Perennial Real Estate Holdings - DBS Research 2020-05-08: To The Greatness Of Small

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PERENNIAL REAL ESTATE HLDGSLTD (SGX:40S)

Perennial Real Estate Holdings - To The Greatness Of Small

• Perennial Real Estate Holdings consortium is divesting its 50% stake in AXA Tower for S$1.68bn to a JV formed with Alibaba.
• The price translates to S$2,270psf of NLA and implied yield of c.3%.
• AXA Tower could potentially be redeveloped into a S$4bn integrated project that can yield up to 6% on cost with potential development profit of c.S$200m.
• 3-way win-win partnership –
  1. Perennial Real Estate Holdings obtains cash to repay debt due in 3Q20 and retain its participation on the redevelopment,
  2. Alibaba expanding as anchor tenant,
  3. decanting of CBD office space bodes well for a balanced demand-supply office market to sustain rents.

Divesting 50% stake in AXA Tower to form JV with Alibaba Singapore

• Perennial Real Estate Holdings (SGX:40S) announced the divestment of Perennial-led consortium’s 50% stake in AXA Tower to Alibaba Singapore for an agreed price of S$1.68bn to form a Joint Venture (JV) for the potential redevelopment of AXA Tower.
• The property price translates to S$2,270 psf based on current NLA of c.740k sqft and implied yield of c.3%.
• Perennial Real Estate Holdings will dispose its existing 31.2% stake in AXA Tower for net proceeds of S$196m and reinvest only a 10% effective stake in the new JV for S$60m.
• Perennial Real Estate Holdings will recognise a divestment gain of S$45m. The transaction is expected to complete in June 2020.

Redevelopment of AXA Tower – A mixed development to maximise its potential

• AXA Tower’s existing GFA is c.1.05m sqft with remaining land lease of 61 years. Approval has been secured to lift AXA Tower’s gross plot ratio to GFA of 1.24m sqft (+18%), and further to 1.55m sqft (+48%) under the CBD Incentive Scheme to develop an integrated mixed development including hotel and residential.
• Based on conservative assumption of built-up potential of 1.24m sqft of office GFA, we estimate that the property price translates to c.S$2,100 psf (including estimated AEI capex of c.S$145m) on assumed NLA of 870k sq ft. As a comparison, office properties transacted in 2019 were priced at a range of S$2,300psf to S$2,900psf.
• Adjusted for land lease tenures, AXA Tower’s property value translates to S$2,800psf, while a redeveloped AXA Tower gross development cost (GDC) translates to S$2,300psf to S$2,600psf compared to office properties being transacted at a range of S$2,600psf to S$3,300psf.
• Taking this a step further, which we believe to be the likely scenario that AXA Tower will be developed into an integrated development comprising of office, hotel and residential components. We estimate the gross development value (GDV) for the integrated development to be c.S$4.1bn (total project to cost c.S$3.1bn). We estimate that the commercial component (office / hotel) can yield up to 5.7% on cost with potential development profit of c.S$200m. This translates to ROE of 36%.

Our thoughts – a 3-way win-win partnership

• Perennial Real Estate Holdings has repeatedly demonstrated its ability to buy assets at good value, ‘value-add’ and realise the full value of the assets. With the assistance of its business partners, Perennial Real Estate Holdings has time and again delivered on the development potential of investments secured.
  1. With AXA Tower to be redeveloped either into a bigger office property or an integrated development, Perennial Real Estate Holdings stands to benefit from
  2. a cash proceeds of S$138m to repay its S$280m MTN due in July / Aug 2020,
  3. opportunity to participate in the redevelopment potential of AXA Tower, and
  4. future recurring income from a bigger commercial property (+18%) or an integrated commercial property.
• As a JV partner, Alibaba Singapore has the potential to expand its presence in Singapore as an anchor tenant at AXA Tower. We estimate Alibaba currently occupies c.120k sqft (16%) of space at AXA Tower.
• On a bigger picture, we believe this transaction and the potential redevelopment based on the CBD incentive scheme could lead to more redevelopment opportunities of older office buildings in Singapore, which bodes well for office landlords.
• The decanting of CBD office space could further reduce the already tight upcoming supply in FY2020-FY2021 and cushion the impact of the expected huge supply in FY2022/FY2023. The reduction of office space may lead to a better demand-supply balance given potentially softer office demand given the weakened economic outlook caused by COVID-19 pandemic. This should help to support office rents at the current level.
• See Perennial Real Estate Holdings Share Price; Perennial Real Estate Holdings Target Price; Perennial Real Estate Holdings Analyst Reports; Perennial Real Estate Holdings Dividend History; Perennial Real Estate Holdings Announcements; Perennial Real Estate Holdings Latest News. 

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-05-08

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