BT RECENTLY reported that Mapletree Investments is ready for an initial public offering (IPO) – at least, in terms of the business profile and track record it has achieved – although any decision on this score will rest with its board and shareholder, Temasek Holdings.

Current weak stockmarket conditions would rule out an IPO in say the next few months. But looking beyond the stockmarket turmoil, one may ask whether the market needs another listed Temasek property company, given that there are already at least two big incumbents – CapitaLand and Keppel Land.

Talk of a potential Mapletree flotation also resurrects a familiar argument – why doesn’t Temasek merge CapitaLand and Keppel Land, given the similarities in their business strategies, to minimise duplication and maximise economies of scale? The argument now would be to add Mapletree to this mix and create a giant property entity. Size does matter, especially when going overseas.

Merging CapitaLand and KepLand – both of which are listed and have their respective sets of shareholders – may be a more complicated affair. However, merging Mapletree, which is currently not listed, with say, CapitaLand, whose business model it approximates more closely than KepLand’s, could be a neater arrangement.

Increasing assets under management and growing the property fund management business to generate stable, fee-based income to drive consistently high returns on equity is a key strategy for both CapitaLand and Mapletree.

The resulting behemoth from any merger would no doubt focus largely outside of Singapore. In fact, most of CapitaLand’s and Mapletree’s efforts are already focused overseas. The bigger they grow, the smaller the Singapore market becomes for them.

That should give some comfort to local property players worried about being crowded out of business at home. As examples in recent years have shown, some of these local players have held their own quite well. For instance, a consortium led by home-grown City Developments Ltd and comprising Istithmar (part of Dubai World Group) and US-based Elad Group last year clinched the coveted South Beach site at a state tender despite competition from CapitaLand and KepLand.

But there is the anti-competition argument against a CapitaLand-Mapletree merger. Temasek was criticised when it sold POSBank directly to DBS a decade ago without a competitive bidding process. If Temasek were to now allow CapitaLand to simply buy Mapletree, it could run into similar issues. If, on the other hand, Temasek agrees to let Mapletree have its own IPO, it allows the market to decide the value.

Temasek may well be very happy with having diversity in its stable. Having several property companies creates greater pressure on their respective managements and boards to perform. Mapletree and CapitaLand may well have similar strategies to step up their funds management business. It’s a matter of who has the better model or executes it better.

However, this would hold true, regardless of whether Temasek lists Mapletree. The big question therefore is what the practical necessity for listing Mapletree would be. Is Temasek starved of capital? Mapletree has an asset-light strategy of expansion and has demonstrated its ability to raise money through co-investors in its various funds.

One could argue that listing Mapletree Investments would not make much difference to its existence as a meaningful real estate player. In fact, some analysts argue that listing Mapletree may create more conflicts of interest with the listed real estate investment trusts and private funds that it manages.

But an IPO would give investors – whether retail, sophisticated or institutional – a chance to invest in Mapletree Investments, its real estate capital management franchise and hopefully a shot at earning consistently high returns. Subsequently, if CapitaLand and Mapletree decide to merge, the market should determine the price.

Source : Business Times – 22 Jul 2008