SINGAPORE (May 21): The two grey towers of The ­Metropolis, situated right outside the Buona ­Vista MRT station, stand at 21 and 23 storeys each. The towers have more than one million sq ft of net lettable area and an eye-catching, state-of-the-art environment. Surrounded by trees and with artwork by world-renowned artists decorating the public area of the complex, it offers a pleasant transition from the MRT to the office towers.

The building has world-class facilities and lives up to its reputation of being the only Grade-A office building in the one-north precinct in Buona Vista. It is an integrated development comprising not only office towers but also a plethora of retail and F&B outlets such as Starbucks, Simply Sandwich and Mr Bean.

The Metropolis is home to tenants such as the Singapore Exchange, and MNCs Procter & Gamble, General Electric and Heineken Asia Pacific. It is also where Ho Bee Land’s headquarters are located. More importantly for the company, The Metropolis’ rental income contributed to some 50% of the developer’s revenue last year. According to Ho Bee’s 2017 annual report, rental income for FY2017 was $90.3 million, contributing about 55% to group revenue for the year. Of this, 91% or $82.71 million was from The Metropolis. The balance was mainly from industrial buildings and residential projects in Sentosa Cove.

Based on an announcement to SGX, The Metropolis was valued at $1.82 billion as at Dec 31, 2017. Assuming that operating costs for The Metropolis are 15% of rental revenue, its yield is likely to be around 3.8%. (In comparison, CapitaLand Commercial Trust’s [CCT] net property income is about 80% of its revenue.) Ho Bee has said that capitalisation (cap) rates for its commercial buildings in Singapore range from 3.75% to 4.75%. The valuation of The Metropolis works out to be at the lower end of the cap rate range.

Aggressive upwards revaluation

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The Metropolis has, however, been aggressively revalued since its completion in 2014. Based on publicly available announcements, it was valued at $1.51 billion as at Dec 31, 2014 (see Table 1). In comparison, the valuation of Capital Tower, owned by CCT, has not moved much since 2014. That year, Capital Tower was valued at $1.309 billion, or $1,770 psf. This rose to $1.363 billion, or $1,847 psf, as at Dec 31, a gain of 4.2%. In the same period, The Metropolis gained 20%. The fair-value gain for building was $38 million last year, compared with $162 million in FY2016.

Capital Tower and CCT are not really comparable to The Metropolis and Ho Bee. Capital Tower, which is owned by a real estate investment trust, is valued based on the cash flow it generates using the income capitalisation approach and discounted cash flow method. The Metropolis is owned by a property developer, and its valuation method and metrics appear to be a lot more flexible. It is valued based on the comparable market comparison method and the income capitalisation approach. In the comparable market comparison method, the transacted prices of comparable properties are used as a comparison. These ranged from $575 to $1,800 psf in FY2017, and $616 to $1,742 psf in FY2016.

Although The Metropolis seems more aggressively valued, its valuation works out to $1,685 psf compared with Capital Tower at $1,847 psf (as at Dec 31).

The outlook for office property this year has improved. “The Metropolis is currently 100% leased and positive rental reversions are expected upon renewal, in line with the market,” Ho Bee says in its annual report. In a recent Phillip Securities report, analyst Tan Dehong says 30% of leases are due for expiry this year. “Expect flat to low single-digit reversions. Average rents for the project fall within the $7.50 psf to $8 psf range.” If this is the case, The Metropolis should record very limited revaluation gain this year.

Sentosa Cove: Unsold properties on the market

The numerous cooling measures since 2009 — nine, or 10 if the rise in stamp duty to 4% for properties above $1 million is included — have left Ho Bee with a lot of unsold units at Sentosa Cove.

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It owns 35% of Cape Royale, where all 302 units were unsold as at Dec 31. Cape Royale announced a fair value loss of $48 million for FY2017, of which Ho Bee’s share was $16.8 million. The valuation of Cape Royale is now $1.32 billion, or $1,882 psf. Ho Bee’s share of Cape Royale works out to around $460 million.

Ho Bee also owns 90% of Turquoise, which has 48 unsold apartments, and 50% of Seascape, which has 103 unsold units. Properties held for sale were valued at $184 million as at end-2017, while Ho Bee’s 50% share of Seaview was separately carried at $235 million.

“About 80% of the units in our three Sentosa Cove projects — Turquoise, Seascape and Cape Royale — were leased out,” Ho Bee says. “The recovery in the residential property market has triggered an increase of interest in the high-end market including Sentosa Cove. Buyers and investors are beginning to see value in this segment. To ride this improving sentiment, the group will market its unsold units in Turquoise and Seascape this year,” it adds.

Recently, EdgeProp reported that a 2,411 sq ft, four-bedroom unit at Turquoise that was put up for mortgagee sale was sold for $3.6 million ($1,493 psf) on March 21, marking the fifth successful mortgagee sale at Sentosa Cove since 2017.

