10 • THEEDGE SINGAPORE | SEPTEMBER 28, 2015

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| BY GOOLA WARDEN |

Only two years ago, public-listed shell Rowsley looked to be on the verge of morphing into a play on the red-hot real estate market of Iskandar Malaysia. Now, Rowsley is turning

to the UK for faster returns, and repositioning its flagship development in Iskandar.

The Iskandar development sits on a free-hold site spanning 9.23ha, in what was sup-posedly among the most desirable parts of the growth corridor, close to the causeway to Sin-gapore. Held under a unit called Vantage Bay Sdn Bhd, Rowsley acquired the site for $358 million (RM923.64 million) in 2013. The pur-chase was satisfied by the issue of 2.38 bil-lion shares (or 15 cents each) to Peter Lim, who held 70% of Vantage Bay, and the Sul-tan of Johor, who owned 30%. The plan was to build a major shopping, entertainment and residential complex with a total gross floor area (GFA) of 10 million sq ft.

However, unfettered development in Iskan-dar, not least by Chinese developers such as Country Garden, Guangzhou R&F Properties and Greenland Group, has raised concerns about a looming oversupply. It also looks to be only a matter of time before global interest rates will rise. In addition, Malaysia appears to be in the throes of a political crisis, and suffering from a rout in commodity prices. The ringgit, which was trading at RM2.58 to the Singapore dollar when Rowsley acquired Vantage Bay, has now slumped to RM3.

On Sept 22, Rowsley announced new plans for the Iskandar site, on which noth-ing has yet been built. Now, it plans to devel-op a complex called Vantage Bay Healthcare City, with only 5.38 million sq ft of space. The development will comprise a specialist hospital, a community hospital, long-term care facilities, a teaching hospital, a medical school, research and training institutions, a purpose-built urban wellness resort, wellness retail services and other associated facilities, according to Rowsley.

Lock Wai Han, CEO of Rowsley, says this new healthcare hub will be complement-ed by a hospital called Thomson Iskandar, which is being developed on an adjacent site

by a company that is privately held by Lim. In fact, this is likely to be the first segment of the healthcare hub to get developed, ac-cording to Lock. “It will take three years to be completed.”

In the meantime, Rowsley will be round-ing up partners and looking at designs for the other segments of the development. The specialist hospital and the medical school, in particular, are unlikely to move ahead un-til suitable partners are secured, according to Lock. On the other hand, the community

hospital and long-term care facil-ities can “move earlier”, he says, while the wellness resort is “a fair-ly independent piece” of the whole development.

The new plan changes the eco-nomics of the Vantage Bay site. Under the original plan, Rows-ley would have developed some 10 million sq ft of space, trans-lating into a cost of RM92.3 psf. A chunk of this would have been quickly sold as residential prop-erty to generate cash flow. Now, the reduced GFA is likely to cost RM172 psf, and the return would be earned over a longer period of time. “This is a longer-term yield play,” acknowledges Lock, who ex-pects total gross development value to be around RM5 billion. “When it comes to funding this, it is bet-ter to find people who are aligned to such returns.” Earlier this year, Rowsley announced a multi-cur-rency medium-term note (MTN) programme in which it raised $350 million. “We will be looking to set up some other structures to bring

in some money. When we talk to partners, if our interests are aligned, they will be putting in some equity. Medical healthcare players tend to be in it for the long haul,” Lock says.

While this might disappoint some investors, the reality is that Rowsley had little choice but to change its plans. “With the market like this, we recognise we have to do something different,” says Ho Kiam Kheong, executive director of Rowsley. Sales of residential prop-erty in Iskandar are simply moving too slow-ly now, he adds. “There are still transactions, but they tend to be very slow.”

What will Rowsley do to generate cash flow while it builds up the Vantage Bay Healthcare City? Fortunately, when the company acquired the land, it also purchased RSP Architects. The firm was acquired for $223 million, and paid for through the issue of Rowsley shares at 15 cents each. According to an announce-ment dated Aug 20, 2013, RSP had agreed to provide the group with about $25 million in net profit a year, for FY2013 to FY2015.

Going to ManchesterRowsley has also begun investing elsewhere. On Aug 27, the company said it would pay a total of £29.1 million ($64.1 million) for a 75% stake in three companies that own Ho-tel Football, a 133-room boutique hotel lo-cated across the Old Trafford stadium; Café Football, a 120-seat restaurant in east Lon-don; and GG Collections, a hotel manage-ment company that manages Hotel Football and Café Football.

“Hotel Football is already operational. So, that [cash flow] will come in,” Lock says, adding that the property yield is likely to be in the mid- to high-single digits. The hotel and café are partly owned by Lim, who also holds a 49.55% stake in Rowsley. That makes

the deal a related party transaction, so it will have to be approved by minority investors at an extraordinary general meeting.

