It was all going so well. A little over a year ago, CapitaLand was announcing its first half results for 2007: S$1.5 billion profit after tax and minority interests, five times higher than the previous year, with an eightfold year-on-year growth in Singapore EBIT as luxury development sales hit a record S$5500 per square foot. Just seven years after its formation from DBS Land and Pidemco Land, its real estate and hospitality empire had spread to 120 cities in more than 20 countries. Investors loved it, and investors in its five real estate investment trusts (REITs) particularly so: CapitaMall Trust was by then up almost 400% since listing, and CapitaCommercial Trust, Singapore’s first commercial REIT, by over 200%.

It doesn’t look much like that anymore. Between November 1 last year and October 28 this, the stock fell 71%. The REITs are looking even worse. Ascott REIT, a trust launched in the serviced residence sector, was trading at over $2 a share in July 2007 but plunged to 40 cents in October 2008; even after a modest rally it was down 73% from its highs at the time of writing. All emerging markets and property stocks have been punished in the last year, but this is extreme by any standards.

But is there anything really wrong with CapitaLand or is it just being oversold? A look at its earnings numbers makes the market reaction seem puzzling. When CapitaLand announced its third quarter results on October 31, it was able to boast $1.18 billion in profit after tax and minority interests for the year to date – a significant drop on the previous year when S$2.08 billion had been amassed by this stage, but significant income nevertheless.

Instead, the problem isn’t really the earnings, nor is it just about the outlook for property in CapitaLand’s most key markets (Singapore, China and Australia). It’s really about a much more toxic attitude towards the whole model that CapitaLand represents.

For years, CapitaLand has won praise for its model and its efficiency. Throughout this decade it has frequently been named Singapore’s best managed company by leading magazines. It made itself a player in every stage of the property supply chain: an investor, a developer, an operator, a manager, active in everything from retail to office, residential and hospitality. Crucially, it bolted on property fund management and real estate financial services as a key part of the business. By September 30 this year it had S$24.8 billion of assets under management: thinking of CapitaLand as just a property developer, and not a financial services group as well, is to miss the point.

In some respects CapitaLand came to resemble the Macquarie model of acquiring assets, putting them into separate trusts, listing some of them (five REITs in CapitaLand’s case, more than any other Asian developer) and keeping others private (of which CapitaLand has 17). Also like Macquarie, it believed in partnership with local experts in unfamiliar markets: in CapitaLand’s case Arcapita in Bahrain, for example.

And it worked like a dream for years, with plentiful liquidity, affordable debt and rising asset prices. In Singapore it rode the growing sense of optimism that the City State was becoming more and more of a player on the world stage, whether in financial services (it is now the leading regional centre for private banking and forex trading, among other things), luxury living or the marquee events like Formula One. It got into China and Vietnam well ahead of those places booming and it did it right: it can justly claim, for example, to be the premier shopping mall developer and operator in the whole of China.

But now everything that worked on CapitaLand’s favour on the way up is heading against it. Singapore and China are two of the markets with the greatest headwinds in their property markets; the liquidity has gone and debt, if accessible at all, is more expensive; and nobody likes either leverage or financial services anymore. On top of that, there appears to be alarm among investors who feel they can’t quite get a grasp on a complex business which combines property with finance and is exposed to a host of separate satellites. Which is, once again, something it shares with Macquarie.

Large cap: CapitaLand

CapitaLand is one of the region’s savviest property developers. UBS’s Alastair Gillespie calls it “one of the leading and most ambitious Asian-based real estate companies”; Goldman Sachs speaks of its “unique capital efficient business model and top-in-class execution.”

The numbers are great – total shareholder returns of S$17.3 billion since inception in November 2000, footprint in 100 cities in 20 countries, EBIT up 154% and EPS 268.3% year on year in the nine months to September 30 (to S$2.8 billion, and 74.4 cents respectively). But it’s CapitaLand’s smarts that really stand out. No other property institution has understood the possibility of the real estate investment trust (REIT) market so well. CapitaLand has now launched five, all of them pioneers: early structures in the Singapore market, a China retail trust that showed just how a Chinese REIT can work if done properly, and now a REIT listed in Kuala Lumpur. All of them have done exceptionally well for unitholders and for CapitaLand itself.

