A time to redefine and re-evaluate

Written on the 1 April 2009

A time to redefine and re-evaluate

 

by Jason Oxenbridge

PUBLICLY listed developer Sunland Group has tapped into Queensland’s lucrative affordable housing market as its share prices plummet in the wake of the global downturn.
While the company posted a half-year net profit of $68 million, share value has been slashed from $4.60 at peak to around 40 cents. The half year results represent an increase of 13 per cent on the previous corresponding half and the company maintained conservative gearing levels of five five per cent debt to assets and 10 per cent debt to equity. Forecast full year profit remains at $74 million.
The landmark structure designer behind Gold Coast hotels Q1 and Palazzo Versace has stepped up its presence in the UAE following the release of the 80-storey D1 Tower and the new Palazzo Versace Hotel in Dubai, both of which are under construction.
At the helm of its Australian operations is 33-year-old Sahba Abedian, son of company founder Soheil. Sahba joined the company in 1998 as legal counsel before establishing the company’s Victoria operations in 2000. In 2006 he became managing director.
Abedian says the company is ‘not immune’ to current conditions and 2009 will be an uphill battle. Conceding a share price battering, he says the listed property sector has been viewed unfavourably by investors and that a recovery could take as long as two years. But that hasn’t deterred investors like James Packer who owns an 11.6 per cent stake in Sunland through his company Cavalena Holdings and is also a non-executive director.
“A battering is a very fair assessment,” concedes Abedian.
“At our peak we were at $4.60 (share prices), today they are at 40 something cents. The market is viewing property companies unfavourably, there is a period of adjustment and we’ll have to see who emerges at the other end. We have been fortunate enough that we have taken a number of measures, particularly over the past two years in terms of disposing of non-core assets (Sun Leisure), not undertaking any new projects domestically and focussing on our offshore operations by the way of joint venture.”
Sunland has minimised its equity contribution and pre sales out of Dubai predominately funds its projects in the Gulf.
“We have structured a business that has given us one of the healthiest balance sheets in the listed property sector,” says Abedian.
“We have five per cent debt to assets with a very strong cash position. We are focused on delivering our projects that are underway. Hopefully we will be able to capitalise on opportunities as they present themselves. The reality is that market conditions are taking a lot longer than most people had initially earmarked to pass. The cycle this time around is caught up in this lack of liquidity.”
Closer to home, Sunland has recorded 40 sales this year across its three projects - Avalon, Circle on Cavil and its master-planned community at Tugun, The Parc. It is also undertaking a $120 million joint venture development with Mulpha at Sanctuary Cove (comprising 123 luxury homes) and a $200 million residential project at Royal Pines, the ‘jewel in the crown’, according to Abedian. The group bought the 19ha lot at Ashmore, adjacent to the RACV-owned resort tower, from US funds manager Morgan Stanley for $28 million. It plans to transform the waterfront site into a medium-density community.
“Our sales are quite healthy on the Gold Coast, price points have shifted significantly,” he says.
 “We are very focused on what we do, we are across residential, which is our strength, that’s what we will continue to provide in years to come, we have a very strong focus on design and that is something that differentiates us.
“Property is becoming very affordable, interest rates are on the way down, yields are on the way up because of the undersupply and there’s strong demand for rental accommodation. We are now entering an era where the cash rate is significantly less that the rental yields you can generate, so we are moving into positive gearing in some instances rather than negative gearing.
“In a world where we have the ‘Mc Mansion’ notion and the boxes that were produced as high rises, that era is finished. People need to reflect on the environments that they’re producing and understand the significance and the influence that it has on the people that choose to live in those places. We have a social responsibility and that is to enhance the homes where people can share their dreams in. It’s a privilege to work in the first home buyer sector as much as it is to produce luxury housing. It’s not a privilege to have money. You should have the means to live in a beautiful environment irrespective of what you can spend on your home.”
The end of capitalism?
The Sunland Group celebrated 25 years of operation in November 2008. The company employs around 1000 employees, with 750 in offices around Australia and a further 250 based in Dubai.
While the trappings of success are evident throughout the company’s lavish Dubai and Gold Coast headquarters, Abedian remains grounded and even philosophical when discussing a new era in property development. He says essentialism will eventually replace capitalism as the business paradigm shifts and global leaders re-evaluate the way in which corporate dealings are conducted. Enter a new face of change in US President Barack Obama and positive change appears imminent.
“From an economic point of view we had at one point communism verses capitalism. We know that communism disappeared at the end of the 80s and just like communism, the notion of capitalism is dying very quickly as well. The notion of free-market capitalism will not exist in the next round and social responsibility will take over,” says Abedian.
“The global financial crisis is going to stall any major developments that have been earmarked globally and the world is going through one of the most significant transformations, be it physical or emotional.
“People are re-evaluating the way they think and how they live their lives. It will have a significant impact on the way the business community will operate. In particular I feel very strongly about the mass consumerism that we have grown accustomed to and it will humble itself to be closer to something more like essentialism.
“These periods, as much difficulty as they present to the world and to the people, is also a wonderful period of reflection and reinvention and recreation. The nature of human beings is so resilient that we will find new ways to approach life and through that, there will be an improvement from where we have come and a refinement. I still maintain an optimism and believe that all of these things happen for profound reasons and although they are not self evident to us today, they will be in the course of time.”
Redefining the corporate code
