John Riady bets on budget housing in Indonesia to remake Lippo

Lippo Group's John Riady speaks at the Indonesia PE-VC Summit 2020 in Jakarta.

Affordable housing is the “sweet spot” for Lippo Karawaci, the real estate group of one of Indonesia’s largest family empires, and now helmed by scion John Riady.

The newly-developed two to three-bedroom homes in Lippo Village, west of Jakarta, sold out within hours of their launch a few months ago, snapped up by young urbanites in the market for their first homes.

The interiors of the houses, between 50 and 75 sq m, are designed by Alex Bayusaputro, an award-winning Indonesian designer, known for his work in luxury developments. But, at the low-end price point of Rp 750 million ($51,052) per house, they are sold at a fraction of what similarly-designed property would cost. Even so, they generate some 50 per cent gross profit margins for the company, Riady said, backed by the large swathes of landbank the group owns.

“The opportunity is in the middle class,” Riady told DealStreetAsia in a recent interview in Jakarta. He pointed out that with home-ownership only at 6 per cent in the country, the potential for Lippo Kawaraci’s strategy of well-designed, yet pocket-friendly property is significant.

The township of Lippo Village is developed on former swampland in Tangerang. Clusters of housing are integrated with schools, malls, and hospitals; there are a five-star hotel and golf course, and a “clean and efficient” drainage system spanning 250km, according to the township’s website.

“[Bayusaputro] thinks about airflow, the window, lighting, layout,” Riady added. “At the price points of Rp 750 million to Rp 1.5 billion ($102,104), there is an explosion in demand.”

Indeed, the sale of the properties has helped the group rack up Rp 2.28 trillion ($155 million) for the nine months of this year, double what they were from the same period a year ago.

“We will continue to see rising demand for residential property,” said Marco Kusumawijaya, director at Rujak Centre for Urban Studies in Indonesia. He believes that the COVID-19 pandemic will spur a rethink in the real estate industry, with new property developments being affordable, well-thought-out and environmentally friendly.

Recycling capital for growth

Early last year, the 34-year-old Riady, grandson of Lippo founder Mochtar Riady, became CEO of IDX-listed Lippo Karawaci, the property play that is the core of the sprawling Lippo Group empire.

Prior to that, John Riady led the group’s digital initiatives under the corporate venture capital arm, now known as Venturra Capital, which is focused on tech startups. Under Riady, the division developed digital payment platform OVO, which has since attracted big-name backers including Grab and Tokopedia.

Lippo Karawaci is the largest publicly-listed property developer in Indonesia that, as Riady explained, rode on demand for commercial and residential property in fast-urbanising Indonesia. The strategy was straightforward: the group amassed landbank, built on it, and sold the properties at a markup.

The company still has some 1,411ha of landbank ready for development. Apart from Lippo Village, it has two listed subsidiaries developing townships in Bekasi, east of Jakarta; and Tanjung Bunga, in Makassar in Sulawesi.

Lippo Karawaci is also the majority shareholder of Indonesian private healthcare services provider Siloam International Hospitals. It also has an ownership stake in Lippo Malls Indonesia Retail Trust, a real estate investment trust (REIT) listed on the Singapore Exchange.

Property development has been lucrative, Riady said. The group has Rp55 trillion ($4 billion) in assets as of end-2019, and he noted that the business generates 10 times more returns than its other units.

Even so, Riady is keen on driving capital recycling at the group, pointing to Singapore’s CapitaLand for inspiration. The commercial and real estate group, one of the largest in Asia, has seven REITs under its belt at the moment. Two of its units – CapitaLand Mall Trust and CapitaLand Commercial Trust – are merging to form a retail and office manager – the largest REIT in Singapore by market capitalisation and property portfolio value.

“While Lippo Karawaci will continue to be a developer, over time we hope that the biggest contributor to the total value will come from the downstream sectors [such as the REITs],” Riady said.

To be sure, Lippo’s mall REIT is having a tough time, amid COVID-19 restrictions that shut stores and kept people at home.

LMIRT, which has a portfolio of 23 malls and seven retail spaces in Indonesia, had to close all its malls in April, which severely impacted its Q2 2020 performance. The trust reported a 57.8 per cent YoY decline in 2Q2020 gross revenue to S$27.4 million due to lower rental income. While malls have resumed operations, opening hours have been cut to eight, from 12, which would continue to drag on earnings.

Even amid all the uncertainty, the trust is acquiring the strata title units of Lippo Mall Puri, a Lippo Karawaci portfolio, for a purchase consideration of about S$330.2 million to make the mall its flagship asset.

To finance the deal, the trust has divested two of its assets, Pejaten Village and Binjai Supermall, while also announcing a rights issue, in which Lippo Karawaci has undertaken to take up its full pro-rata stake.

Moody, however, sees this “increasing linkages with Lippo Karawaci”, a reason for its downgrade review of LMIRT.

“In addition, the acquisition comes at a time when LMIRT is already facing heightened liquidity risk and a weak operating environment given coronavirus disruptions, signaling management’s growing appetite for risk,” said Junling Tan, a Moody’s analyst, in a research report on LMIRT dated 02 September 2020.

Moody’s expects a 46 per cent decline in LMIRT’s 2020 revenue caused by temporary mall closures and weaker demand for retail space, the report adds. It predicts that LMIRT’s adjusted net debt/EBITDA will weaken to around 12.4x in 2020 from 5.2x in 2019, and adjusted EBITDA/interest expense will weaken to around 1.2x from 3.0x over the same period.

Nevertheless, LMIRT has repaid its S$75.0 million EMTN notes utilising internally generated cash to fulfill this obligation, while its gearing ratio as of 30 June 2020 stood at 35.7 per cent, well below the new regulatory limit of 50 per cent.

The trust claims an average occupancy of 88.2 per cent at its malls, which is higher than the industry average of 80.8 per cent. Riady remains bullish on the outlook.

“It is currently a buyer’s market because valuations are cheap…and you have got to believe things will come back – maybe not 100 per cent but at least 70 per cent. So we have been looking (for acquisitions),” he said.

Remaking Lippo

Riady, a Wharton graduate who previously headed Lippo’s digital ventures and investments, took the helm of the group at a time when the group was looking to rebuild investor confidence after bribery allegations related to its Meikarta township development in the outskirts of Jakarta, as well as multiple downgrades in its credit ratings due to concerns over the company’s debt and liquidity.

Four months into Riady’s appointment, Lippo Karawaci raised Rp 11.2 trillion ($788 million) in a rights issue in July and sold its stake in a Myanmar joint venture for $20 million, which helped strengthen the company’s balance sheet.

Riady was also quick to outline a new direction for the group: a laser focus on, and optimum management of, strategic assets in core sectors, namely real estate and healthcare. Non-core businesses, meanwhile, will be put in an “investment bucket”, on which Riady has declined to divulge further information.

Its renewed focus on core business has seen Lippo divesting its 10.5 per cent stake in hospital owner First REIT in April this year. That generated proceeds of Rp 850 billion ($57 million), which it used to increase its stake in its subsidiaries healthcare operator Siloam Hospitals to 55.4 per cent, and developer Lippo Cikarang to 84 per cent.

There are also fresh faces among the management ranks, including former Global Unilever chief auditor Tevilyan Yudhistira Rusli as CFO and former Link Net CFO Tatang Surya as CIO.

Additionally, Riady says the company is also working to put in place solid governance to balance the “very entrepreneurial” nature of Lippo in the past. Upon Riady’s appointment last year, Lippo announced five new board of commissioner members, including two minority investors.

In July, Anand Kumar of Gateway Partners, an investor in Lippo Karawaci, came on to the board to replace John Riady’s uncle, Stephen Riady.

The move leaves no Riady family representation, other than John himself, on the board of commissioners, despite owning 55 per cent of the company.

Riady certainly has his work cut out for him. For the six months to June 30, 2020, Lippo Karawaci recorded net losses of Rp1.22 trillion, on the back of Rp5.33 trillion in revenues.

In April, Fitch revised its outlook for Lippo from stable to negative, based on what it perceived as “heightened risk that Lippo may not be able to meaningfully improve its operating cash flow at the holding company level” due to the challenges brought about by COVID-19.

And, Riady himself has acknowledged that the “golden years” for real estate developers in Indonesia are passed.

“The property sector has been suffering. I think it will never return to its golden years before 2011,” he said. “The years 2008-2011 were the years of the commodities boom when everyone became very rich. The majority of buyers were speculators; very few were end-users.”

Indeed, that property boom and consequent urban sprawl have only been harmful – and a contributing factor to how aggressively the coronavirus outbreak took hold in Indonesia, in the view of Rujak’s Marco.

“The capitalisation of property is partly responsible for unsustainable urbanisation. I’m talking about speculative and aggressive investment in property,” he said.

To that end, Lippo Village’s promise of well-designed living spaces could be welcomed by Indonesia’s burgeoning class of homeowners, and help revive Lippo Karawaci’s fortunes.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.