(SINGAPORE) City Developments Limited (CDL), which now gets most of its income from Singapore, has set up a new unit with some $300 million on hand to build up its presence in China.

The fully-owned subsidiary, CDL China Limited, will target all segments of China’s property market – the high-end, mid-tier and mass market residential markets as well as the commercial and hospitality sectors. So far, 12 first-tier and second-tier cities in China have been earmarked for investment.

The group yesterday reported an 18 per cent increase in second quarter net profit as economic recovery boosted demand for its homes and office space in Singapore. But CDL is looking at diversifying its sources of income geographically.

While the group’s focus will remain firmly rooted in Singapore – where it knows the environment best and serves as a proxy to the Singapore real estate market – China cannot be ignored, said executive chairman Kwek Leng Beng.

His elder son Sherman Kwek, who has been appointed chief executive of CDL China, admitted yesterday that the group has to play ‘catch up’ with other developers – such as CapitaLand – which had entered the China market earlier. But ‘this is the right time for a new market entrant to enter (China),’ he said.

With the Chinese government’s recent measures to control its over-heated property market, CDL believes that the time may soon be ripe to pick up land and/or investment properties at the right price.

Prices in 70 major cities across China climbed 10.3 per cent in July from a year earlier (the slowest pace in six months) the statistics bureau reported earlier this week.

The younger Mr Kwek said that CDL China’s preferred mode of investment will be to buy land directly from the government and then develop it on its own. But the unit will remain open to working with other developers in the form of joint ventures.

Right now, CDL China has just one major asset – the 36-storey office building Tianjin City Tower – in China. But this excludes assets held under CDL’s London-listed hotel arm Millennium & Copthorne Hotels (M&C), which the group has a 54 per cent stake in.

While CDL China’s $300 million worth of initial investment funds is not large, the move is significant as it shows CDL’s new determination to venture into China, analysts said. The group has not shown such strong interest in China before.

‘While the initial capital is negligible compared to CDL’s total net assets of $7.8 billion, the shift in strategy and attitude is significant as CDL’s overseas presence (excluding hotel operations) is fairly limited today,’ said OCBC Investment Research analyst Meenal Kumar.

DMG & Partners Research analyst Brandon Lee said that initial progress is expected to be tepid, with earnings contribution only in the medium-long term.

The move is also an example of CDL’s more proactive stance of late to provide a growth story for shareholders.

‘(CDL’s) management has been actively unlocking value from its older commercial buildings and is now looking to expand in China,’ said Deutsche Bank analyst Gregory Lui.

The developer recently sold its stake in Chinatown Point (the entire retail component of 283 strata shop units as well as four strata office units) for $250 million.

The elder Mr Kwek yesterday said that more such older buildings could be sold as CDL seeks to capitalise on current demand.

Source: Business Times, 13 Aug 2010