whole has improved from 0.381 to 0.419 square metre per man-day in 2016.
Real estate companies have progressively adopted innovation and digitalisation strategies in order to make better and more informed decisions. For example, JTC Corporation adopted the Prefabricated Prefinished Volumetric Construction (PPVC) method for the JTC Space@Tuas industrial complex. PPVC is expected to bring about an estimated 15 to 20-per cent savings in manpower cost. More than 700 firms have also benefited from the Building Information Model scheme since June 2010.
IMPORTANCE OF GOOD CORPORATE GOVERNANCE
As real estate businesses go regional and make plans to corporatise and professionalise the leadership structure in their business, corporate governance becomes increasingly important to business owners, investors, lenders and business partners. Strong corporate governance improves transparency, performance rankings and creates a more balanced and equitable structure to determine executive compensations.
On 30 June 2017, the Governance Index for Trusts (GIFT) was launched and published in The Business Times. The GFIT ranks REITs and Real estate companies have progressively adopted innovation and digitalisation strategies in order to make better and more informed decisions. business trusts on their corporate governance practices and subjects them to greater scrutiny by the public and investors. Transparency and accountability play an important role in attracting real estate investments.
Business owners and CEOs have to make bolder decisions and take greater calculated risks in order to maintain profits. However, our experience shows that they can often make business decisions that overcommit capital, have no synergies with existing core business or overleverage in order to pursue aggressive expansion goals. Companies are increasingly open to independent advice from consultants as a barometer of the viability of their plans and the sustainability of their efforts. Business advisory teams can offer not only independent views of project viability, but also provide advice on the soundness of the governance practices and their ability to properly support these expansion and investment plans.
Business corporatisation needs to be supported by a proper controllership model and good governance as these go hand in hand. Controllership allows a business to protect assets and manage operating and financial risks. This includes the responsible deployment of capabilities, reserves and capital for new business ventures. A business controller helps to ensure the company employs or has access to professional expertise needed for the business to fast-track growth, define responsibilities, accountability and help drive innovation and investment in areas such as design engineering.
Good governance oversight not only provides assurance to the board, it puts in place four key pillars to govern key transactions, direct resources and take accountability for the accompanying results. The four key pillars are as follows:
1. Supervision
2. Support
3. Monitoring
4. Control
A poor corporate governance framework weakens real estate companies’ potential and can increase the risk of financial fraud. Poor risk management (which is an integral means to preventing and monitoring the impact and likelihood of threats) can result in financial losses and fail to attract investors to fund the growth of the business.
FAILURES RESULTING FROM WEAK CONTROLLERSHIP AND GOVERNANCE
Austrian builder, Alpine Bau filed for insolvency in 2013 [1]. It was Austria’s second-largest construction group, employing more than 10,000 people worldwide. It had EUR2.56 billion (SGD4.3 billion) in debt, making its corporate failure the biggest in Austria since World War II. The company had been trying to restructure its finances as it grappled with unprofitable projects in Central and Eastern Europe. However, poor governance in containing strategic project risks in Europe led to contract termination in Singapore, including termination of contracts with the Land Transport Authority valued at more than SGD600 million. This resulted in delays to the Downtown Line of at least three months after the contracts were re-awarded to other contractors.
A local example of corporate failure attributed to weak governance was construction firm, Poh Lian, which also filed for judicial management in 2013 [2]. Poh Lian had secured tenders at low prices. The company failed to factor in additional costs in the light of project delays for Sophia and Goodwood Residences projects, and also incurred substantial losses due to a change in payouts for subcontractors on the Goodwood project. These culminated in an SGD60 million loss position which led to its eventual cessation.
In light of the above, there is sufficient evidence and justification that boards which pursue a strategy of regionalisation, collective asset investment and business model changes to achieve better financial resilience need to put in place these four pillars of good governance to realise their goals. This not only improves the reputation and standing of the real estate sector, but also attracts higher levels of investment and paves the way for increasing business opportunities for inbound and outbound capital through Singapore
[1] Source: http://www.straitstimes.com/singapore/key-mrt-project-contractor-goes-bust
[2] Source: http://www.asiaone.com/print/News/AsiaOne%2BNews/Business/Story/A1Story20130316-409186.html
DENNIS LEE
DIRECTOR, RISK ADVISORY, RSM
Dennis Lee is a director at RSM’s Risk Advisory division with years of audit, internal audit and risk management experience in providing services to Singapore-listed companies, fund management companies, family-managed businesses and statutory boards across a wide array of industries.
Lee has worked closely with boards, audit and risk committees, as well as senior management in the planning and delivery of internal audit, control self assessment and enterprise-wide risk management deliverables. He has assisted numerous listed companies in complying with the enhanced SGX Listing Rules and to address risk governance requirements specified in the Code of Corporate Governance.
JASMINE CHEN
SENIOR MANAGER, RISK ADVISORY, RSM
Jasmine Chen is a senior manager at RSM’s Risk Advisory division. She is well versed in external and internal audit, finance and accounting. She has also audited companies and businesses in various industries such as manufacturing, semiconductors, electronics, shipping, reinsurance and retail. Jasmine works closely with chief audit executives to help audit committees and senior management enhance corporate governance and internal controls for listed companies. Chen holds a Bachelor of Commerce (Accounting and Economics) from the University of New South Wales.
TOMIO TAN
MANAGER, RISK ADVISORY, RSM
Tomio Tan is a manager at RSM’s Risk Advisory division. He has more than 10 years of experience in providing financial, operational and compliance audits. His experience includes audits of companies and statutory boards in various industries. He has also conducted enterprise risk management workshops for senior management teams of SGX-listed companies.
Prior to joining the firm, he spent three years at one of the Big Four accounting firms. Tan holds a Bachelor of Accountancy from the Nanyang Technological University and is a Certified Internal Auditor.
