CapitaLand - Boosting Recurring Income Stream
- Media sources have reported that CapitaLand is currently in exclusive negotiations to acquire Asia Square Tower 2 from Blackrock.
- We expect the pricing to be in the range of SGD2.1-2.3bn, assuming SGD2,700- 2,900psf for the transaction. The deal if concluded, would strengthen its recurring income base and strategically position it ahead of a potential rebound in the office sector.
- Sales in Singapore launches have picked up post increased marketing efforts but the residential segment in China is likely to see a slowdown from recent policy changes.
- Maintain NEUTRAL with revised TP of SGD3.84 (from SGD3.60, 4% upside).
Potential acquisition of Asia Square Tower 2?
- Media sources have reported that CapitaLand is currently in exclusive negotiations with BlackRock for the purchase of Asia Square Tower 2. Recall that Blackrock had in 2Q16 sold Asia Square Tower 1 for SGD3.4bn (SGD2,704psf) to Qatar Investment Authority. While CapitaLand was initially in the race then, it later pulled out of the deal.
- Asia Square Tower 2 has c.750,000 sq ft of office space, 30,000 sq ft of retail space and a hotel component (Westin Hotel). Westin Hotel (308 rooms) was sold to Japan's Daisho Group for SGD468m in late-2013.
- Assuming a pricing range of SGD2,700-2,900psf puts the valuation of the remaining building at SGD2.1-2.3bn. Considering 100% debt funding would increase its net gearing (net debt/equity) to 0.46x from 0.41x.
- The deal, if concluded, would strengthen its recurring income base and allow it to strategically position itself ahead of a potential rebound in Singapore’s office sector.
China policy tightening measures likely to slow down sales.
- On 18 Mar, selected Chinese cities including Beijing, Guangzhou and Zhengzhou, announced new rounds of policy measures to ease property prices. The measures included raising down-payments for second home purchases (to 60% from 50%) and limiting maximum mortgage repayment periods to 25 years. Our China property analyst reckons that the measures would negatively impact investment demand with high-end to luxury projects seeing a bigger impact.
- With CapitaLand targeting the mid- to high-end residential segment, we expect sales to slowdown in the near term.
- CapitaLand has about 8,430 units in the launch pipeline across China for 2017, mainly across tier-1 and tier-2 cities.
Clearing inventory across Singapore launches.
- CapitaLand officially launched its 124-unit Marine Blue project earlier this month, and has so far sold 38 units (as at February) at ASP of SGD1,700psf. Sales across D’Leedon, Interlace and Sky Habitat have also picked up post the launch of its Stay-ThenPay programme.
- Overall, it remains cautious on residential outlook and has been trimming its inventory with capital being redeployed to growth markets.
Maintain NEUTRAL with higher TP of SGD3.84.
- We lower our RNAV discount to 20% (from 25%), in line with sector peers. Our model does not factor in any impact from potential acquisitions.
- Key re-rating catalysts include setting up of more private real estate funds, opportunistic M&As, and a major policy relaxation in China and Singapore.
- Key downside risks include a prolonged real estate slowdown, and faster-than-expected rise in interest rates.