A new development along Somerset is set to enlarge the dominance of [email protected] mall and the profile of its owner Lendlease Global Commercial REIT (LREIT), with acquisitions on the horizon expected to boost DPU (distribution per unit), says DBS Group Research. 

Analyst Derek Tan likens the REIT to a “lotus flower in bloom” in a September 17 note, maintaining his “buy” call on the REIT with a raised target price of 90 cents from 85 cents previously.

“We see more upside from the repositioning [email protected]’s tenant mix in view of its enlarged footprint to approximately 330k sq ft and shopper base following the launch of Grange Road carpark redevelopment in 2Q2022,” says Tan. 

After winning a tender as part of the 2019 URA Master Plan to rejuvenate the Orchard and Somerset areas, the REIT announced in June plans to redevelop the site into an experiential food culture and history attraction, while teasing a collaboration with independent cinema operator The Projector. 

The carpark, located off [email protected], is expected to cease operations later this year. “With projected returns of 18% from the redevelopment, we see DPU growing by 3% CAGR (compound annual growth rate) in FY2021-2022,” Tan adds.

The development project is estimated to cost around $10 million and will be designed by DP Architects, the local firm behind the design of Our Tampines Hub.

“Various retail concepts had been previously tested at Grange Road Car Park, including the Flashbang street market, but we believe that the long tenure period will help anchor the area as a designated event space within the Orchard and Somerset precinct,” he says.

Moreover, we envision that the lease terms for non-anchor tenants will be shorter for this event space to keep concepts fresh and may serve as an expansion or test bed option for new retail concepts for existing tenants at [email protected], putting the mall in the heart of the retail ecosystem.”

LREIT was listed on October 2, 2019 as a real estate investment trust with the principal objective of owning in-producing real estate across the globe. Units in the REIT surged 6.3% at the open from its offer price, the biggest jump among Singapore REITs in the past six years, since SPH REIT opened at 8.8% above its offer price in 2013. 

See: Biggest Singapore REIT IPO gain in 6 years shows yield thirst

The initial portfolio comprised full ownership stakes in two assets, namely retail mall [email protected] (Singapore) and office asset Sky Complex (Italy). “[email protected] continues to show resiliency with high tenant retention of >90% maintained, while churning a surprise value appreciation amid Covid-19. Sky Complex lease remains rock-solid with a 12-year triple net master lease expiring in 2032,” says Tan.

The mall has proven to be able to hold up amid the Covid-19 storm, highlights Tan. “We had previously shortlisted [email protected] as one of the dominant malls in Singapore due to its (i) prime location along Orchard Road with direct connectivity to Somerset MRT Station, (ii) sizeable footprint of 288,000 sq ft with expansion potential from the uplift in unutilised plot ratio and with additional GFA from Grange Road car park redevelopment, (iii) strong positioning targeting millennials, and (iv) superior tenant sales generation.”

“These qualities could be the factors behind the mall’s historically high tenant retention rate at over 90%. With short term catalysts of plot ratio maximisation and redevelopment of Grange Road carpark, [email protected] will likely go from strength to strength, and further anchor the mall’s strong positioning within the Somerset precinct.”

See also: Why FCT, CMT, Lendlease Global Commercial REIT will do well ahead: DBS

Finally, the potential acquisition of quality suburban malls JEM (Jurong) and possibly Parkway Parade (Marine Parade) or a partial stake in Paya Lebar Quarter (office component) may unfold in the near- to medium-term horizon, says Tan. “We believe that the acquisition of stakes in either property will likely utilise a greater proportion of debt given its high cost of equity. With a gearing headroom ranging from $280 million (based on 45% gearing) to $450 million (50% gearing), there is capacity for LREIT to drive higher growth in DPUs.”

As at 12.28pm, units in Lendlease Global Commercial REIT are trading at 0.5 cents higher, or 0.75% up, at 67.5 cents.