SPH’s traditional media business may be feeling the strain, but its property arm – with an emphasis on student residential – is booming. Chief financial officer Hwee Song Chua explains the company’s strategy.
If anyone in student real estate was asked to name an investor making waves in the UK market lately, the chances of Singapore Press Holdings receiving a shout-out are high.
The city-state’s dominant newspaper publisher – which owns publications including Business Times and The Straits Times – is the latest in a cohort of prominent Singaporean investors, including Mapletree Investments and sovereign wealth fund GIC, to invest in UK purpose-built student accommodation.
Hwee Song Chua, chief financial officer of SPH, has been leading the Singapore-listed company’s PBSA strategy, largely devised to mitigate the media division’s declining profitability. To give a snapshot of the drivers behind this, its most recent full-year results showed that profit before tax in its media business tumbled by 18.9% to SGD$92.8m (£53m) in the year ending 31 August, while its revenue fell by 9.6% to SGD$655.8m.
“Life for us took a change around five years ago, when [smartphones] came out with 4G capabilities,” Chua tells EG. “Like many other newsprint companies around the world, our business was disrupted. Our [media] profit has actually declined from a peak of around SGD$200m, to where we were last year. So the board took the decision that we have to be more aggressive in the way that we transform ourselves.”
When Chua joined SPH in April 2018 the group was already leaning on its property business, namely its 70% stake in Singapore-listed SPH REIT. This held properties valued at a combined SGD$3.3bn, mainly in domestic retail, delivering a distribution yield of roughly 5.5%.
“You know [the film] Crazy Rich Asians? If you have seen Orchard Road – we own one of the most prime properties there, called Paragon,” Chua says, referencing fictional socialite Astrid’s favourite shopping centre for extravagant jewellery.
Real estate was the largest profit contributor in the year ending 31 August, bringing in revenue of SGD$242.4m and operating profit of SGD$151.8m. However, it was clear that a more radical property strategy was needed to curb the profit slide in the media business.
Studying the sector
The plan to expand into UK purpose-built student accommodation evolved when Chua sat down with chief executive Yat Chung Ng – who had joined in July 2017 – to explore how to make the balance sheet “work harder” to generate more income.
A strong rationale for it emerged, bolstered by Office for National Statistics findings that showed the UK’s 18-year old population is forecasted to grow by an average rate of 2% per annum between 2020 and 2030.
The weaker pound was also an attractive prospect, as well as the UK’s strong biotech and pharmaceutical industries.
“We believe the PBSA portfolio is something that’s REIT-able. We want to build it up to a scale that will enable us to take it out to market for listing, and continue to grow it from there”
“The UK attracts a lot of brain power as an immigrant society. At the advanced economy level, scientists come in from Eastern Europe, India and China,” says Chua. “[It] has a strong knowledge economy and a very good immigration system, and the annual population is growing. The international population is also growing and attracting a lot of affluence from Asia, especially from China, Malaysia and Vietnam.”
Strong returns
On top of these factors, the potential for returns is undeniably high, even if it leads to greater borrowings. “When we looked at this sector, we were getting cap rates of anywhere between 5-6%, and British interest rates were very low,” Chua says.
“If transactions were financed at sub-2%, and LTV was leveraged to around 60% – which the bankers are very happy to do – a cash yield of about 9-10% could be calculated. If you’re patient enough, this will go into double-digits, say, over a three-year time horizon,” he points out. “That is a very attractive cash yield return. That is why we took the step to invest. [And] to move the needle on our P&L, we need to invest quite a lot.”
After divesting its treasury investment funds to redeploy into real estate at the end of its 2018 financial year, Chua’s team completed the purchase of SPH’s first UK portfolio in September.
This comprised 14 freehold and leasehold assets known as the Mayflower portfolio, bought from Unite Group for circa £180.5m. This was quickly followed by the acquisitions of St Marks in Lincoln in February, and Clifton House and Stewart House in Glasgow, in March. A month later, SPH bought a £133.7m trio in Southampton, Sheffield and Leeds, from a group led by AIG Global Real Estate on behalf of its Europe Real Estate Fund I GP.
Its student housing portfolio now stands at 5,059 beds across 20 assets in 10 cities, including London, Huddersfield and Plymouth. Chua estimates that over a period of eight months, the company deployed roughly SGD$600m on the deals. And there will be more to come, with one or two further acquisitions “on the table right now”.
The REIT stuff
Looking ahead to future investment strategies, SPH is mulling the possibility of creating a new REIT on the Singapore stock exchange, anchored by its UK student real estate.
“We believe the PBSA portfolio is something that’s REIT-able. We want to build it up to a scale that will enable us to take it out to market for listing, and continue to grow it from there,” he says. “It is important for us to tap into the capital markets, so that we can recycle our capital and grow this platform.”
