Year: 2015

Participation banking rises in Turkey

Posted on by Ashton Wenborn

The banking industry has made great strides in Turkey thanks to the stability and accomplishments of the Turkish economy in the past decade. This progress is corroborated by the interest from foreign investors in the industry, which is growing into a more desirable market every day. At Türkiye Finans, we believe that participation banking can gain an increased momentum through the dynamism brought by new players that are expected to enter the market within 2015.

With a history in Turkey dating back to 1985, participation banks have significantly improved their market share in the past decade, reaching 5.3 percent as of the end of third quarter 2014. The participation banking industry displayed a 32.8 percent growth performance, while the banking industry scored an annual growth rate of 19.9 percent between 2005 and 2013. During the same period, participation banks have also achieved fast progress by branching out. They increased their total number of branches to 1,057, up from 290 in 2005 in Turkey. We expect these to reach the masses through branch network expansion and investments in new technologies and products in the coming period.

Mobile finance applications will no doubt be the most far-reaching technological trend in the banking industry to come. These applications have vastly utilised mobile devices, which means their importance is increasing as they are able to meet the needs of a larger part of the population. Consequently, Turkish banks are also introducing myriad banking innovations that are parallel to global developments. The new generation of banking customers is intimately familiar with technology and embraces the internet. In this sense, Turkey’s young population (see Fig. 1) is spearheading the use of technology and banking when compared to Europe.

With a history in turkey dating back to 1985, participation banks have significantly improved their market share in the past decade

Taking stock
Uncertainties abroad and high geopolitical risks marred 2014. These adversities have had a limiting effect on the financial industry and overall economic activity. Therefore, 2015 is a year of growing expectations in the Turkish economy and the banking industry – despite ongoing global challenges.

The banking industry continues to generate profits, and our return on equity is good compared to those of peer countries. Under the current outlook, this strength appears to be sustainable. There is an especially strong correlation between retail deposit shares and branch market shares of banks.

The importance of branching becomes more apparent when viewed from this perspective. Intense competition is likely to continue on the deposits front, as suggested by the loan/deposit ratio, which usually exceeds the 100 percent mark in the industry.

We also see that the banks are rushing to issue new securities to raise non-deposit funds. This trend is likely to continue, given the slower growth rate of deposits. Accordingly, we expect the number of sukuk issuances to pick up at an increasing pace compared to the previous year.Türkiye Finans boasts a pioneering participating banking attitude in diverse fields with an awareness and determination to preserve and carry forward the country’s cultural heritage.

The bank’s total assets increased by 25.6 percent to TRY 32bn ($13.6bn) as of September 2014, compared to the end of 2013. In the coming year, the plan is to continue to increase the number of innovative products we develop while maintaining a high growth rate. As part of our five-year strategy, we aim to achieve an asset size of nearly TRY 40bn ($17bn) by the end of 2015 through continuing to grow faster than the banking industry average every year.

The increase of sukuk issuances in global capital markets reinforces this product’s position among significant finance instruments. Türkiye Finans is shaping the participation banking industry in Turkey with various recent breakthroughs, as well as with innovative products and services. We provide support for the real economy so as to contribute to the country’s overall economy.

With our third overseas sukuk issuance, Türkiye Finans lead a first-of-its-kind practice both for Turkey and Malaysia. This was the first sukuk issuance by a Turkish company carried out in Malaysian Ringgit (MYR) while marking a record high for a foreign investor issuing sukuk in Malaysian markets. The size of the issue was 800 MYR ($221) with a tenor of five years.

Drawing on its robust capital structure, Türkiye Finans is proud to introduce yet another product to help diversify the support we provide for the real economy. We are the first participation bank in Turkey to issue a sukuk in order to help finance the real economy, and we shall continue to strengthen our position in this regard through new issuances.

Our recent issuance of TRY 60m ($25.7m) is the first domestic sukuk issuance aimed at a group of qualified investors. This issuance is the third Turkish lira-denominated sukuk issuance by Türkiye Finans in 2014.

In addition, we have issued a five-year sukuk in the amount of TRY 71m ($30m) for the commercial customer, making a good start to 2015. This is one of the first sukuk issuances to be offered by the real industry in Turkey. Our objective is to familiarise our corporate customers with this new and reliable fund-raising method by supporting them, and to continue contributing to the country’s economy by creating a sizable market base in this field.

Tailor-made products
We maintain a customer-centric approach with a vision of continuing to serve as Turkey’s pioneering participation bank. As part of this vision, we offer products and services to our customers according to the principles of participation banking. We carry out significant projects to take our technological infrastructure, business processes and service concepts to an even higher level.

Turkey's age structure

In order to offer sector-specific solutions and advantages, we have changed the structure of our Siftah card – a faster, card-based version of the murabaha system – as well as of our Faal card. We are working on offering special deal packages for SMEs so that they can easily access banking services. Accordingly, we are entering into agreements and signing protocols with trade and industry chambers.

Recently, we signed a Credit Guarantee Fund (CGF) and Portfolio Guarantee System Protocol with Micro SMEs within the scope of the Micro Loans Project. Furthermore, we offered our customers specific insurance solutions to help SMEs secure not only their businesses, but also the process of their products and services.

Financing support for SMEs will continue to be on Türkiye Finans’ main agenda for 2015. In the meantime, our objective will continue to outperform the industry in both cash and non-cash loan growth in this segment. In addition to financing support – which acts as a leverage in the growth of SMEs – we will also continue to provide easier accessibility and proactive solutions aiming to answer company specific needs. In addition, keeping in mind its customers’ expectations and experiences, Türkiye Finans offers online and mobile solutions that allow customers to complete their banking transactions in just a few seconds.

Indian economy to overtake Japan and Germany, says IMF

Posted on by Ashton Wenborn

Christine Lagarde, Managing Director of the IMF, has labelled India a “bright spot” in the “cloudy global horizon” following predictions that India’s economy will expand by 7.2 percent in the current fiscal year. This is up from 5.6 percent as earlier predicted and will grow to 7.5 percent in the coming year, up from a predicted 6.3 percent. This forecast by the IMF was adjusted in response to the Indian government’s recent revision for estimating GDP and shows that, at its current pace, the country is on course to become the fastest growing economy in the world.

