SPH explains thinking behind mall bid

Winning bidders looking ahead at rentals upon lease renewal

Even as the Housing & Development Board yesterday awarded Clementi Mall to a Singapore Press Holdings-led consortium, members of SPH’s top management sought to explain the rationale for the bid price, which stockbroking analysts and market watchers have said was too high.

The consortium members are taking a long-term position on the investment and looking at forward rentals at the next lease renewal cycle – instead of just immediate returns when the mall begins operating in the first half of 2011, SPH’s management said at media and analyst briefings yesterday.

It also revealed that more than 300 interested parties have registered interest to potentially rent space at the mall.

And the projected fit-out cost will be under $40 million – lower than the $40-50 million that some analysts had assumed.

HDB is building only the mall’s core structure and facade, which it is scheduled to hand over in August next year to the joint venture, which will then finish the project and have naming rights for the property.

NTUC FairPrice, which has a 20 per cent stake in the venture, will lease 20,000-25,000 square feet for a supermarket at basement one of the mall. It may also take up additional space for a convenience store.

NTUC Income, which also has a 20 per cent stake, and SPH, the majority shareholder with 60 per cent, may also take up space in the property. The latter is likely to be for a kiosk selling newspapers and magazines.

Clementi Mall – the working name for the 99-year leasehold property – will have an air-conditioned bus interchange on the first level. The mall’s third level will be linked to Clementi MRT Station.

SPH’s management yesterday explained that the venture’s bid valuation was based on stabilised operations after the mall’s rental renewal cycle, and enhancing yield over time.

‘In other words, when we do our calculations, we are not using the rentals when we start operations. We are actually using after rental renewal cycle, whether it is after three years or six years,’ said SPH chief executive officer Alan Chan.

Had SPH used the typical strategy of real estate investment trusts (Reits), which assume say a 5-6 per cent return based on rents when the mall starts operating, it would have led to bids in the $300 million range – where four of the six bids came in for the mall at the close of HDB’s tender last Tuesday.

‘When you are a Reit, you have to ensure immediate returns. Whereas we are long-term players and we are prepared to place our bets based on forward rentals at the next cycle,’ Mr Chan said.

‘This is the challenge the bidder is always confronted with: Do you use standard metrics or do you think out of the box?’

The venture hopes to achieve the rentals that are obtained by the best suburban malls in Singapore.

Its winning bid of $541.898 million was the highest of six offers that HDB received for the mall. The winning bid is nearly 42 per cent more than the next highest offer of $382 million.

Earlier, analysts had forecast a valuation for the property – comprising the bid price as well as assuming fit-out costs of $40-50 million – of about $3,000 per square foot of net floor area of retail space.

But SPH management yesterday said that the projected fit-out costs would be under $40 million and hence the valuation would be ‘somewhere south of $3,000 psf’.

Along prime Orchard Road, ION Orchard was valued at $3,747 psf of net lettable area as at June 30 this year.

SPH said that it also worked in prospects for potential capital appreciation in the bid price, pointing to its successful track record with Paragon along Orchard Road.

Its valuation has increased from just under $800 million in 1997 to almost $2 billion today. Based on the current market price,

Paragon’s yield is well above 4 per cent. The return on equity is above 10 per cent – a result that was achieved over the years, not overnight.

Mr Chan also sought to allay concerns in some quarters that SPH’s investment in Clementi Mall could clip dividend payouts to shareholders.

Firstly, SPH’s stake in the venture is only 60 per cent – and for which it has enough internal funds to pay, with the rest to be funded through borrowings.

‘Secondly, our dividend track record is always a function of recurring earnings. So this investment is not going to affect the dividend track record.’

And when stabilised rental income starts streaming in from Clementi Mall, SPH’s recurring earnings will increase, he added.

A Happy Problem

SPH shares fall after mall bid

SHARES of media group Singapore Press Holdings (SPH) fell as much as 4.9 per cent yesterday before closing 3.9 per cent down on analysts’ fears over its strong bid for a mall.

But most analysts were upbeat on the fundamentals of the mall.

