Property safest bet for business diversification?

Source: 123rf

15 October, PETALING JAYA – Property has always been the most popular option for local listed companies when it comes to business diversification, but judging from the imbalances in the market, will the sector still be the top choice to make handsome profits?

In the past two years, a total of 16 companies have announced diversification plans, of which 10 chose the property sector.

These included three aluminium-related companies – LB Aluminium Bhd, Alcom Group Bhd and, most recently, A-Rank Bhd.

So too did IT companies such as SKH Consortium Bhd and D’Nonce Technology Bhd.

Other companies that followed the route were Atta Global Group Bhd, JAG Bhd, Jaycorp Bhd, DBE Gurney Resources Bhd and Pasukhas Group Bhd.

Nonetheless, the timing may not have been good for such a move. According to Bank Negara Malaysia, there were a total of 146,196 unsold units at the end of the first quarter of 2018, of which 80% were priced above RM250,000.

For quick turnaround, Inter-Pacific Research Sdn Bhd head of research Pong Teng Siew said, the involvement in a property project will yield fast returns and cash flow within a short period of time.

“It can be done quite quickly. The whole turnaround process, from the land acquisition to the commencement of the development to completion, can be done in four years if they are fast enough.

“If the development has already been approved before they acquired the company, then it can be done within three years. You straight away pump in the money, start the project and the whole thing is done within three years,” Pong told SunBiz.

For instance, JAG’s maiden project, ARCA, is expected to contribute a gross development profit of between RM20 million and RM35 million to the group.

Pong also said the attractiveness of the market is that property development is well funded. “The land owner may lack money to develop the project, so it may form a joint venture with a listed company.”

Moreover, venturing into other segments such as manufacturing, Pong said, can take a longer time, with no certainty in getting the intended results.

On this, JF Apex Securities head of research Lee Chung Cheng opined that local companies lack “creativity” when they want to diversify into a new business.

“They’re running out of business ideas and the other thing is that it does not require highly specialised skills. Usually, for stagnant companies, the easiest way for them to diversify is to go into property.

“For contractors, they gain a few years of experience and they can become developers, so this has been quite rampant in the past few years.”

However, Lee said the risk is that some companies do not have any property-related experience and it is a challenge to achieve the property sales target.

In view of the slow property market, he believes there will be fewer diversifications into the property market going forward.

For Pong, small-scale projects may not give much impact to the overall market if they have special niche and location advantage.

“It’s like a drop in the ocean compared to the whole supply in the property market. If the projects are good enough, they can be easily absorbed amid oversupply in the property market.”

Speaking of the “success rate” of property ventures, Pong said although some have been successful, he cautioned against taking on “ambitious projects”.

“The scale of the project will give you the indication of the risk you are taking.”

Meanwhile, CBRE-WTW managing director Foo Gee Jen advised industry players to adopt the wait-and-see approach before diversifying into the property sector.

“They need to do a proper market study to identify where the demand is coming from. The timing is not ideal for the moment.”

– THE SUN

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