I’m not sure if any of you own shares of Imperium Crown, but I can imagine that it must have been a bumpy ride being a shareholder of this company.

2 years ago in mid 2014, the company then known as Communicating Design International Limited proposed divestment of its outsourcing and marketing business to venture into property development and management in Japan.

In early 2015, Imperium Crown successfully acquired One Room Mansions and Richwood Asia for SGD 31mil which owns 3 properties:

  • Green Forest Kuramae – A freehold 78-unit residential development.
  • Green Forest Itabashi – A leasehold 75-unit mixed use development consisting of 75 residential units
  • Hatchobori Place – A six-storey commercial office development with a supermarket on the ground floor.

Later that year, the Group announced the acquisition of another 2 properties, New City Apartment Minowa and New City Apartment Kuramae for JPY 1.76bil (equivalent to SGD 19.56mil at the time of purchase)

In its latest announcement, the company has said to be reviewing its operations in Japan and Japanese assets (which is 90% of its Net Asset Value). Although this proposal has yet to be confirmed, the newly appointed CEO has already expressed concerns on the economic conditions in Japan and its property market in FY 2016 Annual Report.

The Group’s Chairman and CEO said that the yields on real estate assets will continue to be low as the Japanese central bank continues to lower interest rates with the aim of spurring economic growth. As such, the board and management are of the view that the current portfolio of Japanese properties does not provide the most optimal return on capital deployed.

I know some of you might be thinking; low rates should be favourable for property investments right?

Well, that is true if you’re buying Japanese properties in the early stages of rate cuts.

jp-property-price-index
PPI 5 yr data (source: Tradingeconomics)

The following are Japanese bond yields 10y, 5y and 2y respectively

(source: Tradingeconomics)

JPY10y.png

jpy5y

 

JPY2y.png

 

With the FED setting tone for higher interest rates moving forward, I reckon global bond yields to follow suit.

I doubt Japanese rates would stay negative for long.

As of FY16, the group recorded SGD 16.5mil fair value loss on its initial 3 properties, and has expected softening rental rates. The group has highlighted its concern that the return on capital for Japanese properties barely commensurate with the capital investments made by the Company in these assets.

If I was a shareholder of Imperium Crown, I’d be worried.

It’s only been a year since the acquisition of the Japanese properties and this suggests that the management lacks proper planning on capital allocation.

The CEO has also spoken about exploring new opportunities in the real estate industry directing its attention towards property management services that complements its core business. In addition, the board hopes to re-channel capital into property development and property investment projects in Southeast Asian markets (Singapore and Malaysia).

As part of its efforts to explore new sources of revenue, the group announced proposed acquisitions of 30% stake in 2 property investment companies in China; Linyi Cineplex and Zaozhuang Cineplex both have yet to be fully operational.

Commenting on the rationale of the proposed acquisitions, Imperium Crown’s CEO explains, “We are excited about gaining exposure to the Chinese film market. China has approximately 23 theatres per million residents as compared to the United States, which has roughly 100 theatres per million. Given the popularity of movies amongst Chinese urbanites, the Chinese film industry has huge potential for growth.”

At the moment, I feel that the management seems to lack a clear path of where the company needs to go. I think that they have not found a niche in the real estate industry and are basically trying out new ideas to see if it fits into their plans. As a small cap property developer, they are limited by their size to go against the large caps of REITs or known developers for long term yield return. The group needs to target deals that are unorthodox and focused, its move into the chinese film industry could be key but its way too early to tell.