A Real Estate Specialist Sets Up a Private Investment Fund: 3 Important Implications for Investors

2021-01-06     thesmartinvestor
A Real Estate Specialist Sets Up a Private Investment Fund: 3 Important Implications for Investors

Boustead Projects Limited (SGX: AVM), or BPL, is a real estate solutions company that specialises in design and build projects for multinational companies.

The group uses cutting-edge technology for integrated digital delivery of contracts and its expertise lies in custom-built developments for a variety of Fortune 500 and S&P 500 corporations such as Cummins Inc (NYSE: CMI) and Bombardier Inc (TSE: BBD.B).

To date, BPL has constructed and developed more than 3 million square metres of industrial real estate in Singapore, China, Malaysia and Vietnam.

BPL is a subsidiary of Mainboard-listed Boustead Singapore Limited (SGX: F9D), an engineering specialist that deals with geo-spatial technology, the oil and gas sector and has a healthcare arm.

The group’s leasehold property portfolio currently consists of 21 completed properties with four properties under development.

On New Year’s Eve, BPL announced that it had set up a private fund to invest in and manage investments in logistics and industrial real estate.

Details of the fund

The fund is called Boustead Industrial Fund (BIF) and will see BPL inject a total of 14 properties into the fund to make up its initial portfolio.

Through a subscription of shares and notes relating to BIF, BPL will end up owning 25% of the fund.

Another 26% of BIF will be owned by Metro Holdings Limited (SGX: M01), a diversified property and retail development group with a presence in Singapore, China, the UK and Australia.

The remaining 49% of BIF will be owned by a special purpose entity for institutional real estate investors.

This divestment will raise a total of S$332.2 million for BPL, of which around S$137.2 million will be used for funding further growth.

BPL will recognise a gain on disposal of around S$120.2 million and has mentioned that there is a possibility that it may pay out a special dividend.

Here are three important implications for investors arising from the formation of BIF.

1. Monetizing its properties

BPL has been exploring various ways to monetise the value of its leasehold property portfolio for quite some time.

In its latest fiscal year 2020 annual report, the group’s letter to shareholders stated that “BPL continues to advance on initiatives to unlock value from our completed leasehold portfolio”.

Investors should note that the group has been accounting for these properties at cost on its balance sheet, and has not revalued them annually unlike larger real estate companies such as CapitaLand Limited (SGX: C31).

On this note, the 14 properties in Boustead Project’s books were valued at just S$125.3 million.

At a total consideration of S$332.2 million, we can see that the actual market value of the properties in question was more than double their net book value.

As this injection of 14 properties only comprises its initial portfolio, there is more room for BPL to monetise the remainder of its properties to unlock even more value for shareholders in future.

2. Capital recycling

A lot of businesses are moving towards an asset-light model.

One of the largest accommodation providers in the world, Airbnb (NASDAQ: ABNB), does not own any real estate.

The advantage of being asset-light is that it does not lock up valuable capital within the business that could be deployed to grow the business further.

BPL will use the money freed up by the divestment and plough it back to other projects, thereby building up its design, build and lease portfolio further.

As more projects are completed and the properties generate a stable stream of income, they can be sold to BIF and the resulting money can then be recycled into more projects.

This method of capital recycling avoids the burden of parking significant amounts of physical assets on BPL’s balance sheet and also helps to provide funding for future contracts without undue reliance on debt financing.

3. Partnering with strategic investors

Finally, the formation of BIF introduces the element of strategic partnership.

Metro has been named as a major investor in BPL, while the remaining 49% of the fund is open to institutional real estate investors.

Such investors occupy a niche and can better appreciate the characteristics and qualities of BPL’s industrial leasehold portfolio.

This recognition enables BPL to more easily unlock the value of its properties as BIF creates a source of liquidity for the group.

In time to come, BPL, through its connections, may get more prominent investors on board, thereby enhancing the appeal of BIF.

With a larger pool of potential investors to tap on, the prospects for BIF’s growth over the long-term are good.

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Disclaimer: Royston Yang owns shares in Boustead Projects Limited and Boustead Singapore Limited.

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