The country is on course to become the fastest growing economy in the world

Speaking at Lady Sri Ram College in New Delhi, Lagarde said: “By 2019, the economy will more than double in size compared to 2009. When adjusting for differences in purchase prices between economies, India’s GDP will exceed that of Japan and Germany combined. Indian output will also exceed the combined output of the three next largest emerging market economies – Russia, Brazil, and Indonesia.”

The IMF chief lauded Narendra Modi’s government for taking steps to steer the economy towards a higher growth trajectory through continued commitment to lowering their budget deficit and upgrading the country’s roads, railways and power lines. India’s proposal to commit the central bank to a formal inflation target to “provide a robust institutional foundation for maintaining price stability” was also praised by Lagarde.

While stating that policy reforms and improved business confidence have boosted India’s economic activity, she highlighted increasing financial inclusion, unleashing the potential of women, and investing in infrastructure as three main priorities. Lagarde focused on the need for stronger economic frameworks to establish a more resilient economy, calling for sound monetary policies and a healthy financial sector to support fiscal growth.

Deloitte Brazil on the country’s business environment

Posted on by Ashton Wenborn

This year, the Company Recovery and Insolvency Law, which governs bankruptcy processes in Brazil, will have been in effect for 10 years. There is much to celebrate, but at the same time we should also take a moment to consider the results and advances achieved over this period, such as the cultural change that has occurred, the enhancements in the law’s text, and also the participation of all agents involved.

Replacement of the former bankruptcy regime for the current one represented a drastic change in company reorganisation practices in Brazil. A cultural transformation of those involved was necessary for companies to take advantage.

Starting at the beginning of the 2000s, efforts were intensified to conclude the text and the law took effect in 2005. Representatives of various sectors were involved in this initiative, all working toward the same objective, such as the legislative branch – especially deputy Osvaldo Biolchi, sponsor of the bill; the federal government, mainly the ministers of justice and finance; the World Bank and all civil society.

The arrival of the company recovery and insolvency law contributed to the start of a major cultural transformation in the Brazilian business environment

These agents were engaged in the process of preparing the new law so that it could meet the demands of a modern economy, following the natural flow of society, by which laws accompany the transformations of the economy, business, and human relations. In the establishment of that legislation, we worked, primarily, focused on three principal points that would positively alter the bankruptcy rate in Brazil, which is measured by a combination of three factors. These were celerity, respect for guarantees, and respect for the priorities of obligations. One of the main objectives of this law was to increase the supply of credit in relation to GDP and consequently it was necessary to create a favourable legal environment.

In relation to the increased supply of credit to the private sector, we can see a significant rise. In 2004, the amount of credit granted to the private sector was 23 percent of GDP. Just 10 years later, it rose to 54 percent – more than doubling. The credit balance to the private sector in this same period jumped 589 percent.

Main advances
Since it was implemented, a significant number of companies have been able to find the path to their continuity, thanks to the environment created by the new law. Among the main advances of this law, we can mention the greater involvement of creditors in the process; legal protection granted to companies during the first 180 days of the process; the creation of general meetings of creditors, through which the company, its creditors and other interested parties discuss related topics; the distinction between a company and a businessperson or shareholders, making it possible to remove shareholders from management under certain conditions; and the cram down in the voting process during general meetings of creditors, thus minimising the possibility of abusing voting rights.

Further key advances include the obligation to present a legal recovery plan, which should indicate the recovery measures to be taken by the company and that are discussed with its creditors; greater payment priority for loans not subject to bankruptcy rules, those offered to the company after it enters the recovery process, as a way to stimulate the offer of credit to these organisations; the possibility of selling isolated productive units without any transfer of tax or labour liabilities; and the possibility of having companies declared bankrupt as a block, also without any type of transfer, which implies a greater collection of funds from transferred goods in favour of creditors.

Cultural shift
The arrival of the law contributed to the start of a major cultural transformation in the Brazilian business environment. Financial institutions and creditors in general began to understand that the recovery process for a company is a natural and healthy step in its lifecycle. An organisation that enters the pre-bankruptcy stage obviously experiences a situation of weakness, requiring legal protection, as well as the support of the market agents with which it relates. When it does not receive this support and suffers from the stigma of a company in crisis, the tendency is for its survival prospects to diminish even further, causing negative impacts that will certainly exceed its own borders.

For this reason, it is essential that creditor agents, investors and other stakeholders of a recovering company adequately understand this peculiar and delicate situation, taking a collaborative stance that allows, as a last resort, the organisation to restore its financial health. After all, these are not only interested parties, but also, to a certain extent, jointly responsible for its history of development. Understandably, a company in the process of restructuring should create an environment of confidence and transparency – with the highest level of governance possible – in order to be able to obtain the collaboration of the largest number of those involved.

Furthermore with regard to the cultural change, it is essential that companies that realise they are facing declining operations – caused by internal or external events – take corrective steps, as quickly as possible, while they still have a larger number of alternatives, do not have a damaged image and, most importantly, have cash available.

These warning signs are not always perceptible, but signs of decline are quite well known. Some of these signs are seen when, for example, the corporation begins to miss its profitability targets, or when it loses market share and has a decline in profitability. If the company does not take corrective measures in time, signs of crisis may begin to appear: it becomes impossible to pay taxes, its payments to employees and suppliers are delayed, its lines of credit are cut and its most talented employees abandon their posts, in addition to having its image weakened internally and externally.

When an organisation reaches this point the only path available is that of recovery, which needs to begin as soon as possible, before it suffers significant damage to its image, when it has cash available and still has some alternatives to reposition itself.

