Overpaying for the mall

• SPH’s JV put in a bid of S$542m for Clementi Mall, 42% above second bidder
• Costly at c. S$3,055 psf NLA, vs other bids and latest valuation of other suburban retail malls
• Downgrade to Hold; lower TP: S$4.00

S$542m bid for Clementi Mall. SPH, in a JV with NTUC, submitted the highest bid of S$541.9m (amongst 6 bidders) for a 25,000 sqm GFA shopping mall at Clementi, in a tender that closed last evening (10 Nov). The bid of S$541.9m was above-market-expectations and is c.42% higher than the second bid of S$382m. The bid works out to S$2,014 psf GFA.

Low net yield est at 4.5% – 5%, vs current retail cap rates of 5.5% to 6%. The mall, which is part of a larger 40-storey development that includes two blocks of HDB flats and a bus interchange, comprises two basement levels and five levels above ground with a maximum net floor area of 193,752 sf. HDB will build the core structure and façade, and will hand over to the winning bidder around Aug 2010. The estimated cost of fit-out is around S$50m. This raises the cost further and works out to S$3,055 psf NLA, which is high compared to valuations of other suburban retail malls, ranging from c.S$1,700 to S$2,350 psf. Assuming an estimated gross monthly rental of S$15-16 psf pm, the net yield works out to about 4.5% – 5%, versus current retail cap rates of 5.5% -6%.

Attracted by the potential and revenue sources. Notwithstanding the price, we believe the mall is well located within the town centre, connected to bus interchanges/MRT station and has a good catchment area with 91k residents and 65k students in the vicinity. Furthermore, we believe SPH has been aggressive in looking for additional sources of revenue as Sky@Eleven contribution ceases in 2010. Funding, in our view, could be via its internal resources.

Downgrade to Hold, TP: S$4.00. We believe share price could be affected in the near term as the market will view this piece of news negatively given that: (i) SPH seems to have been overly aggressive; (ii) there will be a higher risk profile attached on its foray into a higher risk project vis-à-vis the stable print business; and (iii) lower prospects of special dividends in FY10 when Sky@Eleven is completed, a catalyst the market was looking for previously. Our revised TP of S$4.00 is based on a 5% discount to our sum-of-parts RNAV.

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