The 91-unit Turquoise has seen 14 transactions (including the one on March 21) over the past five years, with eight being mortgagee sales. On Jan 29, a 2,433 sq ft unit was auctioned for $3.59 million ($1,476 psf). At an average price of $1,400 psf, Ho Bee’s share of its saleable area at Turquoise could fetch $155 million. Seascape became notorious for the sale of a four-bedroom unit in February last year at a $6.6 million loss. At that time, it was the biggest loss ever at Sentosa Cove. The seller, a Russian national, purchased the unit for $12.8 million ($3,146 psf) in June 2010 and sold it in February 2017 at $6.2 million ($1,524 psf) for a loss of 52% over seven years.

According to URA data, transaction prices at Seascape appear to have recovered, with the latest unit sold at $2,080 psf. Ho Bee’s share of Seascape could fetch more than $200 million if the units are sold at $1,700 psf, well below the last transacted price.

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Don’t get too excited

While the market value of the company’s unsold units could be significantly higher than their book value, investors should not get too excited. Prior to 2012, the popularity of Sentosa Cove was partly due to the Financial Investor Scheme. This was terminated in 2012. Edgeprop reported that the termination affected property sales, especially within the Core Central Region. The FIS was introduced in 2004 to allow foreigners with a global net worth of $20 million to gain Singapore permanent resident status if they parked at least $5 million in the city state, of which $2 million could be put into property. In 2010, the $5 million minimum investment sum was doubled to $10 million.

The factors that make Sentosa Cove unattractive to some buyers still exist. Since it is styled as an enclave for the rich and possibly famous, it is relatively inaccessible to the general public. Sentosa Cove residents really need to own a car. The nearest MRT is HabourFront Station, which is on Singapore island. A booking surcharge applies for taxis going into Sentosa Cove. The nearest supermarket is at VivoCity — once again accessible only if you have your own transport. Although there is a Healthcare Medical in Sentosa, hospitals are generally far away. Schools and universities are located far away too and involve travelling into Singapore.

“The drawback of Sentosa Cove is [it is] still very much an investment market. Demand from end-users, particularly local families, remains low,” says Christine Li, senior director, research, Cushman & Wakefield. “Location, tenure of the land (99 years) and amenities are some of the factors why Sentosa Cove has not attracted as many buyers as other prime districts such as district 9, 10 and 11 in the current recovery of the residential market,” she elaborates.

Another drawback is that foreigners need to fork out a 15% additional buyer’s stamp duty, making the acquisition cost of Sentosa Cove properties very high, Li points out.

Based on URA data, the overall median price of transactions in Sentosa Cove rose slightly from $1,479 psf in 1Q2016 to $1,563 psf in 1Q2018. On the other hand, median prices were higher during some quarters in 2016 and 2017 than in 1Q2018. These fluctuations could be because of small transaction volumes and different unit sizes, Li suggests.

Alan Cheong, senior director, research & consultancy at Savills, thinks transaction volumes at Sentosa Cove could start rising. “For the non-landed segment, although prices are still bouncing around the $1,500 psf support levels, transaction volumes are rising, perhaps a precursor to future price increases,” he notes. “At the moment, with the average price psf standing at $1,560 for the non-landed segment there, it would begin to look like a steal when compared to prices in the mass market [in Singapore], which is closing in at around $1,400 psf. It is only a matter of time before Sentosa Cove’s non-landed (and landed) prices start to rise, and all the grouses about the place — for example, being too inconvenient to access — will be forgotten.”

That would be music to Ho Bee’s ears. The company has no development properties in Singapore. It did not actively bid for any government land sale sites or collective sale sites in the past several months. “With rising land prices, management has adopted a conservative strategy in its bidding. We note that the group has been largely absent from the various GLS bids over the past few years, with the only bid coming in the Punggol EC land site. That came in 27% lower than City Development’s winning bid of $583 psf,” Tan of Phillip Securities notes.

Ho Bee’s book value was $4.79 as at March 31. If the Sentosa properties are sold at prices that would take their collective valuation above their book value, the profit would go to retained earnings and boost shareholders’ equity. Ho Bee could choose to give out a special dividend since chairman Chua Thian Poh and his family own more than 74% of the company. In addition, if transactions and prices at Sentosa Cove pick up, Ho Bee stock would be revalued by the market at any rate.

In the event that property buyers continue to shun Sentosa, The Metropolis should continue to provide rental income. Although net profit for Ho Bee fell 12.3% y-o-y to $49.4 million for 1QFY2018, revenue rose 14.8% y-o-y to $48.66 million. Of this, rental revenue made up $37.8 million, or 77%, up from 55% for FY2017, with most of that from The Metropolis.

The Metropolis continues to underpin Ho Bee’s earnings as it looks to divest Sentosa units

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