On Tuesday, a joint venture comprising SPH (60 per cent), NTUC FairPrice (20 per cent) and NTUC Income (20 per cent) emerged as the top bidder for a mall now being developed by HDB in Clementi.

The consortium’s top bid of some $542 million was about 42 per cent higher than the second highest bid of $382 million.

SPH shares closed 15 cents down at $3.74 yesterday.

‘Based on our preliminary calculations, we think SPH may have been unnecessarily aggressive in its bid for Clementi Mall,’ said Citigroup analysts Rigan Wong and Horng Han Low in a note.

DBS Group Research cut its target price for SPH to $4.00 from $4.22, and downgraded the stock to a ‘hold’ from a ‘buy’.

CIMB Research, on the other hand, is maintaining its ‘neutral’ call on SPH and also keeping its target price intact at $4.38.

Also, most analysts were positive about the fundamentals of the mall.

‘Notwithstanding the price, we believe the mall is well located within the town centre, connected to a bus interchange/MRT station and has a good catchment area with 91,000 residents and 65,000 students in the vicinity,’ said DBS Research analyst Andy Sim.

JPMorgan similarly acknowledged the ‘premium location’ of this suburban mall, but qualified that the price offered by the SPH consortium was far too aggressive.

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.

SPH-led consortium makes top bid for Clementi mall

With FairPrice and Income onboard, it puts in $541.9m bid

A joint venture involving Singapore Press Holdings (SPH) subsidiary Times Properties, NTUC FairPrice Co-Op and NTUC Income Insurance Co-op placed the top bid of $541.898 million for a mall being developed in Clementi Town Centre by the Housing & Development Board (HDB).

The top bid was 41.9 per cent above the next highest bid of $382 million, made by a joint venture involving Keppel Land’s fund management unit Alpha Investment Partners and Guthrie.

HDB is building only the core structure and facade of the mall, which it aims to hand over to the winning bidder in August next year. The new owner will then finish the project internally, with flexibility to plan the theme and layout.

Clementi Mall – the working name for the property – comprises two basement levels and five storeys above ground with a maximum net floor area of 18,000 square metres or 193,750 square feet of retail space.

An air-conditioned bus interchange will be on the first level and the third level will be connected to Clementi MRT Station.

The SPH-led consortium’s top bid works out to $2,797 per square foot (psf) based on the maximum allowable retail net floor area (NFA), says Stella Hoh, head of investments at Jones Lang LaSalle, which handled the tender exercise for the mall for HDB.

Including an estimated fitting-out cost of about $50 million, the unit price works out to $3,055 psf of retail NFA, she added.

Knight Frank managing director Danny Yeo, using a lower fit-out expenditure assumption of $40 million, says the top bid works out to about $3,003 psf of retail NFA.

‘To achieve a 5.5 per cent to 6 per cent net property yield that most investors would want today for such an asset, an average gross monthly rental of about $18 psf would be required. Right now the average rental at the best suburban malls is about $15-16 psf,’ he said.

‘If they get their tenant mix right, it would not be a problem to grow the mall’s rental level in a few years,’ he added.

When contacted, a spokesman for SPH said: ‘We intend to optimise the usage efficiency of the mall.’

He added that ‘the joint venture parties have evaluated the business case for the project and believe that it is a reasonable bid’, citing several factors, including the good catchment area.

Besides its location in Clementi Town, the property is in close proximity to the Holland, Bukit Timah and West Coast areas with key tertiary institutions such as the National University of Singapore, Ngee Ann Polytechnic, Singapore Polytechnic and UniSIM.

‘There are not many malls in the area. The property is in a high-traffic area due to integrated transport amenities and the business will provide solid and steady income stream to the JV parties,’ he added.

SPH is leading the joint venture with a 60 per cent stake, with FairPrice and Income taking 20 per cent each.

FairPrice will operate a supermarket and Income is also considering taking up some space in Clementi Mall, said SPH’s spokesman.

The other bidders at yesterday’s tender were Frasers Centrepoint Ltd ($352.1 million), the trustee of CapitaMall Trust, and Australia’s Lend Lease group.