In a related announcement also on Aug 27, Rowsley said it would pay £40 million for a 75% stake in St Michael Investments, an inte-grated development in Manchester city centre, comprising a hotel, residential units, offices and retail space. Beijing Construction Engi-neering Group will own 21%, and footballers Gary Neville and Ryan Giggs will hold 2% each. “We expect to launch the residential compo-nent of St Michael in the second half of next year, and we could sell the offices en bloc,” Lock says. “The development component [of St Michael’s] needs to move, and move ratherquickly.” For the recurring income part, he thinks that the internal rate of return (IRR) is likely to be pretty decent. “If the IRR was not strong, we would not have looked at this.” The gross development value of St Michael is likely to be £200 million, and Rowsley will look at project financing or debt to part-fund the construction.

Lock, who was previously head of a unit of CapitaLand that developed malls in Chi-na, believes the Manchester project will do well. “We’re quite confident about the resi-dential apartments, with the kind of location and demand in Manchester,” he says. He sees buying interest from mainland Chinese and other Asians who have children studying in Manchester.

On the commercial front, Lock says sup-ply is short, and businesses are moving into Manchester from London. The Manchester city council has just approved broad plan-ning principles for St Michael, and Rowsley is looking to close off on all approvals by early next year so that sales and construc-tion can start in 2H2016.

Rowsley repositions Iskandar project, ventures into new investments in UK Isk

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Lock remains confident that Iskandar will eventually work out Ho says sales of residential property in Iskandar Malaysia are moving too slowly

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Reproduced by permission of The Edge Publishing Pte Ltd., Copyright © 2015 The Edge Publishing Pte Ltd. All Rights Reserved Worldwide.

CORPORATE

THEEDGE SINGAPORE | SEPTEMBER 28, 2015 • 11

Sept 28, 2012 Sept 23, 2015

RowsleyVolume (‘000) Price ($)

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0.161

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0.56

0.70

Valuation score* 0.30Fundamental score** 2.25TTM PER (x) 12.42TTM PEG (x) –P/NAV (x) 1.27TTM dividend yield (%) –Market capitalisation ($ mil) 630.21Shares outstanding (ex-treasury) (mil) 4,258.21Beta 1.5112-month price range ($) 0.11 to 0.23

*Valuation score — Composite measure of historical return and valuation**Fundamental score — Composite measure of balance sheet strength and profitabilityNote: A score of 3.0 is the best to have and 0 is the worst to have

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Iskandar not so badBack in Iskandar, Lock says things are not re-ally as bad as some people think. The location of the growth corridor gives it the potential to be to Singapore what New Jersey is to New York, or what Shenzhen is to Hong Kong. No-tably, Singapore could move its manufacturing and storage facilities there to reduce costs, and create space on the island to scale up higher-value services.

As it happened, lax regulations led to overinvestment in Iskandar. Country Garden, Guangzhou R&F Properties and Greenland Group alone have projects that could collec-tively add about 13,000 residential units to the market. Already, some Malaysian devel-opers are scaling back their projects for fear of being stuck with unsold units.

City is going to take a long time, but peo-ple don’t realise that. They think those units will come onstream in the next three years,” Lock says. “My guess is that it will take 20 years or more to fully develop this. I don’t think any sane developer will build everything at once.”

Lock remains confident that Iskandar will eventually work out. “If you look at the invest-ments that are coming onstream in Iskandar, in terms of [foreign direct investment] in the port,

oil and gas, media, education, theme parks, those are on track and ahead of schedule,”he says. Those investments will eventually create jobs and fuel population growth, and drive demand for property.

If he is right, the outlook for Rowsley might also not be all that bad. Lock says the company will eventually have four business segments. The first is the real estate consultancy busi-ness under RSP Architects, which is already operational. The second, real estate develop-

ment, is likely to start next year in Manches-ter. The third is Vantage Bay Healthcare City, and the fourth consists of Rowsley’s legacyinvestments, which include a small stake in FJ Benjamin.

For the six months to June 30, Rowsley reported a 54% y-o-y plunge in earnings to $3.6 million, on the back of a 22% decline in revenue to $34.1 million. Its stock is trad-ing at 1.28 times its net asset value of 11.55 cents a share.

Case in point: Rowsley’s Vantage Bay pro-ject. “On the residential side, people often ask whether there is an oversupply and has that been a consideration of doing this,” Lock says. To be sure, Rowsley is trying to avoid being stuck with unsold residential units. But Lock says Vantage Bay was never going to be any-thing like what the Chinese developers are building. “People do not fully understand what’s in the pipeline,” he grumbles. “Ours was going to be a different product. We were going for slightly higher-end.”

Moreover, people wrongly believed that all the units in the pipeline would be immediate-ly developed. In late 2013, Country Garden spooked the market by announcing the Forest City development with 9,500 units. “The kind of numbers we are talking about in Forest

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The location of [Iskandar Malaysia] gives it the potential to beto Singapore what New Jersey is to New York,or what Shenzhen isto Hong Kong

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