KUALA LUMPUR: Faced with shrinking margins and market share in an increasingly competitive environment, more and more listed manufacturers are shifting their focus to the property development business to reverse their fortunes.

This year alone, three manufacturing companies — Amalgamated Industrial Steel Bhd, Takaso Resources Bhd and Khind Holdings Bhd — have forayed into property development despite a softer market.

Their entry comes on the heels of furniture component maker PRG Holdings Bhd and garment manufacturer Yong Tai Bhd, which had diversified into the property sector last year and launched their maiden projects.

However, not all will be hits.

CIMB Investment Bank head of equity research Terence Wong believes this is not a good strategy as the new business will dilute the manufacturers’ core business, which may not be what investors want.

He cited Mah Sing Group Bhd as the only company that has so far successfully transformed from a plastic product manufacturing outfit into the country’s second-largest property developer by sales.

Wong noted that in the current business environment, it is difficult to replicate Mah Sing’s success as the market already consists of many established players that are big in size and can launch many projects at one go.

He added that the cost of land banking has become too expensive as the value of land has shot up compared with a decade ago. This makes the entry cost higher for the new players.

Wong pointed out that the property development business is capital intensive with inherent risks, and property players need to have sufficient cash flow to weather the fluctuations in the market, particularly when the take-up of their launches is not as good as expected.

“For example, if you sell landed link houses, you can launch them in small batches, let’s say 200 units. But for a condominium project of 1,000 units, you have to launch it in one go.

“A developer will only break even if it manages to sell 60% to 70% of its project. If their cash flow is insufficient, they will have difficulty [starting the project] because they will still need to find financing for the remaining portion,” he added.

Wong is of the view that a viable strategy for manufacturers entering the property sector is to set up joint ventures (JV) with their more established counterparts and let the latter manage the projects.

PRG chief executive officer (CEO) of property and construction Steven Hooi said the group’s move into property development was a strategic decision for the long term, to grow its balance sheet and earnings.

He noted that property development is a dynamic sector, which traditionally provides high growth potential and good returns on investment.

“However, we recognise that the property sector is cyclical and catching the right wave is important.

“The current soft property market is an opportunity and time for us to seek out new property projects to build our pipeline so that we are ready when the market recovers,” Hooi told digitaledge DAILY.

PRG diversified into the property sector in April last year. Its maiden project: Two blocks of mid- to high-end condominiums dubbed “Picasso Residence” in Kuala Lumpur, was launched on March 28 this year, in a JV between its subsidiary Premier Gesture Sdn Bhd and Almaharta Sdn Bhd.

Hooi said the group has seen “reasonable” take-up rate from the project.

Despite uncertainties in the market now, Hooi believes that there is room for different market segments that still command reasonable demand, such as landed double-storey terrace houses, condominium units costing below RM600,000, and affordable housing under Perumahan Rakyat 1Malaysia (PR1MA).

He said the company is currently exploring opportunities to work with PR1MA, but nothing has been confirmed.

“The current market outlook is not as bad as it seems. Both developer and purchaser with strong holding power will see through the current weak ringgit and political situation in the country,” Hooi added.

PRG returned to the black in the six months ended June 30, 2015 with a net profit of RM1.16 million compared with a net loss of RM1.22 million a year ago.

For Yong Tai, its venture into property development has also brought the garment manufacturer back to the black. For the financial year ended June 30, 2015 (FY15), it registered a net profit of RM7.75 million compared with a net loss of RM7.27 million in FY14.

Yong Tai CEO Ng Jet Heong said its textile manufacturing business had been making losses for years due to stiff competition, particularly in China and Vietnam.

The group in April 2014 collaborated with Melaka-based PTS Properties Sdn Bhd to build a 29-storey luxury condominium hotel called “99 Residences”. The units have been fully taken up.

“Our financial results are testimony to the right decision made to diversify into property development. We found potential in this sector and shall continue to focus on this area,” Ng told digitaledge DAILY in an email.

However, Yong Tai is aware that the diversification has its risk.

“The real challenge for us is how to transform Yong Tai into a reputable developer and be recognised by the public,” Ng said.

Another challenge would be the ability to secure land with good prospects for Yong Tai’s future property development activities on its own.

In line with this, the group had recently signed Memorandums of Understanding with five separate companies, which will provide it with five potential projects with a combined gross development value of approximately RM7 billion over the next eight years, he added.

“We recognise the market is soft at this moment. After finalising and signing all the definitive agreements recently, we still need to apply and obtain approval from various authorities. We believe by then the market will rebound,” Ng added.

However, CIMB’s Wong warned that going into a sector when the market is soft and believing that it will rebound later, could be risky.

“At the end of the day, it goes back to the ability to sell. As long as you can sell, you can generate cash flow. But now, even some big developers’ ability to sell is not good. This year is going to be a tough year.

“If the company is new [to the property sector], how will it attract buyers?” Wong asked.

Shares in PRG were untraded last Friday. The stock closed up 8.47% at 64 sen last Wednesday, for a market capitalisation of RM92.71 million.

Yong Tai shares, meanwhile, settled 1.09% higher at 47 sen last Friday, with a market capitalisation of RM55.96 million.

This article first appeared in digitaledge Daily, on September 1, 2015.