SINGAPORE (Dec 20): DBS is maintaining its “buy” call on CapitaLand with a target price of $4.35 following the group’s latest acquisition of a commercial site in Shanghai.
The group on Tuesday announced that it is acquiring a commercial land plot in Wujiaochang decentralised business district (DBD), Shanghai for RMB838 million ($171 million).
See: CapitaLand to buy commercial site next to recently-acquired Innov Center in Shanghai for $171 mil
This marks the group second investment in Shanghai’s suburban office market and is located adjacent to the Innov Center, which the group currently owns.
In a Wednesday report, analyst Derek Tan says, “We are positive on this investment as the group’s deepening exposure in Wujiaochang brings about a myriad of operational benefits.”
When the development completes in 2020, it will increase the group’s operational footprint in the submarket close to 118,466 sqm, empowering the group with increased ability to tap a wider tenant base and potentially larger tenants who require bigger spaces.
Furthermore, the group’s management is also confident in the Wujiaochang district as the Innov Center saw robust leasing activities, reporting 40% occupancy 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.
“The high rents in the central business district (CBD) have pushed tenants to look at decentralised options and we believe that CAPL 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,” says Tan.
The Wujiaochang district is also seen as an up-coming technological and innovation business zone and has attracted a steady number of multi-national companies.
The analyst believes that this bodes well for the group in the longer term especially when the working population within the DBD increases over time, encouraging companies to set up offices there.
The group is also 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.
Meanwhile, the group could potentially see a fair value gain of about RMB153 million upon completion in the medium term, assuming the market transaction level of about RMB38,500 sqm achieved for Innov Tower in July 2017.
This implies a total return of around 15% for this project.
As at 11.55am, shares in CapitaLand are trading at $3.51 or 0.8 times FY18 book with a dividend yield of 3.3%.