Necessary enhancements
Despite the undeniable benefits provided by the Company Recovery and Insolvency Law, some enhancements are still necessary. One of them involves incentives for lenders not subject to bankruptcy rules. The law exempts credit of suppliers to companies in recovery from bankruptcy rules, providing a great incentive for financing organisations in recovery, increasing their real chances of success. These should have absolute priority in payment in cases of bankruptcy, stimulating the financing itself and recovery.

Another important point relates to the need for greater balance of powers and responsibility between debtors and creditors during the recovery process. It makes sense to allow creditors to present alternative recovery plans to those created by companies in difficulties. In this way they no longer act as mere approvers of an offered plan that may not be the most suitable. This is certainly a factor that merits consideration to promote improvement of restructuring plans and, consequently, increase the company’s chances of success, since it opens the path for construction of better-structured solutions. Another relevant aspect for change is related to the need for the goods to be sold as quickly as possible in the case of bankruptcy, ensuring greater speed in the processes.

The judiciary, in turn, needs to create more courts specialised in the subject, in addition to intensifying the work of technical training of judges, continuing an effort that has already been underway for at least a decade. As judges begin to understand more comprehensively the economic aspects and those related to the business environment and corporate management, which are increasingly complex, the ability of the judiciary to ensure the effectiveness of the achievements and the benefits provided by the law improves.

Moreover, in the wake of the increasing internationalisation of Brazilian companies and the very globalisation of business – with a growing number of transnational restructurings – it becomes essential for the country to gradually adopt the most modern practices of the legislation of other countries.

Undoubtedly, when evaluating the results of the last 10 years, it is clear that the law has brought many important advances to Brazil. However, as occurs in all markets, the achievements are part of a continuously evolving process, which requires the legislation that affects business to respond with increasing efficiency to the demands of the economic environment.

Holcim pulls plug on Lafarge-merger deal

Posted on by Ashton Wenborn

A merger between two of the world’s largest cement companies has been called off after the Swiss firm, Holcim, said circumstances had changed since it was announced last year. The deal between Holcim and France’s Lafarge was unveiled last April and would have been worth around €42bn. Intended as a coming together of two equal companies, the deal would have given shareholders equal stakes in the opposing company.

Holcim’s financial performance has been considerably stronger than that of Lafarge

However, over the last 12 months, Holcim’s financial performance has been considerably stronger than that of Lafarge, leading to the Swiss firm calling for a renegotiation of the merger that would better reflect its dominant performance. On Friday, shares in Holcim and Lafarge put their values at around €23bn and €18.5bn respectively.

Holcim released a statement explaining why the deal, in its current form, was off. “The Holcim Board of Directors has concluded that the combination agreement can no longer be pursued in its present form, and has proposed to enter into negotiations in good faith around the exchange ratio and governance issues.”

The final terms of the agreement had yet to be confirmed, but it had been announced that Lafarge’s CEO, Bruno Lafont, would lead the newly-created cement giant. While there was potential in many jurisdictions for legal challenges over competition issues, European regulators had given their approval in December for the merger to go ahead.

The merger would have created the world’s largest cement maker, with manufacturing capacity of 427 million tonnes a year far surpassing that of the 227 million tonnes a year of current market leader, China’s Anhui Conch Cement Company. The two firms had claimed it would save them around €1.4bn a year.

While the deal as agreed last April is no longer on the table, it seems both groups are keen to find some form of resolution. However, Lafarge says many of the agreed principles of the original deal must remain in place. “Lafarge’s Board of Directors remains committed to the project that it intends to see implemented. The Board said it is willing to explore the possibility of a revision of the parity, in line with recent market conditions, but it will not accept any other modification of the terms of the existing agreements.”

Does society need a moral re-education?

Posted on by World Finance

World Finance speaks to Brett Scott author of The Heretic’s guide to Global Finance on where responsibility lies.

World Finance: Now Brett: you’ve said that the financial industry is amoral, but wouldn’t you say it’s just society as a whole that lacks morals?

Brett Scott: Amoral means, in a sense, it doesn’t mean it’s immoral. It kind of, like… it tries divorce itself from the sphere of ethics.

You could argue that society itself is always complicit in forms of… lets, for example, say unsustainable investment. The average person maybe doesn’t understand or necessarily care about future issues like, for example, climate change; but we can argue that a large financial intermediary is in a much greater position of power to do something about that than, for example, a pensioner.

So that’s why in a sense you target financial… like, big banks; when you are trying to make changes in the system. In a sense you demand more of a fund manager than you do of a pensioner who is relying on the fund manager.

Notz Stucki: diversification is the key to success

Posted on by Ashton Wenborn

The commodity trading advisor (CTA) sector has in recent months posted a string of impressive returns, with falling oil prices playing into the hands of those utilising the strategy and hoping to capitalise on budding investment opportunities. By identifying longstanding market trends and using carefully constructed computer models together with asset management expertise, those employing the model to good effect have recorded double-digit percentage returns in a climate rife with challenges.

Since the economic crisis took hold, many investors have chosen to embrace managed futures as a means of protecting against a market downturn. Yet the model is still seen by many as an unsatisfactory way of securing healthy returns in an otherwise volatile market. The spotlight focused on managed futures has the potential for disastrous consequences across the industry – for those employing it to ill effect. Only those with a thorough understanding of the model and the risks and rewards contained will reap the rewards.

Never has there been a better time to demonstrate that there are profits to be had in unfamiliar places

With the global economy in a state of constant change, and the pressure on those in financial services at an all-time high, never has there been a better time to demonstrate that there are profits to be had in unfamiliar places. As a pioneering name in the financial services industry, Notz Stucki has a proven track record of successfully developing and delivering solutions for those invested in the asset management arena. By securing the brightest talents and covering a diverse range of funds, the firm has quickly come to be seen as a leading European name, and a likely candidate for success in international markets. One particularly impressive fund is the Capitrade CTA (see Fig. 1), developed in-house by the CM Capital Markets Automated Systems team.

We spoke to Notz Stucki Europe CEO Paolo Faraone and the Head of CM Capital Markets’ Quantitative Department, Manel Sarabia, about the performance of managed futures accounts in years past, why the strategy is gaining in popularity, and what differentiates the firm from others like it in the market.