When Abedian assumed the mantle of Sunland’s operations in Australia in 2006, he inherited a portfolio that required mega responsibility. The pressure was on, but the company had already delivered the world’s tallest residential tower in the $405 million Q1 and redefined top end tourist accommodation with the $250 million Palazzo Versace. He now makes regular trips to Dubai to visit his father who has been a voluminous source of inspiration.
“It’s an interesting period that we’re in and although I’m relatively young in comparison to what my father’s generation has experienced or even my grandfather’s generation and the number of events that they have seen in their lives, without doubt what we are going through right now is probably one of the most significant events that has taken place over the past 100 years,” he says.
“It’s a defining moment and the fact that there is so much social change, in particular in the centre of the capitalist world in the US. But the election of the very first black president gives hope to the world that there is an ability to reinvent, redefine and look within yourself to see what you stand for.”
Recovery prolonged
For the most part, there is a lot to be optimistic about, but talks of a property recovery pre-2010 are vastly short-sighted, according to Abedian.
“I think Australia is quite unique in this context,” he says.
“When you look at the US and the UK, we see an oversupply and it’s something that Australia experienced in the 1990s when we had the last property correction. This time round however, we have an undersupply. When you look at Sydney, in an historical context, its production levels are the lowest since the Second World War, so it’s fundamentally under supplied.
“We have a situation in Australia where we still have healthy growth, our banking sector has proved to be one of the healthiest globally. There are 18 double AA rated banks in the world, out of those top four are Australian banks. We have a 20 per cent market share of the 18 globally, which really shows the health of our economy.
“I’m not an economist or a philosopher but we are operating in a business environment that we see drastically changing. Those that have not adapted already, or whom live in the notion that things will improve over the next 12 to 24 months, are living in their own bubble. The world has already changed and you should have adapted to that change.”
With banks expected to start lending in the third quarter of this year, the free flow of credit will help to propel new development. The problem, will be the clearing of assets by banks to recover bad loans and the reluctance to sell-off undervalued assets during a time of financial vulnerability.
“We haven’t seen the extent of the fallout just yet. It takes a long time to cleanse portfolios. There’s a nervousness, but we don’t want to move into a Japanese-like era dealing with problem assets and creating a hibernating effect, the inevitable is that you hinder the recovery process and sometimes you need to take the bad medicine sooner rather than later, so that you can get on with life and rebuild,” says Abedian.
“Until there is market demand for asset sales, it’s not going to recover because the predominant assets are held up by the banks and they’re trying to create a scenario whereby they can recover loans against these assets.”
Economic stimulus misguided
Central governments the world over are intervening in an attempt to bolster growth, proof that steps are being taken to reformulate economies. But Abedian is critical of short-term incentives that encourage consumer spending.
“Any stimulus package that promotes cash bonuses to consumers to encourage them to go back and shop is fundamentally flawed,” he says.
“If you look at the billions of dollars that have been spent and the rebates, I know that people would encourage those billions of dollars to be spent on more nurses, teachers, police force, fire services, build better roads, hospitals and schools. Those billions of dollars could have gone into the creation of jobs across the board. I know that in some instances a thousand dollars is going to greatly assist the families, but we are talking about a massive economic correction that is about to loom and Australia is in a recession. It can not avoid it through the process of handouts.
“We may not be in a technical recession as they say, but it is in a recession. In the real world we are in a recession. Promoting consumerism to stimulate the economy is a vert short-sighted strategy. It’s a very naïve way to approach it. They (Federal Government) should be focussing on tax reduction, on encouraging first home buyers, rather than a $21,000 grant. For a $450,000 product we pay more than $40,000 in GST plus stamp duty and land tax, plus rates. They should abolish some of the taxes.”
Property fund model finished
Financiers who once made fortunes fossicking in the high growth property sector have had their day in the sun and will not be tolerated as the sector meanders through its current correction. Brands such as MFS (Octaviar), Centro, Storm and City Pacific have been crucified and have left unit holders devastated.
“The whole funds management structure is dead and it won’t be resurrected,” says Abedian.
“Unless you’re a complete specialist in that field, there is no role for it in the property sector. I don’t want to comment about our peers, but if you look at the players, there’s no doubt that the environment had led to unfortunate lending practices. You can’t apportion all of the blame, but to a certain extent you can blame the availability of free flow credit, which was not healthy.
“There are a myriad of these companies and the crux started at around 2004-05, where smaller financial companies who were not developers but financially engineering outcomes. You can financially engineer anything you want because it’s a piece of paper. You can make it look however you want it to look. The reality is we deal with bricks and mortar. We produce something that has a cost and the buyer is going to sell it and the differential between what you generate as your revenue and your cost is either a profit or a cost.”
Project update
• In 2009 Sunland will return to Sanctuary Cove to undertake the largest single residential project in the resort’s 20-year history. In partnership with Mulpha Australia Limited, the $120 million development will comprise 123 luxury homes to be staged over the next three years.
• The group is also preparing to launch three new residential communities on the Gold Coast – The Parc in Tugun, Cassia in Merrimac $30 million and a new $200 million residential precinct at Royal Pines Resort.
• Internationally, Sunland has continued its focus on Dubai where it is developing Palazzo Versace, Atrium and D1, the 80-storey sister building to Q1 on the
Gold Coast.
• In 2010 plans are afoot for a 100-lot, $38 million residential development at
Pacific Pines.

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