The idea is to more than double the existing value of the portfolio at a “disciplined pace” to circa SGD$1.5bn, before considering whether to spin them off as a REIT.
“In Singapore, I think the bankers would take us out on the basis that we have about SGD$1.5bn in assets, so we are working towards that,” says Chua.
However, Chua emphasised that a decision to list would heavily depend on favourable macroeconomics, and whether the company would be in the right part of the yield cycle. In the meantime, the focus remains on a “steady pace” of investment to grow the portfolio.
The firm has also set up asset management capabilities under its newly-launched Capitol Students brand. A team of five in the UK and eight in Singapore are overseeing the properties, with more than 100 employees managing them.
The UK asset management arm Straits Capitol is led by David Mathewson, head of acquisitions, and Murdo Mcilhagger, head of investment management.
Finding towns either anchored by growing universities, or locations that host multiple universities demonstrably pushing for growth, are crucial to determining investment opportunities.“
The major things are the Russell Group university towns, and perhaps other towns that [have recorded tangible data of a high] international student population,” Chua says.
Micro-locality is also important. To illustrate the company’s approach to locations, Chua highlights a scenario in which SPH walked away from a portfolio on the market – a trio of three assets in Leeds, Lincoln and Sheffield, in which it made an offer for the former two.
“Sheffield is obviously a very competitive market. If you are not in the right part of the city, it can be very challenging,” explains Chua.
“We made an offer for the other two assets but of course, this was not accepted,” he says. “So we had to walk away.”
Chua also identifies Newcastle and Liverpool as markets that are “very difficult”, because of oversupply.
“Those are things we have to be careful of,” he says.
Learning new markets
While a potentially-listed portfolio would be anchored by UK student accommodation, SPH is also setting sights on some diversification. Mainland Europe, Australia, Ireland and the Netherlands were among the “interesting markets” on the company’s radar. Chua is also keen to build presences in other industries.
He says: “While the UK is definitely interesting, we are looking at other potential sectors. It is important that the sector is what we would consider defensive and has to be fairly mature.”
Grocery stores, driven by click-and-collect, is identified as one that ticks the boxes. Senior living could also fit the bill. The company benefits from already owning Orange Valley, Singapore’s largest private nursing home provider, so it is relatively familiar territory.
“The long-term circular trend is that senior living will still grow for at least the next 20 to 30 years,” says Chua. “It is not an easy sector, but if you understand it at an operator level, it will give you a very strong advantage.
“We are well exposed to the UK, [so] we may go out to other markets before looking at other sectors there, but if we find good opportunities we may invest in some of these.”
Despite ongoing political and economic turmoil in the UK, its fundamentals are still appealingly strong where the company is concerned.
“The UK is a fantastic market. Brexit or no Brexit, the issue at hand is to get it over with so that the uncertainty lifts,” reckons Chua. “Its legacy as a major financial [centre], the law system and financial services ecosystem – these are things that are very difficult to disrupt. [The UK] is still the lingua franca that everybody is used to.”
In its approach to the UK, the company will also begin to explore how to engage with communities in the UK, as part of its operating philosophy. It runs a charity arm, the SPH Foundation, in Singapore.
The future of media
When comparing the company’s dynamic acquisition trail with its dwindling media business, one could be forgiven for thinking Singapore Press Holdings might want to tweak its name to Singapore “Property” Holdings. After all, property accounted for two-thirds of the group’s profits for the six months ending 28 February.
However, Chua stressed that the focus is still very much on media. As well as real estate, investment in e-commerce has formed another key aspect of its strategy.
“We believe our media business has a chance of recovering, for the very simple reason that we are still around and are probably at the tail end of disruption,” he asserts. “The good thing about us is that with the internet now and the digital space available, some of our publications can tap into overseas markets. If we know how to use the same tricks as the digital disruptors – and now that people are [more] willing to pay for media – I think it is possible for us to make a comeback.”
What is Singapore Press Holdings?
Founded in 1984, Singapore Press Holdings’ core business is based around newspapers, magazines and books in print and digital. It also owns other digital products, online classifieds, radio stations and outdoor media.
In property, the company owns 70% of SPH REIT, which largely comprises retail malls in Singapore. SPH REIT also holds 85% equity stake in Figtree Grove, a shopping centre in New South Wales, Australia.
As well as building its UK PBSA portfolio, the organisation is also developing a commercial and residential site at Woodleigh, and has a stake in Chinatown Point, both in Singapore.
Elsewhere, SPH owns Orange Valley, Singapore’s largest private nursing home operator. It also runs a regional events arm and a chain of Buzz retail outlets and has education investments.
To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette
