http://www.businesstimes.com.sg/sub/...25323,00.html?

Published February 10, 2011

Changes for South Beach group?

By KALPANA RASHIWALA


AS construction of the delayed South Beach project finally begins this year, market watchers are speculating on whe-ther there will be a change in the composition of the consortium behind the mixed development project that will come up on a landmark site between Raffles Hotel and Suntec City and next to the Esplanade MRT Station.


South Beach: Some analysts say CDL could up its stake in the project by buying out one or both of its partners

City Developments Ltd (CDL), Elad Group and Dubai World unit Istithmar each have a one-third equity stake in the joint venture company which clinched the 99-year leasehold site from the Urban Redevelopment Authority (URA) in 2007 for $1.69 billion.

A fourth party came into the picture in June 2009, when as part of a refinancing exercise for the site's purchase, Hong Kong developer Nan Fung and City Developments subscribed for $205 million and $195 million respectively of secured convertible notes issued by the joint venture company. If Nan Fung converts its notes, it would become a shareholder in the JV company and if CDL does the same, it would become the leader of the consortium.

Some analysts believe CDL, part of Singapore's Hong Leong Group, could increase its stake in the project by buying out one or both of its partners.

Consortium members have the right of first refusal to buy out partners wishing to exit. There is speculation that Dubai World might have found a buyer for its stake and the price offered could be acceptable for CDL to exercise its first right on the stake. If this happens, CDL would increase its stake in the consortium to over 50 per cent.

Some sources also suggest that a new face could emerge in the JV company - Malaysia's IOI Group has been tipped as a contender - that may be in talks to buy the stake of the US-based Elad Group, which is controlled by Yitzhak Tshuva.

If IOI, or whoever the party may be, offers Elad an attractive enough price to exit, and if CDL does not wish to match this price to exercise its first right on Elad's stake, IOI would be CDL's new partner for the South Beach project.

Analysts suggest it makes sense for CDL to spread its risks and save some of its resources for other future investments by accepting IOI as a partner rather than going solo on South Beach.

The project has already been set back by global events.

When the consortium was awarded the site in 2007, the indication was that the South Beach project would be completed by 2012 at a total development cost (including land) estimated at $2.5 billion. In November 2008 - during the global financial crisis - CDL announced that construction would be deferred until building costs eased. Under the agreement signed with URA, the JV company has up to nine years, or until around September 2016, to complete the project, that is, obtain Temporary Occupation Permit (TOP).

Based on the latest information on the project in URA's Q4 2010 publications, the South Beach consortium expects the project to obtain TOP in 2015. Based on the provisional permission granted in January 2009, the project will have 171 apartments, 560 hotel rooms, 632,164 sq ft and 158,014 sq ft gross floor area of office and retail space respectively.

Let's also revisit some history on CDL's partners.

In December 2008, BT reported that Elad was said to be looking for buyers for its one-third stake in the South Beach project as well as for its half-share in the Futura condo site at Leonie Hill Road. This was at a time when Elad's partnership in the US for a hotel/casino project in Las Vegas faced financing difficulties and high construction costs, according to US media reports.

In September 2009, CDL announced that it had acquired Elad's share in the Futura condo site.

A few months later, in November 2009, when Dubai World was hit with debt woes and had to ask all its financiers to 'stand still' and extend debt maturities, CDL said it was open to raising its stake in South Beach if an opportunity arose.

Although Dubai World is in a more comfortable position today - having completed a US$24.9 billion debt restructuring exercise last year - it would be open to divesting its stake in South Beach at the right price, say analysts.

Any changes in the consortium's make-up will have to comply with tender conditions for the site laid down by URA.

All three shareholders together are required to continue retaining a controlling interest of more than 50 per cent of shares in the JV company until the project receives TOP.

Should a shareholder wish to buy out either or both of the other partners and/or if a new investor is keen on acquiring a stake in the JV company, URA's approval would be required. And even then, the original consortium shareholder(s) - such as CDL - must control more than 50 per cent of the joint venture company.

Clearing works have already started on vacant land on the South Beach site and a site-office has been built. As the date to begin construction of the South Beach project draws nearer, it may be a good time for consortium members wishing to make an exit to finalise their arrangements soon and for CDL to neaten the consortium.