Why have assets in managed futures grown in recent years?
MS: The only way to improve profitability relative to the risk of a portfolio is through diversification, so adding carefully chosen assets is one method of boosting performance. Managed futures offer exactly that, and using them allows those concerned to reduce their exposure to risk, as well as meet profitability targets and increase competitiveness. In these well-diversified portfolios, managed futures provide an attractive and consistent annualised return over time, and that is probably the main reason for its growth. It’s also important to recognise that there are models that do not attempt to predict the future but take their positions depending on what is happening in real time, which makes them less vulnerable to an unexpected crisis.

How do you rate your CTA?
MS: We are trend followers and try to make the model as balanced as possible in all aspects that define the characteristics of an account; we want to be able to adapt to all kinds of trends or stages and control very precisely our volatility. Therefore, our model is 100 percent systematic and automated, which is essential in finding a good balance in the medium- to long-term.

We are reasonably pleased with our results in the past seven years, and our model is among the best in its class, irrespective of its relatively short history. Another example of this good performance is the percentile ranking on Bloomberg, where we are regularly placed above 90 percent. In absolute terms we have achieved an annualised return of over 13 percent since May 2008, though our worst year during this period stood at 2.17 percent in 2012, which shows the model’s ability to preserve capital under management even in adverse times.

What are the differences between the Notz Stucki CTA and the rest?
MS: If we are honest, we cannot say exactly without first analysing all other models out there. The balance we have achieved in combining our mix of strategies, namely neutral asset allocation and the process of risk control, may also play an important role in the comparison and in gauging a passionate and sceptical attitude, which are intangibles that generate the competitive edge we all seek.

Generally speaking, what is the management model of your CTA?
MS: Our futures management model is 100 percent automated, 24 hours a day and based largely on trend-following strategies. We also ensure we choose a product with daily cash flow. The fund trades only in electronic and organised future markets with high liquidity levels, which allows the investor to assess the risk in real time, and we only operate in electronic and organised future markets while refraining from option markets. Diversification is a big part of our strategy and the fund is designed to invest in the eight main sectors of the economy (interest rates, metals, softs, global stocks, grains, energies, currencies and meats).

The model changes positions depending on the trend, for example: flat markets with high volatility and high correlation are the worst situation for the model.

Tell us more about your investment process
MS: We are trend followers simply because markets are inefficient and this always causes the appearance of trends that we will try to detect and exploit. To detect and exploit these trends we have designed a dynamic combination of robust strategies, which enables us to calculate which investments we make.

However, given that we do not know where or when these trends will appear, we do not want to be predictive. Instead we seek the greatest degree of diversification and allocate assets neutrally; the investment in each sector depending on the number and liquidity of selectable items and the correlation between them.

There are four key aspects in managing the risks involved: matching of the underlying investment to the same volatility level, the maintenance of the annual volatility of a fund keeping between 13 to 17 percent, draw down control (reduction in leverage from 15 percent of the draw) and a value at risk (VAR) control that is fixed at six percent with a 99 percent confidence – so that hedge fund leverage will not exceed the VAR established.

Tell us about your successful track record in appointing leading asset managers and how you’ve been able to do this
PF: At Notz Stucki, portfolio management is mostly focused on choosing talented managers. We target managers that satisfy our strict due diligence criteria, including capital protection, risk adjusted returns, diversification and risk management. We are constantly looking for the managers that are capable of performing while also capitalising on diversification.

Net asset value on the Capitrade CTA fund

How important is international expansion to the continued success of the company?
PF: International expansion of our business is very important for us. Notz Stucki Europe has earned the AIFM and the Management Company Chapter 15 Licenses, which enables us to offer specific services like fund engineering, EU distribution to qualified investors and a robust risk management framework. We are therefore fully equipped to distribute our funds and services over Europe and to offer the highest fiduciary standards and the utmost integrity, with a specific focus on service customisation.

What new products have you introduced since 2010, and how have they hanged/improved the business?
PF: Notz Stucki has introduced several products, such as systematic CTAs, a long/short fund and traditional UCITS IV funds with several talented managers from different areas. All these products are very important for us if we are to expand our business beyond our own boundaries, and in doing so, better respond to the client’s needs.

What are your ambitions for the future of the company?
PF: The European private clients base remains very important for Notz Stucki Group.
In Luxembourg, Notz Stucki was first to gain a dual license for UCITS funds and non-UCITS funds (AIFMD). In Switzerland, Notz Stucki & Cie has been supervised by Swiss Financial Market Supervisory Authority since 2014 and acts as authorised asset manager of the collective investment scheme. These licenses allow us to serve institutional clients.

Globally, we position ourselves more as an asset allocator. Talent selection and asset allocation are the skills highlighted.

We take advantage of our size, international presence and overall regulation to support our strategy, we will continue to hire managers however it is compelling that people who join us share the same values.

In addition to our Swiss and European presence, we continue exploring opportunities in growing markets while at the same time keeping in mind our specific expertise and core business.

MS: As for CM Capital Markets, we are trying to increase our range of products; we already have a new model (smart beta Europe) launched as a managed account and we are working to develop other types of models. Each of these new models will be 100 percent systematic and – of course – based on statistical analysis, quantitative strategies and our in-house designed platform, which allows the control of the whole process in a totally automated way and enables us to avoid the psychological factor in the decision
making process.

CapitaLand expands its focus on integrated developments in Asia

Posted on by Ashton Wenborn

The rapidly growing ASEAN market offers infinite opportunities for real estate developers and fund managers. CapitaLand, a Singapore-based real estate firm that boasts a diversified portfolio as well as one of the largest real estate fund management businesses with assets in Asia, is one company that has made the most of this. World Finance spoke to Lim Ming Yan, President and Group CEO, about the company’s focus on integrated developments, and what it has planned for the future.

