Singapore Property - Maybank Kim Eng 2017-09-22: Land Market Springs To Life

Singapore Property - Maybank Kim Eng 2017-09-22: Land Market Springs To Life Singapore Property Developers Property Stocks UOL GROUP LIMITED U14.SI CITY DEVELOPMENTS LIMITED C09.SI GUOCOLAND LIMITED F17.SI HO BEE LAND LIMITED H13.SI CAPITALAND LIMITED C31.SI

Singapore Property - Land Market Springs To Life

Busy month in land market; remain POSITIVE 

  • We see a busy month ahead for Singapore’s land market. Tender for a prime commercial site on Beach Road will close on 28 Sep. Those of another nine enbloc deals will close by 16 Oct. 
  • We expect strong bids for the commercial site and see a positive read-through for office REITs and developers with large office exposure. 
  • Given the recent flurry of enbloc deals, we expect developers to be more selective. Our thesis that a resurgent enbloc market could ease land-price escalation could be put to the test in the coming month. 
  • We remain POSITIVE on the sector, expecting catalysts from a rebound in property prices. 
    • UOL and CityDev are our preferred large-cap developers. 
    • GuocoLand offers attractive relative value for investors with lower liquidity thresholds. 
    • CCT is our top office REIT for upside from its Golden Shoe redevelopment. 
  • Risks include a sharp fall in property prices.

Beach Road Tender Closing on 28 Sep 


  • As prime commercial land remains in short supply, we expect strong bids for the Beach Road site, whose tender will close on 28 Sep. Located at the edge of Singapore’s CBD, the land parcel is bordered by Nicoll Highway, Beach Road and Rochor Road. It will be indirectly connected to the Bugis MRT station via underground links to nearby project DUO.
  • DUO and recently-completed South Beach are the newest office buildings in this office submarket. Older buildings in the area include Shaw Tower, Suntec City, The Gateway and Parkview Square.

Predominantly offices; good reasons to add residential component. 

  • Tender conditions require the winning developer to use at least 70% of the site’s maximum 88,313 sqm GFA for offices. Assuming an efficiency ratio of 85%, the minimum net lettable area (NLA) for offices would be 566k sf. This would make it comparable to the office components of DUO (570k sf NLA) and South Beach (510k sf NLA). The balance can be used for a hotel, serviced apartments, residential units or retail space, subject to a maximum of 3,000 sqm for retail.
  • With an impending rebound expected in Singapore’s residential market and a less restrictive development timeline than a typical residential site, we see good reasons to incorporate a residential component. 
  • As a commercial government land sales (GLS) site, the residential component is not subject to Additional Buyers’ Stamp Duties and QC rules, which would limit its sell-by dates. This implies a lower-risk option for the winning developer to replenish its residential inventory.


  • The land was released from the government’s reserve list in June this year, after a developer triggered its sale by committing to a minimum bid price of SGD1.138b or SGD1,197 psf ppr. 
  • In a recent poll conducted by The Straits Times, consultants are expecting the top bid to come in at SGD1,262-1,400 psf. With the exception of a Central Boulevard site sold to IOI Properties (IOI MK, Not Rated) in November last year, the minimum bid price committed is higher than the unit prices of all office sites sold in the past decade. Due to the rental difference between these two office sub-markets, it is unlikely that the Beach Road plot will command the same pricing as Central Boulevard.

Valuation scenarios. 

  • Landlords of newer office buildings in the vicinity are asking for about SGD9.50 psf today. Those of older offices have lower asking rents of SGD4.50-8.00 psf. Given our view of a bottoming office market, we believe rents of a new office building in the area could reach SGD11 psf by the time the Beach Road site is completed in 2022.
  • Assuming cap rates stay low at 3.50%, we estimate an office capital value of almost SGD3,000 psf. This should underpin a gross development value (GDV) of SGD2.4b for an office development with ancillary retail space. We believe a developer can achieve similar valuations by including a residential component. 
  • Apart from diversification benefits and a lower-risk alternative for replenishing residential stock, the developer could potentially enhance the project’s IRR with early cashflows from residential pre-sales. Even at the top end of consultants’ forecast of a SGD1,400 psf land cost, we estimate a pretax development margin of 18%. 
  • With these assumptions, we estimate a breakeven office price of SGD2,400 psf or rentals of SGD8.90 psf. This implies that the project will be unprofitable only if office rents stay stagnant in the next 4-5 years, which is too bearish, in our view.

Positive read-through for office stocks. 

  • We believe bullish bids will be interpreted positively for stocks with large office exposure. As a predominantly office site, bullish bids could enhance the asset values of office landlords by reflecting the high replacement costs for their buildings. This theme played out after the Central Boulevard land tender in November last year; it could take centre stage again after this deal. 
  • Bullish bids would also be an expression of developers’ confidence in the sector’s outlook and provide a positive read-through for office REITs, which are the most concentrated proxies, and developer landlords with large office exposure.

Spoilt for Choice in Resurgent Enbloc Market 

14 deals done, 10 on the market, more than 20 in the pipeline. 

  • We provide an update of our compilation of enbloc deals in the pipeline. 
  • On top of the 7,500 units added from deals concluded YTD, enbloc deals on the market today could offer another 6,000 units to developers’ inventories. Another 20+ deals at various stages of the process could add a further 17,500. 
  • Given the flurry of deals, we believe developers can afford to be more selective. Our thesis that land-price escalation could ease with greater land supply will be put to the test when the results of nine deals due by 16 Oct are announced. We reiterate that this resurgence has also set a positive feedback loop in motion. Displaced households looking for replacement homes will front-load demand and push out supply.

Expect cautious bids for large sites. 

  • While developers are spoilt for choice in the enbloc market, we believe listed players will remain cautious in bidding for large sites. This is due to punitive QC rules, which require foreign developers to complete their projects within five years and sell all units in another two years. 
  • Listed developers are considered foreign developers; privately-held developers owned by Singaporeans are not. This “unfair” advantage was evident in a recent deal. 
  • Recently-privatised Sim Lian was the only bidder for Tampines Court, which could potentially yield 2,500 units when redeveloped. We believe the difference in QC treatment largely explains Sim Lian’s sole bid, as it is no longer subject to this rule after its privatisation.

Listed developers could contemplate privatisation if “unfair” advantage is not addressed. 

  • While QC penalties alone may not be enough to trigger privatisation, we believe some residential developers could start contemplating delisting if this “unfair” advantage is not addressed by the regulators. 
  • A potential screen for privatisation candidates, in our opinion, includes a low free float, depressed valuations and experience in developing residential projects in Singapore. Within our universe, we see Ho Bee as the strongest candidate. It trades at an undemanding 0.53x P/BV and 44% discount to RNAV. Free float is just 25%, which translates to a free-float market cap of a mere SGD0.4b. 
  • While it does not have projects facing QC deadlines, privatisation could give it more flexibility when acquiring fresh enbloc sites.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-09-22
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