CapitaLand (CAPL SP) - DBS Research 2017-12-20: Deepens Exposure In Shanghai’s Fast Growing Decentralised Office Market

CapitaLand (CAPL SP) - DBS Vickers 2017-12-20: Deepens Exposure In Shanghai’s Fast Growing Decentralised Office Market CAPITALAND LIMITED C31.SI

CapitaLand (CAPL SP) - Deepens Exposure In Shanghai’s Fast Growing Decentralised Office Market

  • CapitaLand Enters into agreement to acquire adjacent site to Innov Center in Wujiaochang district.
  • Total investment of RMB 1.3bn to develop a new Grade A office tower.
  • Estimated entry yield of 4.3% with potential total return of 15%.
  • Maintain BUY, TP S$4.35.

What’s New 

Acquisition of land plot in Shanghai. 

  • CapitaLand Limited (CAPL) announced that the group has entered into an agreement with an unrelated third party to acquire a commercial land plot in Wujiaochang decentralised business district (DBD), Shanghai for RMB 838m (S$ 171m). This signals the group’s deepening presence in Wujiaochang district, which is one of Shanghai’s most vibrant DBDs.
  • The land plot is the group’s second investment in Shanghai’s suburban office market and is located adjacent to the group’s property – Innov Centre. CapitaLand plans to build a new 37,765 sqm Grade A office building on this site (named Innov Centre phase 2), planned for completion in 2020. 
  • On a completed basis, the total project development cost is estimated to be c. RMB 1.3 bn (S$265m).

Our thoughts.

Value accretive deal. 

  • We are positive on this investment as the group’s deepening exposure in Wujiaochang brings about a myriad of operational benefits. 
  • Located next to Innov Centre, the development when completed in 2020, will increase CapitaLand's operational footprint in the submarket close to 118,466 sqm. This empowers CapitaLand with the increased ability to tap a wider tenant base, potentially larger tenants who require bigger spaces. A target tenant market will be the financial technology firms (fintech), a fast growing industry in China. 
  • The confidence that management has in the Wujiaochang district is boosted by robust leasing activities at Innov Centre, which is 40% occupied within six months of acquisition. Both properties (Innov Center and the planned extension) will be managed together, implying economies of scale in terms of on-site management and asset management. 
  • Upon completion of this acquisition, CapitaLand will have 19 properties and over 1.4m sqm in GFA in Shanghai across retail, office and hospitality properties.

Decentralised offices have a longer operational runway. 

  • The high rents in the central business district (CBD) have pushed tenants to look at decentralised options and we believe that CapitaLand will capture this trend, especially when the properties are located in a submarket with excellent connectivity to public transport – including the operational metro line 10 and the upcoming line 18.
  • In addition, Wujiaochang is seen as an up-coming technological and innovation business zone near top tertiary education institutions such as Fudan University, Tonji University, and Shanghai University of Finance and Economics. 
  • Most importantly, the submarket has attracted a steady number of multi-national companies including Continental AG, Deloitte, Henke and Nike, AECOM, IBM and Oracle. This bodes well for CapitaLand in the longer term especially when the working population within Wujiaochang increases over time, which will encourage companies to set up offices there.

Estimated 4.3% entry yield; potential total return of close to 15%. 

  • The group is expected to utilise onshore funds, which will improve the group’s capital productivity. 
  • Assuming a market rent of RMB 6 / day at full occupancy implies an entry yield of close to 4.3% for the new acquisition, but with potential to hit closer to the 5.0% level in the medium term once demand picks up for the properties in the submarket when a critical mass of tenants and properties are built up over time.
  • Based on GFA of 37,765 sqm, the total project development cost is RMB 1.3bn, representing an investment of close to RMB 34,000 per sqm, which is close to the c.RMB 32,700 per sqm paid for Innov Center phase 1 (formerly known as Guozheng Centre).
  • Assuming a market transaction level of close to RMB 38,500 sqm achieved for Innov Tower back in Jul’17, the group could potentially see a fair value gain of c.RMB 153m upon completion in the medium term. This implies a total return of c.15% for this project (inclusive of c.4% net operating income yield and 11% upside in capital value).

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-12-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.350 Same 4.350