What is the rationale behind CapitaLand’s focus on integrated developments, and how does it intend to execute its strategy?
An emphasis on integrated developments allows us to leverage our competitive strengths in the retail, office, serviced residence, residential and fund management businesses. This, therefore, maximises economies of scale and increases our competitive edge, as well as provides stable and sustainable returns from both recurring and trading income. CapitaLand has an established track record in integrated development projects, differentiating the group from its competition.

The growing trend of decentralisation to reduce the load on transport networks will further enhance the prevalence of integrated developments

CapitaLand’s nine Raffles City projects in Singapore and China are testament to our leading position in integrated developments. In fact, the Raffles City collection is our most recognisable brand in China today. The completed Raffles City Shanghai, Raffles City Beijing, Raffles City Ningbo and Raffles City Chengdu are all landmarks in their respective cities, while the remaining four Raffles City projects – Hangzhou, Shenzhen, Changning in Shanghai and Chongqing – are in various stages of development. CapitaLand’s Raffles City developments will total more than three million square metres, with their total value exceeding SGD 12bn ($9bn) upon completion.

Typically, CapitaLand’s integrated development ventures are well-designed, well-built and well-managed projects that sit atop easily accessible transportation hubs or in prime locations. In addition, these projects are more resilient despite the continued growth in mobile connectivity and e-commerce.

Riding on the two megatrends of urbanisation and social media, CapitaLand will build a Pan-Asian portfolio with a central focus on integrated developments. China and Singapore, where CapitaLand already has a significant presence, as well as ASEAN capital cities in Malaysia, Vietnam and Indonesia, will be the core markets. Urbanisation that drives the growth of infrastructure developments, for example, the MRT/transportation system, has the potential to change the face of cities, as well as provide endless opportunities for integrated developments within close proximity to transport hubs. Even with the proliferation of social media and e-commerce, consumers still want unique experiences, and transportation nodes continue to be the focal point.

CapitaLand intends to develop a total of 12 integrated developments, of which five would be in the city clusters of Beijing/Tianjin, Shanghai/Hangzhou/Suzhou/Ningbo, Guangzhou/Shenzhen, Chengdu/Chongqing and Wuhan in China, and another five from Singapore and ASEAN capital cities such as Kuala Lumpur, Ho Chi Minh and Jakarta over the next three years.

Alongside integrated developments, we will also continue to expand our ventures in shopping malls and the residential market, as well as double the number of serviced residence units to 80,000 by 2020. In fact, around 50 projects totalling an investment value of SGD 36bn ($27.1bn) are due to be completed over the next three years, with over half of those in China. We will also press forward with our existing business model, which involves capital recycling with our Real Estate Investment Trusts (REITs) and fund platforms, providing diversified sources of capital to grow our assets under management, which amounted to SGD 68.1bn ($51.25bn) as at September 30 2014.

Our strong balance sheet, together with diversified capital sources and capital partners, will allow us to invest in new opportunities as they arise. CapitaLand is in a strong position for its next stage of growth and to achieve its vision to be a leading global enterprise that enriches people and communities through high-quality real estate products and services.

How does CapitaLand intend to compete?
Over the next three to four years, besides residential projects, about 15 major investment projects will be completed, all of which will complement our existing portfolio well. These include an additional four Raffles City projects in China, Jewel Changi Airport, an integrated development at Cairnhill which comprises a serviced residence with a hotel licence and a residential component, and a further 10 shopping malls. Once these are completed, CapitaLand will be in possession of one of the most enviable investment portfolios in Asia.

To further strengthen our position, CapitaLand will continue to grow. In addition to our residential projects, we aim to secure another 12 new investment projects in China, Singapore and Southeast Asia over the next two to three years, some of which will involve the redevelopment of our existing projects. In Shanghai, we have obtained planning approval for a new Capital Tower Shanghai as well as a Hanzhonglu integrated development, which comprises retail, office and residential components. Aside from the redevelopment of existing projects there are endless opportunities in many of the key gateway cities that CapitaLand is operating in. That said, it’s important for us to pursue projects with the right economic fundamentals.

What measures will the company take in the next 12 months to improve its competitive position?
Despite the headwinds and ever-changing operating landscape, CapitaLand is in a strong position relative to many pure residential peers. With a diversified portfolio made up of assets that generate trading and investment income, we are better able to ride property booms and busts. As at September 30 last year, CapitaLand’s residential portfolio constituted 26 percent of its SGD 31.6bn ($23.8bn) total assets, with Singapore and China contributing 21 percent and 32 percent respectively. In addition, three quarters of CapitaLand’s assets from integrated developments, shopping malls, offices and serviced residences generate recurring income, which will help to mitigate any slowdown in the Singapore and China residential markets.

Where will the company’s investments be focused over the next year?
Trends in Asia favour integrated developments, and this sits well with CapitaLand’s integrated development strategy. The growth of mega cities combined with the increasing population density in Asia leads to traffic congestion, which then causes increased demand for public transport. Given the high investment cost of transport infrastructure, the land surrounding subway stations or transport nodes will be put to best use to yield maximum value, and integrated development is the natural outcome. The growing trend of decentralisation to reduce the load on transport networks will further enhance the prevalence of integrated developments.

In China, opportunities could emerge within the next few years as the real estate market consolidates. Weaker players in the commercial space could be flushed out. Moreover, few competitors are competent in the full suite of shopping malls, offices and serviced residences, and only a few have experience in integrating various real estate products.

We will expand our footprint beyond Singapore into an ASEAN presence by adding on Malaysia, Vietnam and Indonesia. In Malaysia, Kuala Lumpur and Penang offer great opportunities for CapitaLand, while there is good long-term growth potential in Vietnam, given macroeconomic stability in the past year. CapitaLand has been in Vietnam for 20 years and is one of the leading foreign developers there, further supported by new government policies to encourage more foreign property ownership. For the Indonesian market, CapitaLand recently entered a joint venture agreement to develop an integrated development in central Jakarta. Globally, we are also actively seeking investments in gateway cities through Ascott, CapitaLand’s serviced residence business.

We are well-positioned to execute our strategy. We have a robust operating portfolio, a steady pipeline of projects under development, potential projects in China and the broader region, and a strong team to make it all possible. CapitaLand’s current organisational structure will allow us to do many things that we’ve set out to achieve. We firmly believe that we are well poised for growth; to be a leading global enterprise that enriches both people and communities through high-quality real estate products and services.

How do you think technology will have an impact on your businesses and how will CapitaLand respond to take advantage?
Technology has changed the business environment and looks set to continue to do so. This is evident by the shift to mobile internet through the use of smart phones, which will change the way we operate through e-commerce, online reviews and social media platforms. We will utilise technology to complement our real estate, so as to deliver even better customer experiences.

Therefore, to respond to this fast changing world, we will harness the talents and creativity of all our people. We will need to change to be a more inclusive and open organisation. In fact, CapitaLand has embarked on various initiatives, including the setup of an innovation hub in Singapore, as well as a lab to pilot test projects for our shopping mall business.

Lukoil: opportunities still rife in energy despite Russia troubles

Posted on by Ashton Wenborn

Those in the energy market are up against a range of challenges at the present time, and without first adopting the correct corporate governance controls and strategy to match, key industry names could fall by the wayside. Lukoil, the country’s second-largest oil producer is testament to the fact that there are still pockets of opportunity in a market rife with challenges.

By committing to international best practices of corporate governance and comprehensive qualitative and quantitative measures to analyse risk, disclosure and compliance, Lukoil has the necessary internal controls in place to shield it from external shocks. World Finance spoke to Andrei Gaidamaka, Vice President of Investor Relations at Lukoil, about the country’s changing energy market and how the company is equipped to weather the storm.

Another advantage for Lukoil is our broad portfolio of overseas assets both up and downstream

How have Western sanctions and falling oil prices impacted Russia’s energy market?
Thanks to the tax system, Lukoil faces fewer decreasing netback prices. At the same time, domestic currency depreciation has reduced our ruble-nominated costs and liabilities in USD terms. Increased competition between subcontractors in Russia allows oil producers to exploit the situation and obtain better prices from suppliers. This is primarily why we expect lower lifting costs and capital expenses in dollar terms for this year. Also, domestic demand for petroleum products remains strong, especially for high margin streams such as high-grade gasoline, low sulphur diesel, jet fuel, and lubricants. So we remain cautiously optimistic and plan to be free cash flow positive in 2015.

The company has several major green-field projects in Russia, which enable us to maintain stable and growing production in the short and medium terms. The shortlist of such projects includes the Filanovsky field in the Caspian, mid-size discoveries in the Timan-Pechora region – our two largest gas fields in Yamal – shale and tight oil developments in Western Siberia, and many more.

Another advantage for Lukoil is our broad portfolio of overseas assets both up and downstream. Up to 30 percent of our total assets are located outside Russia, and in the nine pre-crisis months of 2014 our international businesses generated over $3bn in operational profit.

We continuously monitor the effect of the sanctions on our financial position and operations, but there has been no direct impact to the company on the technology side. Since we don’t have projects in the Arctic offshore, deep production, or significant production from shale fields, the limitations do not currently affect us. An indirect impact of the sanctions however, is to increase the cost of our financing. Our current priority is to reduce capital spending to a level that is in-line with our cash flow generation at current prices, in order to ensure that we live within our means. We have done this successfully before: when oil prices fell in 2009, our operating cash flow fell by more than $5bn from the previous year and we reduced our capital spending budget by approximately the same amount, resulting in positive free cash flow for the year.

How do you see the decline in oil production playing out in the coming years?
As our top management noted before the current crisis, we are expecting a decline in Russia’s oil production if there are no changes to the tax regime before 2017 to 2018, in that it is unprofitable to implement tertiary methods on mature oilfields. Even still, the outlook for Russia’s oil production has worsened recently following the oil price collapse, and I think oil production may begin to decline before 2017. The government has recognised the likelihood of production declines in the absence of new major green-field projects, and is implementing changes to the tax system to focus on support for oil production. There is still time to arrest the impending decline with changes to the fiscal system, and, of course, a higher and more stable oil price environment would result in more investment as well.

What is your strategy to stay competitive?
We constantly monitor the markets and our competitors’ actions in order to maintain our competitiveness. In order to be cash-positive in the low oil price environment we are cutting our capital budget programme. However, this reduction will not affect important and strategic projects. In 2015, we will begin production on new multibillion assets in upstream (Filanovsky oilfield) and downstream (Burgas Hydrocracking Unit in Bulgaria, Catcracking Unit on our refinery in Nizhniy Novgorod, Coking Unit on our refinery in Perm).

Why was the sale of Lukoil’s stake in NPC necessary, and what benefits will this bring?
Our participation in NPC was as a minority, non-operating investor. The project is at an early stage and our incurred cost was only for the purchase of a 20 percent stake. This heavy oil mega-project would require a substantial financial commitment from Lukoil, and, at this point, we think that the project does not fit into our plans. The company prefers to be an operator of projects, so we decided to sell the stake to a partner and focus on other existing opportunities.

How will Lukoil’s investment in the Burgas refinery improve the business?
This year we are planning to complete the construction of a hydrocracking unit at the Burgas refinery with a capacity of 2.5 million tonnes per year, and after commissioning the unit we will reduce the output of low-value fuel oil by 0.9 million tonnes per year.

The refinery will increase the output of light and middle distillates by 0.8 million tonnes per year – up 20 percent – and high-sulfur fuel oil will be replaced by low-sulfur content, which will increase the profitability of the refinery. The project will also reduce our environmental footprint .

What are your current priorities, and have they changed at all in the past year?
Given the dramatic changes in 2014 we are revising our long-term strategy. We do not want to under-react to the changes we are seeing, but we do not want to over-react either.
Our goal is to earn a return that is higher than our cost of capital on every barrel produced over the life of a project, so that we can then pay that return to shareholders and be free-cash flow positive.

Our corporate priorities have not changed over the last year, and our top priority is the maintenance of competitive returns to shareholders and investors. The dividend policy is not being revised despite the turbulence on the markets, and we intend to keep a comparatively high dividend yield.

What differentiates Lukoil from rival oil companies in the region?
Lukoil is a global Russian private energy company with substantial international assets. We have a long and successful company history, respect for shareholders, and a solid dividend record, and as one of Russia’s largest national taxpayers and investors, Lukoil places large-scale orders with key parts of the national economy. As a responsible corporate citizen and an honest participant in the market economy, the company commits itself to socially responsible participation in the life both of the local population in the regions where it operates and in society as a whole. We consider it our duty to pay our taxes in a timely manner, which helps the state to solve social challenges in the regions where our company has a presence.

We also consider it important to be a socially responsible company internationally. For example, Lukoil is hiring local people to work on construction of the West Qurna-2 field in Iraq. More than 11,000 workers were employed at the height of construction, and more than two thirds of them were local people, working for both Iraqi and local companies.

Lukoil has also established standards of corporate governance in Russia with specific keystones to best represent the company’s success in the area that include being independently audited by KPMG since 1994; receiving independent audit of reserves from Miller & Lents since 1997; preparing financial statements under the US GAAP standards since 1998; being listed on the LSE and including independent board members into the board of directors (BoD) since 2002; investment ratings from all three leading international rating agencies since 2007; with the majority of the board of director’s independent since 2009.

The BoD plays a crucial role in Lukoil’s system of corporate governance, exercising overall control of company activities in the interests of investors and shareholders. In accordance with Russian legislation and the Lukoil Charter, the BoD defines priorities for company development and ensures the efficient functioning of the company’s executive bodies.

At the end of 2013 there were six independent members of the board out of 11 total, whose presence enabled objective opinion to be formulated on matters discussed and, therefore, to strengthen confidence in the company.

Bribery plagues Hong Kong’s real estate market

Posted on by Ashton Wenborn

The scramble for even the smallest piece of real estate in Hong Kong over the last few years has led to the island experiencing an ever-expanding property bubble. It has become so inflated that many people have become priced out of the market. While this has predictably caused resentment from people towards the richest in Hong Kong’s society, the unfolding corruption scandal to hit the island’s real estate market during the last year has merely exacerbated the rage.

Last year, Hong Kong saw a series of prolonged, initially peaceful pro-democracy protests transform into a huge wave of violence as demonstrators complained of potential changes proposed to the electoral system on the island. The news swept around the world, as China’s government faced one of the largest challenges to its authority in recent years.

However, while all this was going on, another similarly damaging story was unfolding in the courtrooms of Hong Kong. Thomas Kwok, the property mogul and billionaire, was being tried in a corruption scandal that had lasted for seven months. Eventually sent to prison for five years, Kwok, 63, was convicted of bribing one of the city’s most senior officials, former deputy leader Rafael Hui.

14,600

Houses to be built each year until 2020 in Hong Kong

The scandal went right to the top of Hong Kong’s business and political establishments, with one of the city’s most recognisable business figures and one of its leading politicians at the centre of the issue. It gave Hong Kong’s already angry citizens even more reason to hate the elite, not least because it showed how developers like Kwok were getting unfavourable advantages in an already hugely competitive and astronomically expensive property market.

Family feud
The Kwok brothers have played a prominent role in Hong Kong for many years now and are responsible for a lot of the dazzling new skyline on the island. The owners of Sun Hung Kai Properties – the most valuable real estate company in Asia and second largest in the world – the Kwok brothers have accumulated personal wealth of around $10.6bn each. Their firm has a market value of $32bn, which is around 14 percent of Hong Kong’s entire economy. Sun Hung Kai has become renowned for constructing some of Hong Kong’s tallest and most eye-catching buildings. These include the International Commerce Centre (ICC), which was built in 2010 and is the city’s tallest building. It is the world’s eighth tallest, and houses a number of leading businesses. It is one of many Sun Hung Kai buildings that adorn the city’s skyline, and shows how the city has become the financial capital of Asia over the last two decades since being returned to China by the British.

The Kwok family got their wealth from their mainland-China born father Kwok Tak-seng, who immigrated to Hong Kong after the Second World War. The family were in the news during the 1990s when Thomas Kwok’s elder brother Walter was kidnapped, kept within a wooden crate and tortured for days as part of the gangster Cheung Tze-keung’s efforts to bribe Hong Kong’s richest 10 citizens. The Kwok family eventually paid the ransom of HKD 600m ($77.37m), although Cheung was eventually caught and executed in 1998.

After the incident, Walter withdrew from running the company, eventually handing over the reigns to his mother, who in turn gave control to her two younger sons. However, a family feud emerged in 2008 that saw Thomas and Raymond remove Walter from the board, and he was then removed entirely from the family trust. Some observers think that it was this snub that led to Walter approaching the police over the bribery claims, although the authorities have refused to confirm who provided the evidence.

The scandal emerged in 2012 when Kwok, his younger brother Ramond and Hui were arrested by Hong Kong’s anti-corruption agency, the Independent Commission Against Corruption (ICAC). Pleading not-guilty the following year to corruption charges that involved loans and payments to Hui, the trial began in 2014.

Eventually, Raymond Kwok was cleared of all charges, but Thomas and Hui were found guilty in December. It marked the end of a turbulent year for Hong Kong’s elite, who now face far greater scrutiny than they had before the protests erupted earlier in the year.

Amid the backdrop of the protests, both Kwok and Hui were convicted of serious misconduct, further damaging the reputation of the establishment in Hong Kong. Before being sentenced, Judge Andrew Macrae told Hui that his crime was particularly noteworthy at a time when the eyes of the world were on Hong Kong’s political class. “To know that the former number two in government had received bribes must be a deep disappointment to many people in Hong Kong. It is vitally important in these times the Hong Kong government and business community remain and are seen to remain corruption free, particularly when the mainland is taking obvious and positive steps to eradicate the cancer of corruption in their own jurisdiction.

Progress or stagnation
While the scandal that has struck Hong Kong’s most famous real estate developers has rumbled on, the market itself has continued to swell ever larger. Hong Kong’s real estate industry has been in an ever-inflating bubble for a number of years now, and the city is currently the most expensive place in the world to acquire property. The scandal of the most prominent property developers in Hong Kong has only heightened the sense of feeling that something needs to be done to redress the balance in the market, so that there is more competition to build properties.

However, despite the scandal and tentative calls for reforms, some analysts believe that 2015 will see considerable gains in Hong Kong’s property values. According to analysts Cushman and Wakefield (C&W), Hong Kong’s property market is likely to experience even further gains during 2015.

Kent Fong, C&W’s Executive Director for Investment, Hong Kong, said in a report that the residential sector in particular was likely to remain strong. “We expect the residential sector to stay buoyant in 2015, while fundamentals in most non-residential sector will remain intact, further supporting investors’ confidence in the wider property market.”

Another senior executive at C&W, Vincent Cheung, added: “First hand sales will further increase in 2015 as developers launch more projects and capitalise on the strong demand for smaller units and mid-priced flats. Homebuyers will continue to execute purchases in 2015 due to expectations that it will take several more years for new supply to outstrip demand and that prices will continue to rise until this situation materialises. Exceptionally strong demand for properties priced below HKD 10m ($1.2m) will support another year of healthy price growth in 2015, whereas I expect prices for these properties will increase by an additional five to 10 percent.”

Hong Kong’s Chief Executive Leung Chun-ying told reporters in January that the island faced a difficult period in the coming months unless measures to take the heat out of the price of houses were made. In his annual speech he said that reforms were vital to regain the trust of protestors, as well as making a fairer society. “We must make choices. We have to choose between implementing universal suffrage and a standstill; on the economy, between progress and stagnation; and on people’s livelihood, between reforms and clinging to the status quo.”

With regards to increasing the supply of land for housing developments, and therefore helping to bring down the price of homes, Leung revealed that there would be around 14,600 new private homes built each year until 2020, which would represent a 30 percent increase over the last five years of building. “The consultation process for land planning and development has become drawn out with increasing controversies and uncertainties. Society as a whole must make hard choices.”

Last May, sensing the need to make things easier for buyers, Hong Kong’s government relaxed its rules over its double stamp duty policy. Before the changes, buyers were forced to sell their homes within six months of agreeing to buy their second if they wanted to receive a stamp duty refund. The changes meant that it wasn’t until the sale of the second home was secured that the six month time period began.

Cheung added that some of the reason for buyer confidence had come as a result of the changes to stamp duty rules last May. “Following the slight relaxation of double stamp duty in May, enhanced buyer sentiment lifted both first and second-hand sales in the second half of 2014 and helped push residential prices to a new record high. Strong first hand sales performance this year is credited to developers launching more projects with smaller units, which were met by ample demand among end-users and first-time buyers. They first-hand market continues to account for 25 percent of total transactions, with sales still heavily driven by developers’ more aggressive pricing strategies and the narrow price gap against second-hand homes.”

Too little, too late
Despite these steps towards reforming the real estate sector in Hong Kong, many observers believe that is not enough to placate the disgruntled population over high land values and a sense that those at the top have an unfair advantage within the market.

According to Hong Kong Baptist University political science professor Jean-Pierre Cabestan, Leung’s reforms are not likely to bring about an end to the resentment felt by large parts of the island’s population. Cabestan told Bloomberg Business in January, “Leung has decided to stick to his guns, unwavering, on the political reform. [His] proposed welfare and housing reforms may help him regain some popularity, but it will not solve the challenges that his government is facing. As a consequence, I sadly predict more trouble for the government, its relations with the community and the central government-Hong Kong society relationship.”

The past year has proven particularly challenging for Hong Kong’s elite. If it is to avoid the scenes of last year, the government needs to first distance itself from cosy relationships with high profile real estate developers, while at the same time making things far easier for its population to get a foothold in the city’s incredibly pricey property ladder.

IMF bails Ukraine out again

Posted on by Ashton Wenborn

In an effort to prevent the country falling into bankruptcy, the IMF has agreed to loan Ukraine a further $175.bn over the next four years. The bailout package will begin straight away with a $5bn payment that will help prop up the stuttering Ukrainian economy that has suffered considerably since last February’s political revolution and subsequent year of conflict with eastern separatists.

With the separatists widely believed to be backed by a Russian government intent on claiming back parts of its former Soviet-era territory, Ukraine has looked to the west for help. While political support has come in the form of sanctions against Russia, Ukraine has needed financial aid to plug a large hole in its public finances.

[Ukraine’s economy] should return to around two percent of growth by 2016 as a result of the economic reforms

A condition for the loan is that Ukraine’s government undertakes serious economic reforms that will include cutting pensions and slashing budgets. Announcing the bailout package, the IMF’s chief Christine Lagarde said that the majority of the funds will come during the first year, and that the country had achieved many of its requirements for receiving the loan. “Ukraine has satisfied all the prior actions that were expected and required of it in order to start running the programme… We are off to a good start.”

David Lipton, the IMF’s First Deputy Managing Director and Acting Chair, added in a statement that the conflict in eastern Ukraine had severely harmed confidence in the country’s economy. “Notwithstanding a strong policy-led adjustment effort in 2014, the Ukrainian economy continues to be affected by the conflict in the East and the attendant loss of confidence. The deep recession and sharp exchange rate depreciation aggravated existing vulnerabilities, weakened bank balance sheets, and raised public debt.”

Even though the IMF predicts Ukraine’s economy will contract by 5.5 percent during this year, it should return to around two percent of growth by 2016 as a result of the economic reforms. “Demonstrating strong resolve, Ukraine’s authorities have developed a new program to restore macroeconomic stability and address long-standing structural obstacles to growth, including weak governance. The authorities recognize that the resolute implementation of the program is critical to restore confidence and growth, bring inflation to single digits, keep external deficits manageable, and replenish international reserves.”