SINGAPORE (Nov 25): As property heavyweights CapitaLand, City Developments (CDL), CDL Hospitality Trusts (CDLHT) and Ascott Residence Trust (Ascott REIT) band together to in a bid to redevelop the Liang Court site into an integrated development, market watchers opine that all four developers are poised to gain attractive returns. 

On Nov 21, it was announced that the site – comprising Liang Court mall, Novotel Singapore Clarke Quay (NCQ) hotel and serviced residence Somerset Liang Court Singapore – would be turned into an integrated development. 

See: CityDev, CapitaLand lead consortium to redevelop Liang Court site at Clarke Quay

In a Friday report, analyst Derek Tan from DBS Group Research terms the redevelopment a “four-way win” for the companies involved. He says it would allow the joint venture to own both the residential and commercial components, as well as tap on one another’s synergies.

An attractive deal

On the whole, Tan notes that the redevelopment will result in the site boasting a gross floor area (GFA) or 100,263 sqm. 

“The hotel and serviced residence components will be owned by CDLHT and Ascott REIT respectively, while the JV will maintain ownership of the 700-unit residential towers and commercial component,” says Tan. 

In addition, the joint venture has obtained the in-principle approval for the land’s leasehold to be topped up to a fresh 99-year lease, a significant hike from the existing remaining leasehold of 57 years.  

“The rejuvenation of the Liang Court precinct will compliment and create synergies as both developers already own surrounding properties within the vicinity,” says Tan.

CDL owns office-cum-retail integrated development Central Mall along Magazine Road, while CapitaLand has a stake in Clarke Quay Mall through CapitaLand Mall Trust (CMT) and a stake in Park Hotel Clarke Quay through Ascott REIT.

According to Tan, the developers stand to gain higher returns through a “precious land-bank” within the heart of the city. 

He describes the estimated cost of $1,000 psf and an all-in cost of some $1,400 psf as “attractive and unattainable”, especially when compared to prices at recent government land sales for sites within the city. 

“The estimated end value of $2.9 billion for the completed redevelopment represents an attractive return of close to 30% for the project,” says Tan. 

Handsome profits in pipelines for Ascott REIT

Tan notes that Ascott REIT’s partial sale of its stake in Somerset Liang Court to the consortium is poised to pay off in the longer term.

In particular, Tan attests that Ascott REIT’s exit price at $163.3 million, or a 44% premium, emphasises the REIT’s conservative book value. 

“The use of proceeds towards the redevelopment of a refreshed serviced residence product with a hotel license is positive as it empowers the REIT with more operational flexibility to capture a broader clientele,” says Tan. 

“Upon completion, the expected upside in valuation and cashflows will underpin Ascott REIT’s longer term growth profile,” adds Tan. 

The majority of divestment proceeds, or some $157.3 million, will be used in a combination of funding the redevelopment, as well as distribution to unitholders to stabilise DPU during the four-year development phase. 

Although Ascott REIT could well thrive on the promising payouts, Tan estimates that the loss of income from Somerset Liang Court will reduce the REIT’s pro-forma FY18 distributable income by $7.2 million, or 4.6%. 

Yet, Tan opines that the proposed merger between Ascott REIT and Ascendas Hospitality Trust, which is slated for completion by end-2019, could cushion the impact of this. 

“Following the merger, Ascott REIT’s portfolio will increase to approximately $7.6 billion, and debt headroom will accordingly rise to $1 billion,” observes Tan. “With ample debt headroom, Ascott REIT could consider acquisitions in the near future to mitigate the loss of income from
Somerset Liang Court.”

CDLHT cushioned from potential cost overruns

Apart from divesting NCQ for a $36.6 million gain, CDLHT had concurrently entered into an agreement with the joint venture to purchase the new hotel when completed in 2025. In Tan’s view, this could well work in CDLHT’s favour. 

“The forward purchase price will be the lower of $475 million or 110% of development costs. This protects CDLHT against any potential cost overruns from the entire integrated development,” says Tan. 

Tan adds that the hotel is set to deliver additional benefits to CDLHT upon completion. 

“The operator has guaranteed a step-up in revenues over three years once the new hotel is completed. Initial yield for the new hotel will be approximately 2.5-3.0%, and gradually stabilising at 5.6% by the third year,” says Tan. 

In addition, the brokerage is also bullish on CDLHT’s acquisition of W Singapore – Sentosa Cove, which marks its foray into the luxury Sentosa Island segment. 

“With average occupancy of 76% in FY18, we believe there are potential RevPAR upside with the $4.5 billion expansion of Resorts World Sentosa and transformation of Sentosa Island,” says Tan, who notes that the lower occupancy recorded in FY18 was partly due to the opening of the 606-room Village Hotel Sentosa owned by Far East Hospitality Trust. 

Similar to Ascott REIT, Tan cautions investors about CDLHT’s potential loss of income from the absence of contributions from NCQ. 

“Although the income from of W Hotel will help to mitigate the loss of income from NCQ, there is still a near term earnings void. We believe the Manager can disburse divestment gains to stabilise DPU while on the hunt for more accretive acquisitions,” says Tan. 

On the whole, DBS remains bullish on Liang Court’s revamp, which will see both Ascott REIT and CDLHT unlock gains upon selling their stakes in the existing development at an attractive premium to net asset value (NAV). 

“While proceeds can be utilised towards “trading up” the quality of their respective portfolios, we see that these strategic maneuvers will drive significant value in the medium term,” concludes Tan. 

DBS has a “buy” call on both CDL Hospitality Trusts and Ascott REIT with target prices of $1.80 and $1.45 respectively. However, the brokerage has a “hold” call on City Developments with a target price of $11.00. 

As at 4.22pm, units in CDL Hospitality Trusts are trading 2 cents higher, or 1.3% up, at $1.60, while units in Ascott REIT are trading 4 cents higher, or 3.0% up, at $1.36. Shares in City Developments are trading 2 cents lower, or 0.2% down, at $10.76.