CapitaLand’s strength lies in spotting every bit of the value chain and positioning itself accordingly. It is a developer, a manager, an operator, a financial advisor, a fund manager and an investor, and better still it is good at all of them.

Mid cap: Tat Hong

If you want to play a construction boom, buy cranes. Singapore’s Tat Hong Holdings is, within its chosen field of renting out 70-800 ton cranes, the biggest crane company in Asia, and a world leader in its fleet of crawler cranes.

That’s a useful business to be in, and consequently Tat Hong more than doubled its first half net profit (for the first half of its 2008 financial year) to S$40.2 million. It can boast a gross profit margin of a whopping 39.4% and almost doubled its earnings per share in the first half. Prior to the latest result, president and CEO Roland Ng had set a target of 30% annual net profit growth for the next three years. In November, he said he was confident of beating it.

Tat Hong, formed in the 70s, has four core businesses: rental of cranes (the biggest part and getting bigger), rental of general equipment, sale of cranes, and sale of spare parts. It can serve clients in infrastructure, oil and gas, construction and even pharmaceuticals, and does so across the region from the Middle East to Australia. It has a combined rental and sales fleet of 500 mobile crawler cranes and has built exclusive distributorship agreements with companies like Hitachi-Sumitomo, Mitsubishi and Kawasaki.

It listed its Australian subsidiary, Tutt Bryant, in 2005 and has now turned its attention to China, where it owns a stake in the Dushun Yongmao tower crane company and holds a joint venture company. In the last 12 months it has launched another JV, this time for tower crane rental, and acquired China Nuclear Industry Huaxing Construction Machinery. Still only on a P/E of about 15. The sky’s the limit.

Small cap: SC Global Developments

Merrill Lynch’s Singapore research head Melvyn Boey calls it “Singapore’s most respected high end developer”, and it’s a very useful time to have that accolade. Singapore wants to boost its population from four to six million, much of it from skilled expatriates; wealth is booming and demand for top end residential property seems assured. SC Global Developments is very well placed to benefit. “With an excellent track record and standing in the luxury residential segment of the property market, we believe that upcoming launches will continue to set record prices over the next year,” Boey says. Merrill predicts a compound annual growth rate of 209% in earnings over the next three years – yes, 209.

If that seems farfetched, recent numbers do demonstrate the company’s momentum. Net profit was up 74% in the half year to June 30, year on year, with a 32% gross margin thanks to high sales prices. Its ultra-luxury developments are selling out within days of debut, with construction barely underway; and an associated company in Australia, AVJennings, is helping performance too. SC has a 1.1 million square feet landbank of developable area in high end lifestyle districts on Orchard Road and Sentosa Cove and is well placed for the city state’s growing opulence.

Best executive: Roland Ng, CEO, Tat Hong.

Roland Ng joined Tat Hong in 1979, when it was a family business with a small presence in equipment trading. He became managing director in 1991; since then the group has taken on a corporate structure, become a regional leader in its field, listed in both Singapore and (through a subsidiary) Australia, and is now taking on China.

Fund managers and analysts love what he’s done with the place. That’s hardly surprising: at listing in 2000, Tat Hong shares began trading at 30 cents apiece. In mid-December they were going for $3.24. “He’s very proactive and open to meeting investors,” says one analyst.

Tat Hong’s fleet, of heavyish crawler cranes, is ideal for infrastructure projects, of which there are a great many in Asia. That’s better still for a rental company since the length of the lease can be years at a time. But Ng has been smart enough to adapt to local needs: preparing to take on China, he first observed there was no sense going it alone, then realised that Tat Hong’s fleet of crawlers was of limited use in China where the usual method is to use tower cranes. So he bought a stake in a Chinese tower crane manufacturing company and launched a JV with a rental group; now, he’s confident the country will contribute 20-25% of the bottom line within three years. 

Renting cranes is a surprisingly good business model. For a start, there are very high barriers to entry for people trying to build a fleet on the Tat Hong scale. “For someone new to come in, they don’t just need money,” explains Ng. “If you put your order in for a new crane it takes 18 months to deliver.” Also, you don’t run the risk of technology making your fleet obsolete: Ng says commercial cranes are typically good for about 30 years. “They don’t move much, so there is very little wear and tear,” he says. “They just sit there. I lift something, I drop it. That’s it.”