Crunch time for Lendlease in China

9 Nov 2021

CEO Asia Justin Gabbani speaks with the Australian Financial Review on his ambitions for the Asia business.

Singapore: Lendlease Asia is on the hunt for more opportunities in China, with the ASX-listed developer still determined to expand its presence despite ructions elsewhere in the country’s property market.

Last week marked the formal opening of Ardor Gardens, Lendlease’s flagship senior living project in Qingpu, Shanghai.

It was a welcome milestone in a year dogged by pandemic-related delays in other big ticket construction projects. Now Lendlease just needs to convince retirees to sign on.

Long-time observers of the retirement property market in China say demand and purchasing power are both abundant. In recent months, though, there has also been a surge in nationalism and regulatory uncertainty that could dampen interest.

By Lendlease’s standards, this project is not large. In the first phase, Autumn Garden, there are about 250 apartments spanning six buildings, with three other season-themed instalments to come.

However, it’s also strategically important. Lendlease chief executive Tony Lombardo has told investors the group is looking to strengthen its Asian pipeline, and has described Ardor Gardens as “our first big pilot” in China.

The next few months will show if the model is a winner.

“We know there is a demographic imperative - China has an ageing population that will continue to increase for the next three decades - and a booming middle class,” said Bei Wu, dean’s professor in global health at New York University.

“I’m not surprised an Australian firm is investing there. Strategically, it seems like a smart move, but there are some caveats.”

Dr Wu, a long-time scholar of elder care in China, says some companies that have tried to tap into this market have got it wrong.

“There are many upscale facilities that face challenges,” she said. “It’s not just about facilities, it’s mainly about services. I’ve seen some when you think, ‘well, this is housing, it’s not a retirement community’.”

Other, non-market specific factors could also be influential.

The Chinese government’s intervention in private sector operations this year has had a dramatic effect on equity markets.

Nationalism is also on the rise. Dr Wu said Shanghai - her home city - is one of China’s most cosmopolitan centres, where people have traditionally been open-minded about foreign investment, but she still has some reservations.

“A decade ago I would have been more optimistic about this kind of investment. There is a great deal of uncertainty and unpredictability now,” she said. In July, Lendlease confirmed about 50 apartments had been sold before completion. About 100 residents are gradually moving in, with an average of two per apartment, said Lendlease Asia chief executive Justin Gabbani, who moved into the Singapore-based CEO role after Mr Lombardo took the top job in June.

Mr Gabbani said post-opening sales are expected to be strong, with pre-sales not so popular in this segment. “Our experience suggests those interested in a project like this wait until it’s open, and they can come and walk around,” he said.

Lendlease is not fussed by the furore related to the tightening of regulation around property lending that helped push Evergrande into its precarious position, Mr Gabbani said.

“We’re obviously monitoring the situation, however, we haven’t seen any change on the ground in consumer behaviour or sentiment,” he said.

“The feedback from our China team is the noise seems to be a lot more offshore than it is onshore.”

About $1.5 billion of the $2 billion Lendlease has allocated to expand operations across China, Singapore, Malaysia and Japan has been invested, with senior living one of the group’s five target segments, along with commercial property, residential, data centres and life sciences.

In Malaysia, construction at The Exchange TRX is back on pace as the country’s economy gradually rights itself.

On a per capita basis, Malaysia’s COVID-19 emergency was the most extreme in the region in terms of case numbers and deaths. The country was locked down through July and August.

Mr Gabbani said the short-term disruption will be superseded by other trends that play to its favour.

Property markets across the region have stayed buoyant thanks to a shift to domestic spending and sustained low interest rates.

“It’s been a bumpy ride, but close to 95 per cent of the workforce is back on-site and operating, with an extremely high vaccination rate.”

Elsewhere in the region, construction is expected to begin this year on an $800 million data centre development in greater Tokyo.

The project is under Lendlease Data Centre Partners, a joint venture with an institutional investor.

Mr Gabbani said Lendlease was particularly focused on increasing its presence in Japan.

“It’s one of our smaller markets but in the top three globally, so I see good opportunities to scale up from where we are today.”

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Source: The Australian Financial Review, Thursday 7 October 2021.

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